tag:blogger.com,1999:blog-63965085258727540442024-03-17T20:03:54.764-07:00Clif Droke Market AnalysisClif Drokehttp://www.blogger.com/profile/14608461795434758077noreply@blogger.comBlogger402125tag:blogger.com,1999:blog-6396508525872754044.post-54822969915143322622018-02-01T11:41:00.001-08:002018-02-01T11:43:37.390-08:00A look at the bull market ahead<span style="font-family: "arial" , "helvetica" , sans-serif;">My latest missive on the near-term stock market outlook can be seen at Financial Sense web site. You can see it by clicking on the following link:</span><br />
<span style="font-family: "arial" , "helvetica" , sans-serif;"><br /></span>
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<span style="color: #1f497d;"><a href="https://www.blogger.com/null" rel="noopener noreferrer" removedlink__26ab44a0-828f-4759-ba6b-cb65338b18d2__href="https://www.financialsense.com/clif-droke/what-will-end-bull-market" style="color: blue; cursor: pointer; text-decoration: underline;" target="_blank"><span style="font-family: "arial" , "helvetica" , sans-serif;"><br /></span></a></span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">Special thanks to FSO for publishing the article.</span></div>
Clif Drokehttp://www.blogger.com/profile/14608461795434758077noreply@blogger.com0tag:blogger.com,1999:blog-6396508525872754044.post-8868534178329929482017-11-08T11:40:00.003-08:002017-11-08T11:41:09.390-08:00Gold’s silent comeback and the middle class rebound<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";">The
middle class has been stuck in a rut – psychologically if not economically –
for years, and they’re not afraid to admit it.
Last year’s upset victory for Donald Trump in the U.S. presidential race
was a manifest token of middle class angst.
Opinion polls have shown that many of the anxieties expressed by the
middle class last year are still a concern for them this year. In other words, not much has changed since a
year ago. There are some strong
indications that the middle class outlook will change for the better in the
coming months, however, as we’ll discuss in this commentary.<o:p></o:p></span></div>
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<span style="font-family: "arial" , "sans-serif";">Ask
the typical middle class wage earner if they think they’re economic prospects
will improve in the year ahead, however, and you’ll likely receive a cynical
response. If there was any doubt that
Middle America’s economic prospects haven’t improved much since last year, the
following graph will lay them to rest.
Shown here is the Middle Class Index (M.C.I.), a share price composite of
several leading companies that cater to a largely middle class customer
base. The components of this index
include JC Penny (JCP), Ford (F), Dollar General (DG), Wendy’s (WEN), Wal-Mart
(WMT), and Kroger (KR). <o:p></o:p></span></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiBRv_dtJDIEfDMu5GXDfwLw3lmcEp8Ex5iZDwWXTIvM76KTANUc7zSc5PFF-I8jWhhlUC3l8TsmeEFlf7eRSXKhvbPF_QtRN8LS1K_nSaQcN4wxVXTwjtl1BXXT4titGJAniAuwL0jXdTM/s1600/middleclass.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="465" data-original-width="640" height="290" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiBRv_dtJDIEfDMu5GXDfwLw3lmcEp8Ex5iZDwWXTIvM76KTANUc7zSc5PFF-I8jWhhlUC3l8TsmeEFlf7eRSXKhvbPF_QtRN8LS1K_nSaQcN4wxVXTwjtl1BXXT4titGJAniAuwL0jXdTM/s400/middleclass.jpg" width="400" /></a></div>
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<span style="font-family: "arial" , "sans-serif";">If
the above graph is any indication of middle class consumption patterns, then
middle income Americans haven’t exactly set the world on fire with their
spending. The implication of the M.C.I.
is that while middle class spending has certainly increased over the last several
years, it has essentially flat-lined on a 3-year basis. While there is admittedly a danger in reading
too much into such a simplified overview of middle class spending, it’s likely
not far from the truth to assume that middle class Americans aren’t making much
progress. At least, that’s how they feel
based on the trend of the Middle Class Index.<o:p></o:p></span></div>
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<span style="font-family: "arial" , "sans-serif";">So
the question is, “Will the economic prospects ever improve for the middle
class?” While many would respond with a
bleak “Never!” there is actually a good indication that the year ahead will witness
some solid improvement. Consider the
next chart exhibit, which highlights the prospects for the upper middle class
(i.e. individuals who earn in excess of $75K/year). The Upper Middle Class Index shown here is a
stock price average of several companies which cater mainly to the upper
middle, including Target (TGT), Starbucks (SBUX), BMW (BMWYY), Apple (AAPL),
and Ruth’s Chris (RUTH).<o:p></o:p></span></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg_4hDqTrAV_R1M18qvyIzrKIgFQxA588W26n0TVGXeIZ0Dsh084vAyu8zZfb_hc9q9m-dkRgN6aV1IpWrJLGEt6NkCte2cy5KPhD6gSA4PD5m9LKIxNGsD7J6roLeyHe58nKmmITA5Pew2/s1600/uppermiddle.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="465" data-original-width="640" height="290" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg_4hDqTrAV_R1M18qvyIzrKIgFQxA588W26n0TVGXeIZ0Dsh084vAyu8zZfb_hc9q9m-dkRgN6aV1IpWrJLGEt6NkCte2cy5KPhD6gSA4PD5m9LKIxNGsD7J6roLeyHe58nKmmITA5Pew2/s400/uppermiddle.jpg" width="400" /></a></div>
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<span style="font-family: "arial" , "sans-serif";">What
this graph suggests is that, in contrast to the middle class, upper middle
class consumers have increased their spending over the last year. In just the last few months alone the Upper
Middle Class Index has trended decisively higher as luxury spending among upper
middle and upper income consumers has been buoyant. The message of this indicator is that the
upper middle class is in much better shape than the middle class.<o:p></o:p></span></div>
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<span style="font-family: "arial" , "sans-serif";">There
is another takeaway from our discussion of the Upper Middle Class Index,
however. Historically, economic
improvement following a major downturn like the last recession proceeds from
the highest economic classes to the lowest.
It’s much like a freight train when it starts rolling from a standstill;
the engine moves first, then the cars closest to the engines, and so on until
at last the final cars begin moving forward.
The upper class is always the first to benefit from an increase in
credit and money supply, then the upper middle, then the middle, and finally
the lower class. Like a train, economic
momentum takes time to build up but when it finally becomes established it
tends to be self-sustaining. <o:p></o:p></span></div>
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<span style="font-family: "arial" , "sans-serif";">The
fact that the Upper Middle Class Index is increasing is a positive indication
for the middle class, for it suggests that the increased spending patterns of
the upper class of recent years have finally spilled over into the upper middle
class. Eventually the middle class will
eventually follow the lead of the upper middle, as is always the case. <o:p></o:p></span></div>
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<span style="font-family: "arial" , "sans-serif";">One
sign that the U.S. economy may be on the cusp of truly breaking out is found in
the graph illustrating the rate of change in M2 money velocity. This is one way of measuring the demand for
money. Money demand, as measured by the
ratio of M2 money stock to nominal GDP, has been extremely high by historical
standards for the last several years. In
fact, the demand for cash has been extraordinary since the 2008 crash, as
investors have feared a recurrence of the crisis years. The inverse of this measure is the velocity
of M2 money (nominal GDP divided by M2).
Velocity remains near multi-decade lows in reflection of the public’s
massive demand for cash; however, it shows signs that it may be reversing. <o:p></o:p></span></div>
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<span style="font-family: "arial" , "sans-serif";">The
following graph, courtesy of the St. Loius Fed (https://fred.stlouisfed.org),
shows the year-over-year change in M2 money stock. As you can see, it’s trending gradually
higher and is close to entering positive territory for the first time since Q1
2010, when the combined impact of Federal Reserve and U.S. government stimulus
was at its highest following the Great Recession. This is also a sign that the perennial problem
of low inflation is gradually reversing as inflation slowly, almost
imperceptibly, makes its return.<o:p></o:p></span></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiyiXk4juuo-iMo_TBxEc_EJHbRjfXgQBnyNHhT8L5b_XNNWb6mqEJvJECl-z00UjOMvRJBQzTgw1arjfGUyKhftXnlOWgHxL3Qb7uORn9jKvlfsIHiRIStzGLDSTk78pfWDZbxnrznK1dt/s1600/velocity.gif" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="450" data-original-width="1168" height="153" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiyiXk4juuo-iMo_TBxEc_EJHbRjfXgQBnyNHhT8L5b_XNNWb6mqEJvJECl-z00UjOMvRJBQzTgw1arjfGUyKhftXnlOWgHxL3Qb7uORn9jKvlfsIHiRIStzGLDSTk78pfWDZbxnrznK1dt/s400/velocity.gif" width="400" /></a></div>
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<span style="font-family: "arial" , "sans-serif";">Another
indication that things are about to improve for the middle class is, perhaps
surprisingly, the price of gold. Gold
serves two primary functions in today’s economy. The first is as a reflection of how much fear
exists among investors as it pertains to the future outlook. The gold price is basically one way of
gauging how much confidence stakeholders (producers, consumers, and investors)
have in the future prospects for business.
<o:p></o:p></span></div>
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<span style="font-family: "arial" , "sans-serif";">More
than this, gold is also a measure of future inflation expectations. When the economy was still quite fragile
between the years 2009 and 2011, investors placed a high premium on gold
ownership as reflected in runaway gold prices.
When it became clear in late 2011, however, that the U.S. recovery was
gaining traction, gold lost much of its luster as a safe haven and it became
less desirable for investors to commit the bulk of their investment capital to
it. Risk assets instead became more
attractive, undermining the demand for gold.<o:p></o:p></span></div>
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<span style="font-family: "arial" , "sans-serif";">Since
last year, however, gold has embarked on a “silent comeback,” effectively
ending a four-year bear market. (See the
SPDR Gold Shares ETF chart below for illustration.) It has been consolidating its gains in recent
months as it prepares to continue its long-term rebound. The going has been slow for the most part,
mainly because inflation has been slow to return and equities continue to steal
some of the yellow metal’s thunder. If
the M2 velocity chart shown above is any indication, however, then inflation
should slowly increase in the coming years.
This would certainly brighten gold’s longer-term prospects and make gold
ownership more attractive to the average investor once again. A moderate amount of inflation, besides
boosting gold’s lure, would also help the middle class to recover even more.<o:p></o:p></span></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi4Eg0rx3rOfvjTVxroG45w0UpBeC3di4cF0_62ZSVNIN5hA1wC-tjVcLHcMGesKPYHN_4lstPq4jzsDVBi3l1eEYlMPJzDxWWGRluRhFJOIV5-xXD53sUKiSbYtQytcgC_ovl66IeK8mL_/s1600/gld.gif" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="335" data-original-width="579" height="231" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi4Eg0rx3rOfvjTVxroG45w0UpBeC3di4cF0_62ZSVNIN5hA1wC-tjVcLHcMGesKPYHN_4lstPq4jzsDVBi3l1eEYlMPJzDxWWGRluRhFJOIV5-xXD53sUKiSbYtQytcgC_ovl66IeK8mL_/s400/gld.gif" width="400" /></a></div>
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<span style="font-family: arial, sans-serif; text-align: justify;">In
the final analysis, a full-fledged middle class economic revival has been
talked about and anticipated for years, and its failure to arrive has been
frustrating. Its manifestation is long
overdue, however, and while it has been slow in coming the indicators discussed
here bode well for the middle class in the months ahead. History shows that sustained improvement in
the upper middle class always eventually spills over to the next level down,
which is good news for Middle America in 2018.</span>Clif Drokehttp://www.blogger.com/profile/14608461795434758077noreply@blogger.com0tag:blogger.com,1999:blog-6396508525872754044.post-60968868022230284622017-08-13T20:52:00.002-07:002017-08-13T20:52:18.794-07:00MSR Performance Review<div class="MsoNormal" style="margin-bottom: 0.0001pt; text-align: justify;">
<span style="font-family: Arial, Helvetica, sans-serif;">Following
is the 2014-2017 weekly performance of the MSR total stock/ETF portfolio based
on all buy/sell trading recommendations in the <i>Momentum
Strategies Report</i>. The performance graph pictured here was updated as of Aug. 7,
2017.</span></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhEWmlf1ZV9W-JksMTSmNg0D7zwrnnPgev_iQ8VlZu7zujsBisUPA3viix9W1DIVXxwItRZB0pcMOre_YsBHCshnEt3lEqoJPg_SRc_96NL6B4qgBmB0I4zQutRfAdI07jmTFSq2rH7A6Ht/s1600/msr2.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="394" data-original-width="616" height="255" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhEWmlf1ZV9W-JksMTSmNg0D7zwrnnPgev_iQ8VlZu7zujsBisUPA3viix9W1DIVXxwItRZB0pcMOre_YsBHCshnEt3lEqoJPg_SRc_96NL6B4qgBmB0I4zQutRfAdI07jmTFSq2rH7A6Ht/s400/msr2.jpg" width="400" /></a></div>
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<span style="font-family: Arial, Helvetica, sans-serif;">Recommendations
made in the <i>Momentum Strategies Report </i>are
based on a combination of technical analysis, fundamental analysis, relative
strength analysis and investor sentiment analysis. Recommendations are only made in what are
deemed to be high-probability, low-risk, low-volatility trading
opportunities. <o:p></o:p></span></div>
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<br /></div>
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<span style="font-family: Arial, Helvetica, sans-serif;">All
trades are initiated once a “buy” signal is confirmed by the price line of the
stock or ETF in relation to its 15-day moving average, along with other
pertinent technical confirmation (e.g. relative strength, internal momentum,
etc.). Conservative stop-loss
recommendations are given and continually updated with each trading
position. The average length of the trades
made in MSR is approximately two months, but can sometimes be longer. <o:p></o:p></span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;">MSR
rarely recommends short selling (only in confirmed bear markets) and prefers a
100% cash position whenever faced with a dearth of potential high-probability
buy candidates.<o:p></o:p></span></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiueB_BBprcKiQETAAzP2g6YXopv0n-JbGBXnhSysjMm1puJ7bTK487t-JlA6If6yb4mmCwCNi9vZFxrvdse7dXFPJAmTP4IfRSlwtyD52SOnS7pYaadnkcDsaMmEI1jy8-fgTTNg5_tzXT/s1600/msr.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="835" data-original-width="1235" height="270" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiueB_BBprcKiQETAAzP2g6YXopv0n-JbGBXnhSysjMm1puJ7bTK487t-JlA6If6yb4mmCwCNi9vZFxrvdse7dXFPJAmTP4IfRSlwtyD52SOnS7pYaadnkcDsaMmEI1jy8-fgTTNg5_tzXT/s400/msr.jpg" width="400" /></a></div>
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<span style="font-family: Arial, Helvetica, sans-serif;">In the
vast majority of cases, there are only 1-2 stocks/ETFs in the model portfolio
at any given time.</span><span style="font-family: Arial, Helvetica, sans-serif;"> </span><span style="font-family: Arial, Helvetica, sans-serif;">Rarely are more than three
positions recommended at one time.</span><span style="font-family: Arial, Helvetica, sans-serif;"> </span><span style="font-family: Arial, Helvetica, sans-serif;">This
allows us to concentrate all our attention on a few positions without being
distracted by having to worry about multiple positions.</span><span style="font-family: Arial, Helvetica, sans-serif;"> </span><span style="font-family: Arial, Helvetica, sans-serif;">This also limits draw downs.</span><span style="font-family: Arial, Helvetica, sans-serif;"> </span><span style="font-family: Arial, Helvetica, sans-serif;">Most recommended positions involve
low-volatility, actively traded NYSE stocks and ETFs.</span></div>
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<br /></div>
<div class="MsoNormal" style="margin-bottom: 0.0001pt; text-align: justify;">
<span style="font-family: Arial, Helvetica, sans-serif;">The preceding
graphs reflect only entry and exit signals, not profit-taking advice.<o:p></o:p></span></div>
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</div>
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<span style="font-family: Arial, Helvetica, sans-serif;">[<b>Note: </b>Performance graph is updated each Friday based on change in
portfolio value from previous Friday.]</span><span style="font-family: LiberationSans;"><o:p></o:p></span></div>
Clif Drokehttp://www.blogger.com/profile/14608461795434758077noreply@blogger.com0tag:blogger.com,1999:blog-6396508525872754044.post-47433398043403714442017-07-21T13:50:00.002-07:002017-07-21T13:52:49.370-07:00Prepare for a 30-year bull market<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , sans-serif;">Heading
into 2017, Wall Street was excited by the prospect of a U.S. president who
sympathized completely with business.</span><span style="font-family: "arial" , sans-serif;"> </span><span style="font-family: "arial" , sans-serif;">His
promised tax and healthcare reforms were widely cheered by investors in the
wake of his election.</span><span style="font-family: "arial" , sans-serif;"> </span><span style="font-family: "arial" , sans-serif;">Yet the Congress
has so far failed to deliver on those promises and investors are no longer
giving the Trump administration a free pass based on the assumption that tax
breaks are on the way.</span></div>
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<span style="font-family: "arial" , "sans-serif";">This
loss of enthusiasm is reflected in the long periods of dullness the market has
experienced since March. While the bull
market leg which began with the November election remains intact, the market
has proceeded in a halting fashion and has gradually lost some of its erstwhile
momentum. The following graph illustrates
this principle. <o:p></o:p></span></div>
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<br /></div>
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<span style="font-family: "arial" , "sans-serif";">Along
these lines, a number of Wall Street economists have expressed the belief that
if Trump’s promised reforms fail to materialize, the stock market’s current
valuation precludes a continuation of the bull market. There are a number of reasons why this
statement is likely false, however, not the least of which is that the market
doesn’t need a political excuse to rally.
Indeed, if that were the case then China’s equity market, in view of the
country’s Communist government, would forever be stuck in neutral. The pace of innovation and productivity in
countries with a market-driven economy is consistently high enough to always
provide some justification for higher valuations and stock prices, regardless
of the political climate.<o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";">Writing
nearly 200 years ago, Alexis de Tocqueville observed that in America no matter
how much the tax burden increased, American ingenuity and resourcefulness
always found a way to counteract its malignant effect. He stated:<o:p></o:p></span></div>
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<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";">“It
is certain that despotism ruins individuals by preventing them from producing
wealth, much more than by depriving them of the wealth they have produced; it
dries up the source of riches, whilst it usually respects acquired property. Freedom, on the contrary, engenders far more
benefits than it destroys; and the nations which are favored by free
institutions invariably find that their resources increase even more rapidly
than their taxes.” [<i>Democracy in America</i>]<o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";">Tocqueville
understood that America is unique among the nations in that its people and
commercial spirit are strong enough to countervail even the most strenuous
attempts by politicians at slowing commercial progress. This principle is as true today as it was
then, perhaps even more so.<o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";">While
many analysts are concerned by currently high market valuation indicators, the
reality is that valuations can climb considerably higher before the market is
in imminent danger of a bear market. The
S&P 500 P/E ratio may be high at 26.13 by historical standards, it’s still
a ways from those high levels in the late 1990’s/early 2000’s which preceded
the death of the powerful ‘90’s bull market.
Moreover, price/earnings alone isn’t a reliable measure of how
undervalued or overvalued a market is.
One must also take into account the investor sentiment backdrop, levels
of participation among retail investors, and other technical and monetary
policy factors when forming a final determination as to whether or not the
market is truly “overvalued.” <o:p></o:p></span></div>
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<br /></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgMeEbxjgxsedc7rQE-FYIf5mPQkklPTstvPlqtXXGmuncFZj0mel0LrEtH-ifW_EO4ow0YMb_ZdcDelZh_3UDqIh3bjPTcTkJBdW5xHiAlnVdfiQjqYbXpvOYDq-gDrucL1rH8pILSBTxe/s1600/p-e.gif" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="384" data-original-width="890" height="172" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgMeEbxjgxsedc7rQE-FYIf5mPQkklPTstvPlqtXXGmuncFZj0mel0LrEtH-ifW_EO4ow0YMb_ZdcDelZh_3UDqIh3bjPTcTkJBdW5xHiAlnVdfiQjqYbXpvOYDq-gDrucL1rH8pILSBTxe/s400/p-e.gif" width="400" /></a></div>
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<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";">To
illustrate how important it is to consider investor sentiment along with
valuation, I reprint here the words of William Jiler, who wrote investment
books in the 1960s. Using International
Business Machines (IBM) as an example, he wrote:<o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";">“How
could [an investor] anticipate that IBM would sell as low as 12 times its
annual profit in the late Nineteen Forties and at 60 times earnings in the late
Fifties? Obviously, ‘investor
confidence’ went up sharply in the Fifties.
And obviously, the psychology of the market – that is, the sum of the
attitudes of all potential buyers and sellers – is a crucial factor for
determining prices.” [<i>How Charts Can Help You in the Stock Market</i>]<o:p></o:p></span></div>
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<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";">The
main consideration for stocks going forward is the level of participation among
individual investors. With investor
sentiment still neutral and few small investors actively trading, the bull
market still has plenty of room to run.
The informed investors who are keeping the bull market alive need
someone to sell to when it finally comes time for them to unload their
holdings. That someone is the uninformed
public which by and large has been afraid of owning stocks since the 2008
credit crash. Until they rediscover the
“joys of investing” the 8-year-old bull market will continue to age, all the
while maintaining its vigor. <o:p></o:p></span></div>
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<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";">History
teaches that following a major financial crisis, a bull market lasting from
around 20 to 30 years normally follows.
Such was the case following the Great Crash and Depression of the 1930s,
the economic and political turmoil of the early 1970s, and in other eras in
U.S. market history. The last crisis in
2008-09 witnessed the birth of a new secular bull market which is already eight
years old. A generation is around 20-30
years, which partly explains why bull market typically last so long until the
next great crash; it takes that long for the generation that experienced the
last crisis to be replaced by an entirely new one which doesn’t remember
it. It’s only when the new generation
has come of age that the mistakes which led to the previous crisis are repeated
and the cycle begins anew.</span></div>
<br />
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";">Given
that the current generation is still, nearly 10 years later, still averse to
stocks to a large extent, the secular bull market has probably another 10-20
years to run before encountering the problems which always prove fatal to
it. I’m referring of course to the
dangers of over-participation and excess enthusiasm. Those dangers are nowhere in sight
today. We can therefore assume that the
long-term bull market still has many more years to run before eventually
reaching its terminus. <o:p></o:p></span></div>
Clif Drokehttp://www.blogger.com/profile/14608461795434758077noreply@blogger.com0tag:blogger.com,1999:blog-6396508525872754044.post-82267067767150443242017-07-14T11:04:00.003-07:002017-07-14T11:04:22.967-07:00Is the market all-knowing?<div class="MsoNoSpacing" style="text-align: justify;">
<span style="background-color: white; font-family: Arial, sans-serif;">“The tape tells all” is a Wall Street bromide we’re all
familiar with.</span><span style="background-color: white; font-family: Arial, sans-serif;"> </span><span style="background-color: white; font-family: Arial, sans-serif;">It neatly summarizes the
belief that the major averages discount everything pertaining to the business
outlook.</span><span style="background-color: white; font-family: Arial, sans-serif;"> </span><span style="background-color: white; font-family: Arial, sans-serif;">It’s also a basic tenet of Dow
Theory.</span></div>
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<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "Arial","sans-serif";">Writing
a century ago, Richard Wyckoff was one of the very first market pundits to put
this belief in writing. “The tape tells
the news minutes, hours and days before the news tickers or newspapers and
before it can become current gossip,” he wrote.
“Everything from a foreign war to the passing of a dividend; from a
Supreme Court decision to the ravages of the boll-weevil is reflected primarily
upon the tape.”<o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="background: white; font-family: "Arial","sans-serif";">This sentiment was also eloquently summarized by author
Robert Rhea over 80 years ago. Writing
in his classic book, <i>The Dow Theory</i>,
Rhea observed:<o:p></o:p></span></div>
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<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="background: white; font-family: "Arial","sans-serif";">“The fluctuations of the daily closing prices of the
Dow-Jones rail and industrial averages afford a composite index of all the
hopes, disappointments, and knowledge of everyone who knows anything of financial
matters, and for that reason the effects of coming events (excluding acts of
God) are always properly anticipated in their movement. The averages quickly appraise such calamities
as fire and earthquakes.”<o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "Arial","sans-serif";">The
late Joe Granville took this a step further by suggesting that the stock market
represents the sum total of a nation’s intelligence across many different
fields. He maintained that the market
knows virtually everything worth knowing about the short-to-intermediate-term
outlook.<o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "Arial","sans-serif";">Writing
in September 2004, just after a devastating series of Florida hurricanes,
Granville observed: “When the stock market turns down it is warning of trouble
ahead. It doesn’t matter what the
trouble turns out to be…For a look at the future it was only necessary to follow
the market instead of hurricane reports.”
In view of the vulnerable state of the market prior to the major
hurricanes of 2005 and 2012 (Katrina and Sand), perhaps Granville was on to
something.<o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "Arial","sans-serif";">Not
all investors believe that Mr. Market reflects the sum of all wisdom as it
pertains to the future outlook, however.
Proponents of Random Walk Theory in particular dismiss this notion with
scorn. But are they right to reject this
proposition?<o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "Arial","sans-serif";">Experience
has shown that Granville’s proposition is essentially correct, if overly
simplistic. To assume that the market
always declines at the first scent of trouble would be the height of
folly. The collective wisdom of informed
investors does tend to trace out its foresight in the charts, but it isn’t
always blatantly obvious at first and sometimes is evident only in
retrospect. The market action of the
year 2007 is instructive. Consider that
beginning in February that year the market commenced a series of volatility
plunges as insiders first began to manifest their advance knowledge of the
coming credit storm. <o:p></o:p></span></div>
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<br /></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiJVhew5awavRSMajfwwmj43zuaVzt-09xqsNho4oGtL_zR92TFvb-Jx3TjsaaURK4xGdHCA4GGMr3xt20HqwbLAV3iYAEKOiENiBUEK72X11kErlIXhqTcCN7NbxZeRuAwWmEXo5FPgPf3/s1600/spx.gif" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="335" data-original-width="579" height="231" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiJVhew5awavRSMajfwwmj43zuaVzt-09xqsNho4oGtL_zR92TFvb-Jx3TjsaaURK4xGdHCA4GGMr3xt20HqwbLAV3iYAEKOiENiBUEK72X11kErlIXhqTcCN7NbxZeRuAwWmEXo5FPgPf3/s400/spx.gif" width="400" /></a></div>
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<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "Arial","sans-serif";">In
between, and immediately after, the market plunges in February and August ’07,
however, the S&P made new highs.
This was either a consequence of the recoil rallies going too far, or
was the result of manipulation to disguise insider selling. The lesson here is that while Mr. Market will
usually provide advance warning signals for trouble on the horizon you must
often pay close attention to discern those signals, for it isn’t always
obvious. <o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "Arial","sans-serif";">If
the tape does indeed tell all, what is it telling us now? The major indices and the NYSE breadth
indicators have been in good shape for most of the year. By the same token, cumulative trading volume
has been subdued because of diminished participation among individual traders
as passive ETF investing has gained popularity.
The major averages have been buoyant, but not lively, in recent
months. This has been reflected in the
economic news for most of the year, and there have been no crisis events to
speak of. The market, in short, has been
dull and listless in reflection of the lack of bad news news. You could even say that the market has
predicted the lethargic U.S. political/economic scene of recent months by its
own lack of excitement. <o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "Arial","sans-serif";">If
the tape indeed tells all (and I believe it does), then it’s telling us that
there are currently no major worries among informed investors and insiders
about anything that might torpedo the U.S. ship of state and disturb the
country’s equanimity. Developments of
this magnitude take time to develop and the traces of these dangers always
eventually manifest in the stock market long before making an announcement
anywhere else. </span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "Arial","sans-serif";">This
is not to say that the market will necessarily continue to experience smooth
sailing for the balance of the year, as short-term volatility tends to be
erratic and isn’t always predictable.
But the tape doesn’t suggest anything calamitous on the horizon,
contrary to the warnings of the perpetual alarmists. The secular bull market which began in 2009
is still very much intact with lots of room to run before entering those
tumultuous shoals which always mark the end of the line. By the time that point has arrived, however,
the tape will have long since whispered the danger to those who bother to
listen.</span><span class="apple-converted-space" style="font-family: Arial, sans-serif;"><span style="color: purple;"> </span></span><span style="font-family: Arial, sans-serif;"> </span></div>
Clif Drokehttp://www.blogger.com/profile/14608461795434758077noreply@blogger.com0tag:blogger.com,1999:blog-6396508525872754044.post-82179856305095503382017-06-02T13:06:00.006-07:002017-06-02T13:06:49.460-07:00The silent economic boom<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: Arial, sans-serif;">[Note: I was recently
interviewed by Kenneth Ameduri who hosts the Crush The Street internet
show.</span><span style="font-family: Arial, sans-serif;"> </span><span style="font-family: Arial, sans-serif;">In it I discuss my take on gold,
stocks, Trump, the economy and Bitcoin.</span><span style="font-family: Arial, sans-serif;">
</span><span style="font-family: Arial, sans-serif;">The interview can be found here: </span><a href="https://crushthestreet.com/videos/live-interviews/economic-bubble-burst-trumps-watch-clif-droke-interview" style="font-family: Arial, sans-serif;" target="_blank"><span style="background: white;">https://crushthestreet.com/videos/live-interviews/economic-bubble-burst-trumps-watch-clif-droke-interview</span></a><span style="font-family: Arial, sans-serif;">]</span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "Arial","sans-serif";">Though
many Americans aren’t feeling it, the economy is quietly gathering forward
momentum. With consumers gaining in confidence and real estate heating up
on both the commercial and residential levels, the U.S. economy is much
stronger than it may seem at first glance.<o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "Arial","sans-serif";"><br />
One reflection of the strengthening economy is the equity market, which is in
the eighth year of a bull market since the bottom of the credit crash. The
bromide, “As goes the stock market, so goes the economy,” is something that
hardly needs explaining, yet so many investors lose sight of this cogent fact
that it bears repeating. Rising corporate profits and efficiencies in
recent years have contributed in large part to the economic improvement. <o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "Arial","sans-serif";"><br />
Another reflection of the recovery can be seen in our in-house New Economy Index
(NEI), which combines the stock prices of the leading U.S. retail and business
service stocks. The graph below shows that NEI continues to hit all-time highs
on almost a weekly basis and as such is reflecting a strong consumer retail economy.</span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "Arial","sans-serif";"><br /></span></div>
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<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "Arial","sans-serif";">
With so many indicators pointing to a strong economy, why then are so many
Americans acting as if recession is imminent? That’s the question we’ll
address here.<o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "Arial","sans-serif";"><br />
Ed Hyman is one of the most respected, and accurate, economists. As
Barron’s recent observed, he has been voted Wall Street’s top economist for 36
of the past 41 years in Institutional Investor’s annual poll.<o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "Arial","sans-serif";"><br />
In an interview conducted by Barron’s editor Randall Forsyth, Hyman said he
sees cities around the U.S. “booming,” including smaller ones away from the
megalopolises on the coasts. His conclusion is that this will benefit Main
Street more than Wall Street.<o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "Arial","sans-serif";"><br />
Hyman has a rather old-fashioned, yet highly effective, method of gathering
data from which to make his forecasts. His team of researchers simply
contact companies such as employment agencies, truckers, car dealerships and
home builders and ask, “How’s business?” A rating scale of zero to 100 is
used by respondents to describe business conditions and from this tally Mr.
Hyman is able to get a good read on what’s happening in the economy. <o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "Arial","sans-serif";"><br />
According to Barron’s, Hyman’s surveys were trending higher well ahead of last
year’s election. “At that time,” quoting the Barron’s article, “his
model was forecasting real growth in gross domestic product of about 1.5%,
although not as ‘uplifting’ as the recent ‘soft data,’ such as confidence
surveys, indicate. Now, the model points to 3% growth, bolstered by
indicators such as tight credit spreads and high consumer net worth, which accords
with what he calls a ‘scientific method.’”<o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "Arial","sans-serif";"><br />
Ad Ed travels around the country, he’s finding that “every place is booming,”
he told Barron’s. “Every major city, Chicago, Minneapolis, Kansas City,
they’re doing great.” Smaller cities are also outperforming, he says.<o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "Arial","sans-serif";"><br />
Hyman also reports that “millennials are coming on like locusts,” as they
emerge from years of living in their parents’ basements. “They’re getting
jobs and apartments,” he told Barron’s. “Millennials’ employment is
growing at 3% while everything else is growing 1%.”<o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "Arial","sans-serif";"><br />
Hyman also pointed out that many observers have undervaued the extent to which
central banks around the globe “are still flooding the system every week” with
liquidity, with the Bank of England and the ECB having purchased more than two
trillion euros’ ($2.14 trillion) worth of bonds in less than three years.
Meanwhile the BOJ and the Federal Reserve, along with the ECB, hold $13
trillion in assets, which has lowered interest rates around the globe.
This, he says, explains how the Fed funds rate at just 0.80% while U.S.
companies are doing so well.</span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "Arial","sans-serif";"><br /></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "Arial","sans-serif";">
If Hyman’s macro optimism is to be believed – and our indicators strongly
suggest he is right – then 2017 may prove to be the year that the U.S. economy
finally takes off and leaves investors with no doubts as to its latent strength
and momentum. <o:p></o:p></span></div>
Clif Drokehttp://www.blogger.com/profile/14608461795434758077noreply@blogger.com0tag:blogger.com,1999:blog-6396508525872754044.post-11016966647042551342017-05-31T00:40:00.002-07:002017-05-31T00:40:29.580-07:00Crush The Street Interview<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "Arial","sans-serif"; font-size: 11.0pt;">I was recently interviewed by Kenneth Ameduri
who hosts the Crush The Street internet show.
In it I discuss my take on gold, stocks, Trump, the economy and
Bitcoin. The interview can be found
here:</span></div>
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<a href="https://crushthestreet.com/videos/live-interviews/economic-bubble-burst-trumps-watch-clif-droke-interview" target="_blank"><span style="background: white; font-family: "Segoe UI","sans-serif"; font-size: 11.5pt;">https://crushthestreet.com/videos/live-interviews/economic-bubble-burst-trumps-watch-clif-droke-interview</span></a></div>
Clif Drokehttp://www.blogger.com/profile/14608461795434758077noreply@blogger.com0tag:blogger.com,1999:blog-6396508525872754044.post-60373885038453833452017-05-20T19:03:00.003-07:002017-05-20T19:03:24.621-07:00The bull market and Donald Trump's death knell<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: Arial, sans-serif;">In the minds of many investors, the election victory of Donald J. Trump to the
United States Presidency was nothing short of a miracle. Following his
shocking victory, expectations were high that Trump would, with the help of
Congress, fulfill his promises of tax reform and infrastructure spending.
The lifting of the heavy penalties associated with Obamacare was another hope
that investors cherished. Many hailed his victory by declaring that it
was “morning in America” again.</span><span style="font-family: Arial, sans-serif;"> </span><span style="font-family: Arial, sans-serif;">But after
only six months since the election, Trump's presidency has hit a potentially
fatal obstacle and he now faces the growing possibility of impeachment.</span><span style="font-family: Arial, sans-serif;"> </span></div>
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<span style="font-family: Arial, sans-serif;"><br />
By now the particulars of the political onslaught against President Trump are
well known and there is no need to recount it. Impeachment in the wake of
recent developments has become an increasing likelihood, and it is said that
even the Trump White House is preparing for it. It now
appears that the president will be investigated by a Congressional inquiry with
the possibility of eventually being replaced by his vice president. The
powers-that-be, it seems, have decided they've seen enough of Trump's muscular
leadership and controversial America-first plans. <o:p></o:p></span></div>
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<span style="font-family: Arial, sans-serif;"><br />
How did America come full circle so quickly? What started as a widespread
hope that a president who fully understood the needs of commerce and would do
everything in his power to further America's economic future now faces an
ignominious ending. Can this be chalked up to voter's remorse or
the volatile temper of the American voter? Or is it simply a case of
Trump's ideological opponents taking an aggressive approach to derail his
ambitious reform plans? <o:p></o:p></span></div>
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<span style="font-family: Arial, sans-serif;"><br />
A more likely answer is that Trump's election was a fluke and that it was never
intended that a man of such convictions could ever be allowed to lead today's
left-leaning society. There are a few basic principles which can be
addressed here. One is that the leader of a free country is generally a
reflection of the people he represents. Is it credible to assume that
today's average American favors the type of free-enterprise capitalism
championed by Trump? America's shift to the left of the political
spectrum has become pronounced in the last two decades and the long-term trend
is conducive to more socialist activism, not less, in government. France
has only recently been reminded of that and the U.S. is now being faced with
that lesson. <o:p></o:p></span></div>
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<span style="font-family: Arial, sans-serif;"><br />
If anything, Trump's election victory was an aberration – a counter-trend rally
in financial market terms. It was born of deep frustration among middle
class voters. After the painful experiences of the Great Recession and
years of stagnation, Main Street America was in a rebellious mood. Donald
Trump represented a radical departure from Washington-as-usual and, unlike the
other candidates, he addressed middle class concerns in the most vigorous terms.
Voting for Trump was essentially an act of defiance, a way of rejecting the
Establishment which professed concern for the plight of the middle class but
did nothing to help it.<o:p></o:p></span></div>
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<span style="font-family: Arial, sans-serif;"><br />
Indeed, Trump's election was tantamount to a full-scale middle class
revolt. As with all revolutions, however, this one appears destined to
end at the point of origin with no net progress to show for it. (A
revolution, after all, consists in making a full circle according to a literal
rendering of the word.) Since his election victory was against the
primary trend toward socialism, Trump's eventual replacement as president will
almost certainly be in line with the status quo, and the middle class will once
again be ignored.<o:p></o:p></span></div>
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<span style="font-family: Arial, sans-serif;"><br />
Incidentally, the word revolution has more than one application here. The
long-term economic Kress cycle which bottomed around the year 2014 was
described by the late cyclist Samuel J. Kress as the “Revolutionary Cycle.”
This observation was based on the cycle's tendency to usher in a new
socioeconomic order when it bottoms (e.g. the transition of the U.S. from an
agrarian to an industrial economy in the late 19th century). Before his death, Kress forecast that the
next bottom of the 120-year cycle around 2014 would witness the final
transition from free-market capitalism in the U.S. to a much more aggressive
socialist government. His prediction proved prescient when one considers
that the Affordable Care Act (a.k.a. Obamacare) was the first major legislative
inroad to full-blown socialism since the New Deal of the 1930s. <o:p></o:p></span></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh2Vjrw_dV_7qZBuT-15FIQiU6XgrBqgfEx2rKyEAKkQs3xy_GdtIbv6gbV-8p39BSKdiyE6_njWglK9UhbK1agPv_wkJpGBb8U1yM7fC1dDev_-B6sgyVaybD4aKNr7elp-Rbd1QPbUXWX/s1600/revolution.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="183" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh2Vjrw_dV_7qZBuT-15FIQiU6XgrBqgfEx2rKyEAKkQs3xy_GdtIbv6gbV-8p39BSKdiyE6_njWglK9UhbK1agPv_wkJpGBb8U1yM7fC1dDev_-B6sgyVaybD4aKNr7elp-Rbd1QPbUXWX/s400/revolution.jpg" width="400" /></a></div>
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<span style="font-family: Arial, sans-serif;">The revolutionary aspect of the long-term Kress cycle – which also
answers to the Kondratieff wave, or K-wave – provides the context for the mass
discontent we’ve seen develop in the U.S. and other countries in recent
years. From Occupy Wall Street to Arab
Spring to Brexit, discontent has been widespread in the wake of the 2007-2012 economic
malaise. Students of behavioral finance
are aware of the connection between financial market collapse and mass
psychology. After a major shock in the
financial market/economy, it usually takes several years for the resulting
psychological impact to fully disappear.
This is why revolutions are common occurrences in the years following
such a shock, not during the actual shock itself. Humans are reactive by nature and it takes
them a while, in the aggregate, to psychologically process an economic shock,
hence the delayed reaction to the economic event in question.<o:p></o:p></span></div>
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<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: Arial, sans-serif;">The mentality behind the above mentioned revolutions also resulted
in Donald Trump’s presidential victory.
But since this revolutionary episode was against the grain of the
prevailing political wind, its lifespan will likely be brief. Many European countries are already
rethinking their political reactions against the European Union. Now America will soon be forced to decide
whether it truly wants to commit to the path it chose last November. <o:p></o:p></span></div>
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<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: Arial, sans-serif;">Free market capitalism can survive only when a country’s citizens
are fiercely committed to preserving personal liberty and self-initiative. It requires a healthy, but respectful,
disdain of government interference and a reliance on one’s own ingenuity to
thrive. If the Obamacare debate was any
indication, America lacks the internal strength and will to survive as a
free-market economy. For this reason and
others, socialism will eventually reassert its sway in the U.S. once the wave
of revolutionary fervor subsides.</span></div>
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<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: Arial, sans-serif;">Returning to the subject at hand, how would a Trump impeachment
affect the markets? Will the secular
bull market in stocks continue if Trump were removed from office? What about the potential impact on the price
of gold? A successful Donald Trump
presidency replete with tax and Obamacare reform would not have been good for
the price of gold. Gold is primarily a
barometer of investor fear and uncertainty.
Tax reform would almost certainly have benefited both corporate profits
and the economy, and a booming economy isn’t normally conducive for a vibrant
gold market (the exception being a war-time economy). However, the uncertainty generated by an
investigation and subsequent impeachment hearings would likely serve to buoy
the gold price to some degree. The
greater the uncertainty surrounding the outcome of Trump’s trial by fire, the
more likely gold will benefit.<o:p></o:p></span></div>
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<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "Arial","sans-serif";">As
for equities, the secular bull market which began in 2009 for the S&P 500
is still alive and will likely remain intact even if Trump is impeached. The stock market hasn’t been as vibrant in
the last couple of years due to a variety of technical and fundamental factors,
including the uncertainties surrounding the U.S. political outlook. Yet throughout the ups and downs of the last
two years, there has been one constant: the lack of interest among retail
investors. Americans by and large lost
their appetite for equities several years ago and it shows little sign of
returning to normal in the immediate future.
This factor alone will ensure the bull’s longer-term survival throughout
the short-term uncertainties, for no major bull market can end until the
informed “smart money” investors unload their holding on uninformed
participants (“dumb money”). The big
money investors have to have someone to sell to as they can’t very well unload
their stocks amongst themselves. So
until we see the return of equity mania, we can be assured of the bull’s
continuance notwithstanding its reduced vigor. </span></div>
Clif Drokehttp://www.blogger.com/profile/14608461795434758077noreply@blogger.com0tag:blogger.com,1999:blog-6396508525872754044.post-43203207114347001902017-04-08T14:41:00.004-07:002017-04-08T14:42:06.034-07:00What will finally break the market's lethargy?<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";">To
most individual traders, there is no bigger buzz kill than a narrow trading
range. It takes the wind out of the sails of breakout and momentum
traders, and even expert stock pickers have a tough time finding the stocks
which are bucking the sideways trend.<o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";"><br />
Wall Street would much rather see a lively bull market when stocks are roaring
and participation is widespread among all classes of investors. But
sometimes even a trading range-type market is good enough for the Street ,
provided stock prices are near all-time highs. For even when prices are
making no headway, the aggregate yield on stocks pays enough in dividends to
make the lack of action worthwhile. <o:p></o:p></span></div>
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<span style="font-family: "arial" , "sans-serif";"><br />
There are indeed enough listed companies which pay a high enough dividend to
make buying and holding in a lackadaisical stock market an attractive
proposition. This is one reason for the torpor which currently infuses
not only the financial market, but the rest of the country as well. Why
worry when you can sit back and live off the interest? Widespread
lethargy breeds a range-bound stock market, but it also contributes to a
sluggish economy. As we'll discuss here, there is a reason for the
public's lethargy and within that reason lies the solution to the
problem. <o:p></o:p></span></div>
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<span style="font-family: "arial" , "sans-serif";"><br />
If you needed proof of the trading range-induced complacency out there right
now, the public's response to the U.S. airstrike on Syria is a good
example. While there was a modicum of shock and anger, the response to
the military action was mostly lethargic. Even the stock market seemed
unimpressed enough to rally, which underscores the extent of the public's
complacency. <o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";"><br />
Even Congress is infected with the conservation bug. Even as President
Trump touts his ambitious plan to cut taxes, the U.S. House majority leader is
pouring water all over that plan by saying Congress will balance any proposed
tax cuts by finding ways to increase revenues (read more taxes, but in
different areas). Thus the old "paying Peter by robbing Paul"
syndrome has infused America's elected leaders, who seem to afraid to risk
anything like general prosperity.<o:p></o:p></span></div>
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<span style="font-family: "arial" , "sans-serif";"><br />
One certainly can't fault the President for trying to break the lethargy that
has dominated the economy in the last two years. His attempt at lifting
the huge burdens imposed on the middle class by reforming Obamacare were
spurned by Congress. His latest move appears aimed at stimulating
the economy via military conflagration, a tried-and-true (short-term) economic
palliative to be sure.<o:p></o:p></span></div>
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<span style="font-family: "arial" , "sans-serif";"><br />
The subdued mood of the market can only be understood in terms of the long-term
economic cycle, or K-wave. This cycle is divided into four
"seasons" of economic activity over a period encompassing roughly 60
years. Each season approximates to 15 years. The winter season of
the cycle was between 2000-2014/15, with the last 60-year cycle bottoming at
the end of 2014. We're now in the early stages of K-wave spring, which
should last until about 2029/30. <o:p></o:p></span></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi8h8SAk0Ehvewvr9OfxeCVFlWNAi5_mtznO1aKZfkKwgGLO2anU8KkF34rB1evUWQSfrL-nww6aFj3zr6AIVcmvPo4JFHtOFGvKxBMtE-rmx7LtEqeOtQ9qQgHIHz7iUiWRLkwfDKuIuyF/s1600/seasons.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="113" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi8h8SAk0Ehvewvr9OfxeCVFlWNAi5_mtznO1aKZfkKwgGLO2anU8KkF34rB1evUWQSfrL-nww6aFj3zr6AIVcmvPo4JFHtOFGvKxBMtE-rmx7LtEqeOtQ9qQgHIHz7iUiWRLkwfDKuIuyF/s400/seasons.jpg" width="400" /></a></div>
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<span style="font-family: "arial" , "sans-serif";"><br /></span><span style="font-family: "arial" , sans-serif;">So if economic spring has sprung, what is keeping the economy from
flourishing? The answer to that is best seen in a timely analogy.
Even as the Northern hemisphere experiences the early phase of spring in April,
there are still lingering signs of the previous winter. While most days
are fairly warm, temperatures can still be sometimes chilly and even
winter-like. It takes a while for a new season to fully establish itself
while the vestiges of the preceding season gradually fade away. In like
manner, it will probably take a few years for K-wave spring to become
established -- especially given the severity of the K-wave winter season a few
years ago. </span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";"><br />
The question everyone is concerned with is what will it take to finally break
the psychological shackles which have held back profligate spending and
retail-level investing? The answer to that question can be found in the
previous paragraph: the immutable laws of the economic K-wave will eventually
lay the foundation for a fundamental change in mass psychology. <o:p></o:p></span></div>
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<span style="font-family: "arial" , "sans-serif";"><br />
At some point in the current K-wave spring season the zeitgeist of contraction
and fiscal restraint will give way to expansion and liberality. Until
then, expect to see occasional flare-ups of the winter mentality that
predominated in the last decade. These flare-ups should become more and
more infrequent, however, as the K-wave spring season gradually warms the blood
and increases the animal spirits. <o:p></o:p></span></div>
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<span style="font-family: "arial" , "sans-serif";"><br />
When K-wave spring finally hits full bloom, it will bring many economic
benefits. There will be a few signs to watch for to let us know that
spring has fully arrived. First and foremost, watch for higher yields on
U.S. Treasury bonds. There is no surer sign that the long-term economic
cycle is accelerating than rising bond yields. <o:p></o:p></span></div>
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<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";">As
the new K-wave upward phase progresses we'll also see increasing real estate
activity as prospective home buyers and commercial builders alike look to lock
in still-attractive mortgage rates before they get too high. As real
estate timer Robert Campbell addressed in his latest newsletter (<a href="http://www.realestatetiming.com/">www.RealEstateTiming.com</a>), U.S. home
prices have broken out of a two-year doldrums phase and are rising at their
fastest pace since 2014. The momentum of
real estate activity is on the upswing. </span><br />
<span style="font-family: "arial" , "sans-serif";"><br /></span></div>
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<span style="font-family: "arial" , "sans-serif";">
Finally, look for speculative interest in both stocks and commodities to
increase on a large scale. Risk aversion is a lingering symptom of the
contractionist psychology of the K-wave winter season. When K-wave spring
blooms in full, however, investment activity will pick up as participants shed
their anxieties and trade them in for a more optimistic outlook. <o:p></o:p></span></div>
Clif Drokehttp://www.blogger.com/profile/14608461795434758077noreply@blogger.com0tag:blogger.com,1999:blog-6396508525872754044.post-44141673575148367932017-03-28T11:20:00.001-07:002017-03-28T11:21:03.120-07:00 Book Review: Mind, Money & Markets<span style="font-family: "arial" , sans-serif; text-align: justify;">Most books in the financial genre tend to be, quite frankly, boring. Books on the subject of stock market speculation are prime culprits of this tendency toward the tedious. Every now and then, though, a book appears which breaks out of this mold and is truly as entertaining as it is educational. Such is the case with Dave Harder and Dr. Janice Dorn’s recent book,</span><span style="font-family: "arial" , sans-serif; text-align: justify;"> </span><i style="font-family: arial, sans-serif; text-align: justify;">Mind, Money & Markets</i><span style="font-family: "arial" , sans-serif; text-align: justify;">.</span><br />
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<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";">The fruit of their collaboration is a useful guide for investors, traders, and business people and is rich in examples of how psychology influences markets. Dr. Dorn is imminently qualified to address this subject as she is a Board certified psychiatrist as well as a long-time investor and investment writer. Mr. Harder also brings long experience as an investment adviser and is currently vice president and portfolio manager with Canada’s largest financial firm. The decades of experience between them provides the reader with a far deeper insight into investor psychology than is available in most works on the subject.</span><br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiEeDw1Arol0elTIyibdrt_2hQWZItZdFst_4llumuprjAVW-aWcF93kIHJwSZ0ix632JMNx3wER44PlOq5mpH_fMNSKlSfXFW3y3P6sH9y_LbIEXOyu9PLayb6-MtPBK7KGmuDNG-b_WqR/s1600/mind.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" height="320" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiEeDw1Arol0elTIyibdrt_2hQWZItZdFst_4llumuprjAVW-aWcF93kIHJwSZ0ix632JMNx3wER44PlOq5mpH_fMNSKlSfXFW3y3P6sH9y_LbIEXOyu9PLayb6-MtPBK7KGmuDNG-b_WqR/s320/mind.jpg" width="224" /></a></div>
<span style="font-family: "arial" , sans-serif;">I personally found</span><span style="font-family: "arial" , sans-serif;"> </span><i style="font-family: arial, sans-serif;">Mind, Money & Markets</i><span style="font-family: "arial" , sans-serif;"> </span><span style="font-family: "arial" , sans-serif;">to be an engaging and insightful read. At over 400 pages, there’s a lot of info to digest but the writing is smooth and the chapters seemed to fly by. The book is richly illuminated with many colorful charts and illustrations and is lively with many accounts of how psychology influenced the financial market debacles from the distant pass to the present. </span></div>
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<span style="font-family: "arial" , "sans-serif";">Chapter 6 affords the reader with an in-depth discussion of market trends and momentum and is alone worth the price of the book. There are also chapters dealing with the cycle of investor emotions, emotional management, identifying market tops and bottoms, and portfolio management. Chapter 28 entitled, “It Is Time for a Revolutionary Change in Portfolio Management”, is also worth the price of admission. </span><span style="font-family: "arial" , sans-serif;"> </span><br />
<span style="font-family: "arial" , sans-serif;"><br /></span></div>
<br />
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";">I heartily commend <i>Mind, Money & Markets</i> as a worthy addition to every trader/investor’s library. The book is available from Amazon.com or click <a href="https://www.amazon.com/Mind-Money-Markets-Investor-Business/dp/0993951902/ref=sr_1_1?ie=UTF8&qid=1490506848&sr=8-1&keywords=mind+money+and+markets" target="_blank">here</a>.</span></div>
Clif Drokehttp://www.blogger.com/profile/14608461795434758077noreply@blogger.com0tag:blogger.com,1999:blog-6396508525872754044.post-87789547265080686002017-03-25T22:41:00.004-07:002017-03-28T11:17:11.245-07:00What Obamacare’s failure means for America<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , sans-serif;">The first legislative setback of the Trump Administration is being celebrated
by many, but not by middle class taxpayers and business owners. A
Republican-led Congress last week failed to generate the consensus required to
overturn key provisions of the Affordable Care Act (ACA). In a frank
admission of defeat, House Speaker Paul Ryan declared that Obamacare would
remain "the law of the land." </span></div>
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<span style="font-family: "arial" , "sans-serif";"><br />
The stock market wasn't too thrilled about it, either, although there wasn't a
concerted selling effort on the part of the bears. The major indices were
down for the week, but the tech sector continued to show resilience with
semiconductors in the leadership position. There was a suggestion in
the press last week that the stock market "couldn't care less" about
Obamacare, and perhaps that's true. But there's one thing that will be
seriously impacted by the lack of Obamacare reform and that's the middle class
economy.<o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";"><br />
Performing a postmortem of a failed political reform effort is seldom a
gratifying task, but in this case there are a couple of things that need to be
addressed. From the start, the mainstream press tried to control the
debate by constantly reminding everyone of the 24 million Americans who stood
to lose coverage should Obamacare be repealed. Never mind that is only
about eight percent of the entire U.S. population, hence an extreme
minority. In a representative-style democracy such as ours, public policy
is supposed to benefit the majority -- not the minority at the expense of the
majority. <o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";"><br />
What too many pundits have failed to consider in their treatment of the
Obamacare debate is that the legislation which mandates health insurance for
Americans is at root a personal liberty issue. It's not about providing
free (or cheap) coverage for the needy or the underinsured. The main
issue, which seemed to escape most commentators, is that Obamacare is a form of
redistributive economics: socialism in its essence. Obamacare represents
the government putting the proverbial gun to the individual's head and saying,
"You will buy health care whether you need it or not...or
else!" <o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";"><br />
I found it shocking that Obamacare was passed in the first place with little of
the impassioned protest among individuals which characterized the first attempt
at establishing socialized medicine in America (in 1993). Even more
surprising was the limp-wristed effort with which the current Congress failed
to address the underlying problem with Obamacare, viz. the individual mandate.
An easy solution to the Obamacare reform debate would have been to simply
eliminate the individual mandate and leave everything else intact. This
would have highlighted the single biggest problem with the legislation while
avoiding direct confrontation from those who insisted that Obamacare not be
entirely repealed.<o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";"><br />
Aside from personal liberty considerations, the other main consequence of
leaving Obamacare intact is that it does nothing to alleviate the problems
faced by individuals and small business owners who are forced to shoulder the
burden of expensive healthcare coverage or else pay a hefty penalty. One
of the big reasons why the current economic recovery since 2009 has been the
slowest on record is because of the exorbitant tax and regulatory burden imposed
by Washington in the wake of the credit collapse. Rather than remit
taxes, the tried-and-true palliative for getting out of recession, the
Washington establishment did the exact opposite. No wonder then that Middle
America has struggled to restore its financial condition ever since the housing
bust laid waste to it some 10 years ago. <o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";">If
you want to see just how the middle class business economy is doing right now,
take a look at the following graph. It combines the stock prices of some
of the leading U.S. publicly traded companies which cater primarily to the
average American. As you can see, it's hardly a picture of health and
prosperity. <o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";"><br /></span></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjgta2T_nAXLXtSqjQ4E92kNsL0iXtgnZnlFw1vLO7uwynp7ZSKrtlDbF5GVL6iSkRXDV13HDN7oNAYtLtmcYrm6k529bMvkVn6W8z-Ypcz59hGpqPso7QH_UaCbpTc00b4vyfGsOtOToGW/s1600/middleclass.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="263" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjgta2T_nAXLXtSqjQ4E92kNsL0iXtgnZnlFw1vLO7uwynp7ZSKrtlDbF5GVL6iSkRXDV13HDN7oNAYtLtmcYrm6k529bMvkVn6W8z-Ypcz59hGpqPso7QH_UaCbpTc00b4vyfGsOtOToGW/s400/middleclass.jpg" width="400" /></a></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";"><br /></span><span style="font-family: "arial" , sans-serif;">Had Congress signaled its sympathy with middle class struggles by remitting the
Obamacare taxes, there would almost certainly have been a strong consumer
spending boom in its wake. Lowering taxes always has a stimulative
effect, and there's no better way to facilitate economic health than to make it
easier for individuals and businesses to spend more of their hard-earned
dollars into the economy than by letting them keep more of it. Failure to
lift the burden imposed by Obamacare means that the millstone remains tied
firmly around the necks of millions of Americans. It also means the
economy won't be returning to a vigorous state anytime soon.</span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";"><br />
The failure of the Obamacare reform attempt also paves the way for the
continued dominance of financial engineering in steering the economy.
Congress let slip an opportunity to regain the control over the economy that it
surrendered to Wall Street and the Federal Reserve in the wake of the credit
crash. Instead of economic healing via fiscal stimulus and tax
remittance, the economy will for now continue to be dominated by financial
sector and central bank policy. Any economic improvement from here will
likely be due to the trickle-down effect of a rising stock market. The
direct stimulating effect of Congressional tax policy would have been far
preferable. <o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";">While
the tone of this article might be construed as fatalistic, by no means should
it be assumed that the die is cast. There's still a chance, however
remote, that the Congress will come to its senses in time to at least address
some aspects of tax reform before the 2018 mid-term election. By failing
to seriously address one of the leading issues facing the middle class economy,
however, Congress has telegraphed the message that it lacks sympathy with the
majority of U.S. taxpayers. An overnight change in this
attitude would seem unlikely.</span></div>
Clif Drokehttp://www.blogger.com/profile/14608461795434758077noreply@blogger.com0tag:blogger.com,1999:blog-6396508525872754044.post-61252476884719533192017-03-14T14:12:00.004-07:002017-03-14T14:12:44.061-07:00What’s preventing the Dow from exploding?<div class="MsoNoSpacing" style="text-align: justify;">
<span style="background-color: white; font-family: Arial, sans-serif;">The stock market has once again entered a period
of consolidation as investors wait for the results of the most important
legislative decision of the year. The fight to repeal and replace
Obamacare has taken the spotlight as Congress debates the passage of
legislation that would eliminate its most burdensome aspects for businesses and
individual taxpayers alike.</span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "Arial","sans-serif";">Internally,
the NYSE broad market has been unsettled for the last several days after a
period of relative calm in the months following the U.S. presidential
election. There have been more than 40
stocks making new 52-week lows on a daily basis since last week. This makes almost two weeks that the number
of daily new lows has exceeded 40, which reflects an increase in internal
selling pressure. Most of that selling
pressure is coming from consumer/retail stocks, bond funds and, increasingly,
energy stocks. <o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "Arial","sans-serif";">The
extremity of internal selling pressure isn’t yet great enough to cause any
major concerns about the strength of the stock market’s intermediate-term
uptrend. If the new lows don’t soon
diminish, however, it could eventually cause problems for the interim trend as
internal weakness spreads from the above mentioned sectors to the broader
market.<o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "Arial","sans-serif";">Following
is a graph of the daily cumulative NYSE new highs-new lows. It’s telling that for the first time since
the Nov. 9 election, the highs-lows have stalled out. And while the trend is still technically up
for the highs-lows, that trend could be broken if the new lows continue to
expand in the next couple of weeks. <o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhGa_rwlR4lkLR65wcdADNYwwNXDWY-GtnoLZXpCMczwTIQ2dOv3jxv6qHSrNDEbF21Hv8lb5xgxrwO5tYDHUieEqU5Rhm8Piicm1Ev23cgn4Fj8LceKlkjI8n0m-b88nxoGJZLpnAGXt5G/s1600/highs-lows.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="270" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhGa_rwlR4lkLR65wcdADNYwwNXDWY-GtnoLZXpCMczwTIQ2dOv3jxv6qHSrNDEbF21Hv8lb5xgxrwO5tYDHUieEqU5Rhm8Piicm1Ev23cgn4Fj8LceKlkjI8n0m-b88nxoGJZLpnAGXt5G/s400/highs-lows.jpg" width="400" /></a></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "Arial","sans-serif";">It’s
clear that the honeymoon phase of President Trump’s election is over as
investors aren’t giving a free ride to the stock market until he delivers on
some of his campaign promises. The most
critical of these promises concerns the proposed overhaul of the Patient
Protection and Affordable Care Act (a.k.a. Obamacare). The mainstream news media are in full swing
right now with negative stories which undermine the Congress’ effort at
eliminating the onerous taxes surrounding Obamacare. The tantalizing prospect of having the bill’s
individual and employer mandates (which forces individuals to purchase health
care or else pay a steep penalty) repealed is one big reason why the middle
class turned out in droves to elect Trump.
<o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "Arial","sans-serif";">Now
it’s time for the Republican-controlled Congress to “spit or get off the pot”
as the saying goes. Congress has an
excellent chance to relieve a massive tax burden on individuals and small
business owners by approving the proposed repeal of the Obamacare
mandates. Unfortunately, there is now a
concerted effort underway within Congress designed at undermining the proposed
overhaul. It can’t be emphasized enough
that the repeal of the Obamacare taxes would be of tremendous benefit for the
economy by relieving the stress created by years of burdensome taxation. That pent-up energy would likely express
itself through a massive rally in the Dow and major averages, which have been
tethered by the uncertainty surrounding the Obamacare reform debate in
Congress. <o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "Arial","sans-serif";">A
repeal of the individual and employer mandates would also likely result in a
hiring spree by small business and would give the stock market the euphoric
burst of investor confidence needed to achieve heights undreamed of by even the
most optimistic bulls. This in turn
would stimulate even more business activity due to the stimulative effect of
America’s financially-driven economy. </span><span style="font-family: Arial, sans-serif;"> </span></div>
<br />
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "Arial","sans-serif";">It’s
sobering to think that how the rest of 2017 turns out for investors and wage
earners alike might very well rest in the hands of Congress even as we
speak. All we can do now is pray for the
best outcome and hope the Congress is able to deliver what would be the most
extraordinary gift that Washington could possibly give the American
taxpayers. <o:p></o:p></span></div>
Clif Drokehttp://www.blogger.com/profile/14608461795434758077noreply@blogger.com0tag:blogger.com,1999:blog-6396508525872754044.post-86745472076463301432017-02-23T13:53:00.000-08:002017-02-23T13:53:48.395-08:00Another bubble? Bring it on!<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";">Anytime
the Dow makes a new high you can be reasonably assured of hearing the B-word
bounced around in the media. Memories of
the last bubble are still vivid and painful enough to trigger flashbacks of the
bubble’s collapse. It’s only natural
then that investors fear a return of irrational exuberance. Despite these fears, the evidence of a newly
formed bubble is surprisingly lacking, as we’ll uncover here.<o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";">Asset
manager Jeremy Grantham famously defined a bubble as any asset whose price has
moved at least two standard deviations above its longer-term statistical mean,
or norm. This definition is too rigid,
however, and can sometimes be misapplied to see bubbles where none actually
exist. Markets can sometimes exceed the
2 standard deviation rule in non-bubble environments, as when the utilities
sector last year experienced a 3 standard deviation event. <o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";">This
definition also is overly reliant on statistics and is lacking in the
psychology department. Investor
psychology, after all, is a primary driving force of the pricing mechanism in
all free markets. What Grantham’s 2
standard deviation event rule fails to consider is that if a market experiences
a record-breaking and sustained run-up, it can sometimes occur without widespread
participation by small traders and investors.
And without large scale participation among retail traders the
psychology of a bubble is lacking, i.e. there is no bubble.<o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";">The
latest rally in the major stock market averages has once again fueled talk of a
mania for equities in the popular press.
As discussed in previous commentaries, though, there is as yet no
evidence of widespread direct participation in the equity market by small
investors. Much of the movement behind
the rally to new highs is courtesy of institutional activity, with the public
participating only indirectly via retirement savings funds. Nowhere to be seen is the incessant
preoccupation with day trading, swing trading and stock picking which were
symptoms of the last two bubbles. <o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";">One
explanation for this startling lack of bubble psychology despite the all-time
highs in stock prices is the K-wave.
Readers of this commentary should be familiar with this most basic of
all long-term economic cycles, which answers roughly to the 60-year equity
market cycle. The K-wave deflationary
descent bottomed in 2014 based on the Kress cycle count. K-waves are often divided into four sections
or “seasons” with each section being assigned a season of the year (e.g.
winter, spring, summer, fall). The
following graph was devised many years ago by P.Q. Wall and does an admirable
job of describing the K-wave seasons.<o:p></o:p></span></div>
<div class="MsoNoSpacing" style="tab-stops: 374.25pt; text-align: justify;">
<span style="font-family: "arial" , "sans-serif";"> <o:p></o:p></span></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjWC7z_t5GSyjpY04HHWHEYqrY52O1M57NCr8wDLj0F5-Q87TxLUhA8eFnpPw4vPKW0loT-KHe-AltBs1SXwx-57Ct0JN0f6_mBK-DxGhvwu-W_3_KFsvb1B1Ik80rTtBbBaTMuPJGgqcsN/s1600/seasons.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="112" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjWC7z_t5GSyjpY04HHWHEYqrY52O1M57NCr8wDLj0F5-Q87TxLUhA8eFnpPw4vPKW0loT-KHe-AltBs1SXwx-57Ct0JN0f6_mBK-DxGhvwu-W_3_KFsvb1B1Ik80rTtBbBaTMuPJGgqcsN/s400/seasons.jpg" width="400" /></a></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";">If
we assume that K-wave winter season ended in 2014, we’re now in the early phase
of K-wave spring. Early spring can
easily be confused with winter due to the occasional freeze or snow storm that
sometimes happens during the transition period between the two seasons. But as the season progresses the signs of new
life and warmth that always accompany spring gradually become more
evident. In that same vein, the last
couple of years might easily have been confused with winter due to periodic
outbursts of deflation in the global economy.
Yet we’re starting to see unmistakable signs that K-wave spring has truly
sprung, even in the weakest performing foreign markets. <o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";">To
take one example, China’s stock market is starting to show renewed signs of
life after being in a bear market the last two years. <span style="background: white;">China has also
recently begun trying to increase its economic growth by providnig plenty of
credit. As Dr. Ed Yardeni has observed,
“During January, total ‘social financing’ rose by a record $542.3 billion. That’s not on a y/y basis, but rather on a
m/m basis! On a y/y basis, social
financing totaled $2.7 trillion over the past 12 months through January. Bank loans, which are included in social
financing, rose $335.7 billion during January m/m and $1.8 trillion over the
past 12 months.”</span><o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";">The
emerging markets have experienced a similar rebound along with several euro
zone markets. As the U.S. leads the rest
of the world out of global recession, there can be no denying that the K-wave
is beginning to work its spring-time magic.<o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";">The
aggressive policy stance by China’s central bank has led to worries that
China’s real estate and stock markets may soon experience another bubble. This in turn has added to fears that the U.S.
will soon experience another bubble event in the stock market. This need not concern us, however, since
painful memories of the credit crisis are still strong enough among central
bankers to prevent a bubble from forming, let alone get out of control. Even China’s last taste of an equity market
bubble ended prematurely when frightened policy makers quickly tightened money
and credit in fear of the consequences. <o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";">Now
let’s assume for a minute, though, that a bubble was allowed to form in the
U.S. equity market this year. Would this
be such a bad thing? Considering that
the biggest advances in technological progress and development, to say nothing
of widespread prosperity, have occurred during bubbles it’s easy to answer that
question in the negative. While the
naysayers focus on the negative aspects of a bubble’s implosion they neglect to
mention that even after the inevitable popping, society is still immeasurably
better off than before the bubble began.
Indeed, a bubble might be just what is needed to put the U.S. economy
back on the right track for vigorous growth.
<o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";">It
should be added that when it comes to economic policy, it’s always best to err
on the side of too much growth than on too much austerity. The events in Europe of recent years serve as
a stark reminder of this fact. Thus
whenever fears of a bubble are discussed, it would do policy makers well to
consider that the benefits of a loose monetary policy always outweigh that of a
tight one. <o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";">Probably
the biggest argument used by the bubblemongers right now is the chart of the
NASDAQ 100 Index (NDX). This chart can
easily be used to justify the fear of an incipient bubble, yet the investor
psychology and mass participation factors are curiously missing right now. <o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiYh45eSJT5hrCU9oroO2MW54FNkYAoALz_5i29Pm7G50_ZKgU_y-DZmee6FtDimNMTmKjIzSRZrrzXDasWhm6-BO1UWoUfjQxDoVglyciFpXro_P-KrMBJSNANle_YxE28-GRWzpVoEjiu/s1600/ndx.gif" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="231" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiYh45eSJT5hrCU9oroO2MW54FNkYAoALz_5i29Pm7G50_ZKgU_y-DZmee6FtDimNMTmKjIzSRZrrzXDasWhm6-BO1UWoUfjQxDoVglyciFpXro_P-KrMBJSNANle_YxE28-GRWzpVoEjiu/s400/ndx.gif" width="400" /></a></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";">Before
we arrive at the bubble stage, we should see increased interest bordering on
obsession among small investors as the stock market becomes a primary focus
among the masses. As this hasn’t yet
happened, the inescapable conclusion is that the long-term bull market hasn’t
reached bubble proportions yet and therefore has a ways to go before
expiring. <o:p></o:p></span></div>
Clif Drokehttp://www.blogger.com/profile/14608461795434758077noreply@blogger.com0tag:blogger.com,1999:blog-6396508525872754044.post-71984551758951424662017-02-14T11:18:00.003-08:002017-02-14T11:39:21.470-08:00The bull market no one believes in<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , sans-serif;">The
stock market continues to make new highs, yet none of the signs which accompany
a market bubble are evident.</span><span style="font-family: "arial" , sans-serif;"> </span><span style="font-family: "arial" , sans-serif;">Investors
are asking, “When will the Dow finally correct?”</span><span style="font-family: "arial" , sans-serif;"> </span><span style="font-family: "arial" , sans-serif;">By “correct” they mean “decline.”</span><span style="font-family: "arial" , sans-serif;"> </span><span style="font-family: "arial" , sans-serif;">However, a market correction doesn’t always
entail a decline for the major averages and can sometimes take the form of a
lateral consolidation or trading range.</span><span style="font-family: "arial" , sans-serif;">
</span><span style="font-family: "arial" , sans-serif;">That appears to be the case for the 2-month period from December through
early February when the Dow and S&P made little headway.</span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";">In
fact, in January the Dow Jones Industrial Average (DJI) recorded its tightest
trading range of only 1.1% in over 100 years.
This continues a prolonged sideways pattern in the Dow and other
averages since mid-December when the post-election rally reached a
plateau. The question everyone was
asking was whether this plateau was merely a temporary “pause that refreshes”
in an ongoing rally or the end of the rally and the prelude to another market
setback. The Dow provided the answer to
that with the last week’s breakout above the top of the trading range
ceiling. It has rallied each day since,
putatively on the hopes generated by President Trump’s forthcoming tax-related
announcement. <o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="separator" style="clear: both; text-align: center;">
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<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";">While
the bull market in equities continues, a surprising number of investors are
either mistrustful of the rally or outright bearish. According to a recent article in BBC News,
there are a growing number of wealthy and politically liberal U.S. citizens who
are doing things in the wake of Donald Trump’s election that were commonly seen
by politically conservative citizens during the Obama years. That is, they are buying guns, becoming
survivalists, and preparing for an impending catastrophe related to the Trump
presidency, the article reported. <o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";">It
was also reported that a number of wealthy Americans are preparing for what
they believe is the apocalypse.
According to <i>Business Insider</i>,
some have purchased underground bunkers while other wealthy individuals are planning
to emigrate to New Zealand. “Saying
you’re ‘buying a house in New Zealand’ is kind of a wink, wink, say no more,”
said Steve Huffman, CEO of the Reddit web site.
“Once you’ve done the Masonic handshake, they’ll be, like, ‘Oh, you
know, I have a broker who sells old ICBM silos, and they’re nuclear hardened,
and they kind of look like they would be interesting to live in.” <o:p></o:p></span></div>
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<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";">The
common denominator in these accounts is fear among the upper class. The dread of an uncertain future which was
pervasive among America’s middle class for much of the last eight years has now
been transferred to the upper class.
While it might be premature to ascribe this to the recent rush back into
gold, bond funds and other safe-haven investments, it would seem that there is
just enough uncertainty among the upper crust to account for the lack of
movement in the major stock market indices since December. <o:p></o:p></span></div>
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<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";">Tight,
narrow trading ranges in the major indices are launching pads for major moves
in either direction. In the context of a
bull market, they typically represent rest and consolidation before the next
move higher. The odds technically
favored this outcome, yet a substantial number of investors still don’t believe
in the strength of the bull market. This
is reflected in the manifestations of fear among the upper class mentioned
above, as well as in the path the market rally is taking. <o:p></o:p></span></div>
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<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";">There
is talk among some observers that the market is undergoing a “melt-up”. This is an erroneous application of that
term. A classic melt-up is characterized
by a runaway, almost straight-up and sustained market rally on high volume with
widespread participation. The trajectory
of the major indices since November can hardly be described as “melting
up.” Rather, the market’s path has been
measured and well-ordered, as the daily chart of the NYSE Composite Index (NYA)
attests. <o:p></o:p></span></div>
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<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";">The
real melt-up phase of this bull market hasn’t even started yet. We’ll know it has arrived when we see runaway
stock prices coupled with increased participation among the legion of retail
investors still on the sidelines. Even
institutional investors are surprisingly tempered in their usual optimism, as
expressed in their collective 2017 forecasts.
Melt-ups have a way of surprisingly even the bulls in how high they
carry the market averages before peaking.
For now, though, a combination of fear and cautious optimism holds sway
among investors and this alone is enough to argue that the bull market still
has legs.</span></div>
Clif Drokehttp://www.blogger.com/profile/14608461795434758077noreply@blogger.com0tag:blogger.com,1999:blog-6396508525872754044.post-89747084102391292532017-02-06T13:25:00.004-08:002017-02-06T13:25:35.251-08:00The danger of being bearish in a bull market<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: Arial, sans-serif;">One
of the biggest contributors to losses for traders in the financial market is
the temptation to sell short.</span><span style="font-family: Arial, sans-serif;"> </span><span style="font-family: Arial, sans-serif;">Borrowing
shares of a company that are not owned by the seller in the hopes of making a
massive profit has shipwrecked more traders than probably any other
factor.</span><span style="font-family: Arial, sans-serif;"> </span><span style="font-family: Arial, sans-serif;">With stories abounding of the
quick and easy profits to be made in selling stocks which are supposedly on the
verge of plummeting, it’s no wonder that the allure of “shorting” is so irresistible
to so many.</span><span style="font-family: Arial, sans-serif;"> </span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "Arial","sans-serif";">Selling
short is a simple enough proposition: place a short sale order with your broker
for a company whose shares you believe are overvalued or technically
“overbought”. Then just sit back and
wait for the profits to start rolling in.
If only it were that easy! The
trouble with selling short is that in most cases the odds are against the short
seller. This is due to a number of
factors, some of which we’ll examine here.
<o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "Arial","sans-serif";">Perhaps
the biggest risk for short sellers is the crowded short trade. A high-profile example of what happens when
too many traders pile into a single stock on the short side occurred recently –
a cautionary tale if ever there was one.
It involved the loss of one man’s entire fortune due to a misguided
attempt at selling short one of the most widely traded U.S.-listed stocks. It’s a textbook case of what can go wrong
when attempting one of the most dangerous of all trading maneuvers. <o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="background: white; font-family: "Arial","sans-serif";">According to<span class="apple-converted-space"><span style="color: #26282a;"> MarketWatch,</span></span> Canadian investor F.S. Comeau
bet his last $249,000 against <strong><span style="color: #26282a; font-weight: normal;">Apple Inc.</span></strong><span class="apple-converted-space"><b><span style="color: #26282a;"> </span></b><span style="color: #26282a; mso-bidi-font-weight: bold;">(AAPL)</span></span> in an
attempt to reclaim $2.5 million lost in poor investments. At the time of the trade, shares were valued
around $122, and MarketWatch reported that an increase of just $6 would deplete
Comeau’s savings. <o:p></o:p></span></div>
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<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="background: white; font-family: "Arial","sans-serif";">Apple shares screamed higher last week when the tech giant<span class="apple-converted-space"><span style="color: #26282a;"> </span></span></span><span style="font-family: "Arial","sans-serif";">released an impressive Q1 earnings
report<span style="background: white;"> and Comeau lost substantially. As of this writing, AAPL shares had risen to
a 52-week high of $130.50.<o:p></o:p></span></span></div>
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<br /></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiBaUvmzxaGLvBMCK79flB10T_dsFH3kWhztlHOfL8YcH200qrapw1jy2wmqvpGWmw7yCHRPoaMhF4RXOxS-z9vjSi5N2NxUGtS5pba6NQjWPwNi6eqBTJcfp65iYBm9RLL5vihgItFfd0i/s1600/aapl.gif" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="231" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiBaUvmzxaGLvBMCK79flB10T_dsFH3kWhztlHOfL8YcH200qrapw1jy2wmqvpGWmw7yCHRPoaMhF4RXOxS-z9vjSi5N2NxUGtS5pba6NQjWPwNi6eqBTJcfp65iYBm9RLL5vihgItFfd0i/s400/aapl.gif" width="400" /></a></div>
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<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "Arial","sans-serif";">Before
Apple released its earnings report, Comeau, who live blogged his reactions
while wearing a wolf mask, acknowledged the capacity of investors aware of his
short position to fade his trade. “With
14,000 people watching, you guys could really mess with me,” he said. When the company released its report his
reaction was terse but poignant: “Oh, no.”<o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "Arial","sans-serif";">YahooFinance
described Comeau’s reaction to Apple earnings as follows: [Comeau] kept
howling. And crying. And throwing his pre-popped, celebratory
champagne bottle. <span style="background: white;">There was a timeless stretch of blank camera stares,
and then the sound of dry heaving. With mask still on, he pulled out a
trashcan, and vomited more than his life savings.”<o:p></o:p></span></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="background: white; font-family: "Arial","sans-serif";">This misguided trader can perhaps be excused for his
desperation born of inexperience. What’s
inexcusable, though, are the far more experienced trading advisors who gave
assurances to their followers that Apple was a prime short-sale candidate
despite all the technical and fundamental evidence to the contrary. This misleading advice undoubtedly led to
many hundreds of traders making the same mistake as Comeau. <o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="background: white; font-family: "Arial","sans-serif";">More than anything, the Apple experience provides a wonderful
cautionary tale for all would-be short sellers.
The lesson here is that in an established bull market it’s best to avoid
selling short altogether. Trading
against the prevailing trend is especially dangerous when one considers that
short interest can quickly reach critical levels, thus the slightest bit of
contrary news can catalyze a massive rally.
Short-covering rallies tend to involve wealth-destroying upside gaps, as
the latest Apple stock experience proved.
These gaps are products of the urgency among short sellers to exit the
trade. They frequently represent losses
on an unimagined scale.<o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="background: white; font-family: "Arial","sans-serif";">Since naked short selling involves borrowing, the debt
component of this trade ensures that the volatility factor will be greatly
magnified vis-à-vis buying outright.
While this can sometimes work to a trader’s advantage in a bear market,
it can prove catastrophic in a bull market.
The best policy is to avoid shorting unless a major bear market is
underway and downside momentum has been thoroughly established. Even then, your timing must sometimes be
perfect.</span><span style="background-color: white; font-family: Arial, sans-serif;"> </span></div>
<br />
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="background: white; font-family: "Arial","sans-serif";">In a bull market the trend is truly your friend, and trading
against the grain is usually a fool’s errand.
Best leave that to the men wearing wolf masks. <o:p></o:p></span></div>
Clif Drokehttp://www.blogger.com/profile/14608461795434758077noreply@blogger.com0tag:blogger.com,1999:blog-6396508525872754044.post-22434364305223305092017-02-02T22:59:00.000-08:002017-02-02T23:14:51.993-08:00Financial Sense News Hour <div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";">I
was recently interviewed by Cris Sheridan of the Financial Sense Network (<a href="http://www.financialsense.com/">www.financialsense.com</a>).
The interview can be downloaded at the following link:</span><span style="font-family: "arial" , "sans-serif"; font-size: 16.5pt;"><o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";"><br /></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="color: blue; font-family: "arial" , "sans-serif";"><span style="color: #888888; text-decoration: none;"><a href="http://www.financialsensenewshour.com/broadcast/insider/fsn2017-0203-droke-j3h8s7c.mp3" target="_blank">CLICK HERE</a></span></span></div>
<br />
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";">In
it we discuss the possibility that 2017 will witness an extreme "blow-off" in the stock market followed by a major sell-off later in the year. Special thanks to Cris and everyone at
FSN.</span><span style="font-family: "arial" , "sans-serif"; font-size: 16.5pt;"><o:p></o:p></span></div>
Clif Drokehttp://www.blogger.com/profile/14608461795434758077noreply@blogger.com0tag:blogger.com,1999:blog-6396508525872754044.post-30693112086547381782017-02-02T13:22:00.005-08:002017-02-02T13:23:33.081-08:00Why stock market analysts will be wrong about 2017<div class="MsoNoSpacing" style="text-align: justify;">
<span style="background-color: white; font-family: "arial" , sans-serif;">We’re already a month into New Year and there has been an
ample amount of sentiment data to suggest that investors, both retail and
institutional, aren’t terribly enthusiastic on the stock market outlook for
2017.</span><span style="background-color: white; font-family: "arial" , sans-serif;"> </span><span style="background-color: white; font-family: "arial" , sans-serif;">Granted that institutional
analysts are still bullish, as per usual, but in the round table type opinion
polls I’ve seen they’ve apparently lowered their expectations.</span><span style="background-color: white; font-family: "arial" , sans-serif;"> </span><span style="background-color: white; font-family: "arial" , sans-serif;">Everyone seems to be preparing for a somewhat
disappointing year based largely on the assumption that after eight years of a
bull market, surely another major rally is out of the question.</span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="background: white; font-family: "arial" , "sans-serif";">The decennial rhythm we discussed in an earlier commentary
argues against these diminished expectations.
Indeed, </span><span style="font-family: "arial" , "sans-serif"; mso-fareast-font-family: Calibri;">seventh year of the decade tends to be one of unusual volatility for
stock prices. While it’s true crashes, corrections
and panics are quite common in the seventh year (e.g. September 1987, October
1997, February/August 2007), the seventh year also sees a pronounced tendency
for sustained rallies in the first seven months of the year. </span><span style="font-family: "arial" , "sans-serif";">Accordingly,
2017 could be</span><span style="font-family: "arial" , "sans-serif"; mso-fareast-font-family: Calibri;"> a year filled with tremendous opportunity for making money in the
stock market – in both directions. </span><span style="font-family: "arial" , "sans-serif";"><o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif"; mso-fareast-font-family: Calibri;">For 2017, the 10-year rhythm equates to
2007. As you recall, 2007 was a
momentous year characterized at once by great volatility alternating between
great fear and euphoria. It was the year
that saw the last major stock market top and also the onset of the credit
tsunami which overwhelmed the market the following year. If the decennial pattern holds true, 2017
should witness both a meaningful rally to new all-time highs as well as a
decline of potentially major proportions.
In short, it could turn out to be a big year for the bulls as well as
the bears.<o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif"; mso-fareast-font-family: Calibri;">As for the idea that the bull market is
getting “long in the tooth” and has therefore exhausted its upside potential,
consider that the previous two years could well be characterized as a stealth
bear market. The major large cap indices
essentially went nowhere in 2015-2016 while the Russell Small Cap Index (RUT)
experienced a 25% decline. That’s a bear
market by anyone’s definition. <o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif"; mso-fareast-font-family: Calibri;">Retail investors have also been </span><span style="font-family: "arial" , "sans-serif";">quite pessimistic since 2015 in the
overall scheme of things.<span class="apple-converted-space"> </span> From the start of 2015 up until
the election, more than $200 billion was pulled out of U.S. equity funds and
ETFs, while a bit more than that was funneled into bond funds and
ETFs. <span class="apple-converted-space"> </span>That
two-year stretch of risk aversion, however, is apparently ending as investors
have gradually embraced more risk tolerance since the election. <span class="apple-converted-space"> </span>Since
the election nearly $46 billion has flowed into U.S. equity funds, while nearly
$3 billion has left bond funds, according to money flow statistics.</span><span style="font-family: "arial" , "sans-serif"; mso-fareast-font-family: Calibri;"><o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif"; mso-fareast-font-family: Calibri;">The evidence strongly suggests that the past
two years served the purpose of clearing out the excesses generated by the
long-term bull market which began in 2009.
In other words, the market is rested and ready to resume its potential
as we head further into 2017.</span><span style="font-family: "arial" , "sans-serif";"><o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="background: white; font-family: "arial" , "sans-serif";">Another concern among investors is that the rise in interest
rates since last year could stifle the stock market’s upside potential. </span><span style="font-family: "arial" , "sans-serif";">While
it’s true that sustained periods or rising Treasury yields have often proved a
hindrance to higher stock prices, there is an exception to that rule. <span style="background: white;">According to
LPL Research, there have been 11 periods of<span class="apple-converted-space"> </span>rising interest rates (at least a 1%
rise in the 10-year Treasury note) since 1996, each lasting an average of six
months. During those times, the S&P
500 rose an average of 5.44%, thus proving that in the early stages of rising
interest rates stocks and yields often rise simultaneously.<o:p></o:p></span></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";">We’re
at a point in the long-wave credit cycle where interest rates are ready to rise
after being depressed for years.
According to K-Wave theory, after the 60-year economic cycle bottomed in
2014 we should see a gradual increase in rates as the economy recovers its
former vigor. Of course this process
will take a long time to complete – possibly decades – but we’re likely at a
point in the newly formed 60-year cycle where even a temporarily sharp run-up
in rates won’t damage the economy or even necessarily hinder the stock
market. In fact, rising rates at this
point indicates increasing demand for credit and a corresponding improvement in
the economy. <o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";">Following
is a 10-year chart of the 10-year Treasury Yield Index (TNX). The double-bottom in the interest rate is
clearly visible between the years 2012 and 2016. I believe this marks the long-term low in
interest rates for the previous long-term cycle.<o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh2aq5vLGoPEcrLgm_wD8vG9Y4zIVzWkAEZKVc6GMlE8POeQxbLJFQWyGPQV6YDXRGBAMETzOb-oSfKOy6ZLpCGITenyiDco1Biqa54D2DFGbHvFI9weiAYP8b070LgoaeSL3QjzHF5mK4o/s1600/tnx.gif" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="231" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh2aq5vLGoPEcrLgm_wD8vG9Y4zIVzWkAEZKVc6GMlE8POeQxbLJFQWyGPQV6YDXRGBAMETzOb-oSfKOy6ZLpCGITenyiDco1Biqa54D2DFGbHvFI9weiAYP8b070LgoaeSL3QjzHF5mK4o/s400/tnx.gif" width="400" /></a></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";">As
long as rates don’t rise too high, too fast it’s very possible that stock
prices will rise along with Treasury yields without much interference along the
way. An added bonus to the rally in
T-bond yields is that bond prices are now in a downward trend. This should serve to discourage investors who
piled heavily into the bond market in the last few years. It should also cause them to look more
closely at stocks as a long-term investment once again, especially as painful
memories from the 2008 crash gradually wear off. The underperformance of corporate debt
vis-à-vis equities should also encourage investors to take a second look at the
stock market. Below is the 1-year graph
of the Dow Jones Corporate Bond Index.<o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEihco3QcusSqyQRQW1GfQvM5a6i3YabmGWJ3nRSNr0z50wYbFeNBejCXwrJtlqcU11q8NpsMhnz60XFCiUFcir0diXDrf9BiJWlrjhU5hrbBGCwiIhwQ64dWiHmxqewCmA-vP6btO0uRrZQ/s1600/dowbonds.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="276" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEihco3QcusSqyQRQW1GfQvM5a6i3YabmGWJ3nRSNr0z50wYbFeNBejCXwrJtlqcU11q8NpsMhnz60XFCiUFcir0diXDrf9BiJWlrjhU5hrbBGCwiIhwQ64dWiHmxqewCmA-vP6btO0uRrZQ/s400/dowbonds.jpg" width="400" /></a></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , sans-serif;"><br /></span>
<span style="font-family: "arial" , sans-serif;">The
bottom line is that 2017 should see an increase in business activity across the
board as the U.S. returns to a normal business cycle after being artificially
suppressed by the actions of central banks for years.</span><span style="font-family: "arial" , sans-serif;"> </span><span style="font-family: "arial" , sans-serif;">Moreover, the decennial rhythm suggests that
except for a period of potential weakness in the August-October time frame,
year 2017 will likely prove to be a memorable one especially from the
standpoint of the upside potential in both the equity market and the U.S.
economy.</span></div>
Clif Drokehttp://www.blogger.com/profile/14608461795434758077noreply@blogger.com0tag:blogger.com,1999:blog-6396508525872754044.post-19549942563267362852017-01-19T08:26:00.003-08:002017-01-19T08:27:12.688-08:00Dow 20,000: A new beginning…or the beginning of the end?<div class="MsoNoSpacing" style="text-align: justify;">
<span style="background: white; font-family: "arial" , "sans-serif";">After touching the benchmark 20,000 level last month, the Dow
Jones Industrial Average has spent the last five weeks in a tight, narrow
trading range just under this level.
Famed trader Jesse Livermore theorized in his pseudonymous book, <i>Reminiscences of a Stock Operator</i>, that
stocks are attracted to major round number levels. In the case of the Dow, the 20,000 level has
generated more press and speculation among investors than any number since the
formerly mythical 10,000 level was crossed in 1999. Clearly Dow 20,000 carries a tremendous
psychological significance, even if it’s a simple case of self-fulfilling
prophecy. <o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";">While
the technical significance of Dow 20,000 can be endlessly debated, the action
of the Industrials in the weeks following the first test of this level is of
more immediate concern. To wit, does the
action of the last several weeks represent a normal consolidation (i.e. a
“pause that refreshes”), or is it indicative of distribution (i.e. informed
selling)? The NYSE tape doesn’t suggest
distribution since the new 52-week high-low differential has been mostly
healthy in the last few weeks while market breadth has also been confirming,
and in some cases leading, the advance.<o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";">It’s
possible, however, that the extended effort to push above Dow 20,000 could be
the prelude to a distribution phase. In
an earlier commentary we discussed the distinct possibility – based on the
“echo” of the 10-year cycle – that the coming months could witness a blow-off
interim top, followed by significant decline at some point later in the
year. Historically such declines have
occurred in the late summer/early fall months, particularly in the seventh year
of the decennial rhythm. <o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";">A
run-up above the Dow 20,000 level, should it occur, would undoubtedly generate
lots of enthusiasm among the hold-outs in the retail investor camp. There’s still a huge amount of money on the
sidelines right now with small investors still skittish about buying stocks at
current valuations. But greed is a
persuasive argument, and if the Dow breaks out decisively above 20,000 in the
coming weeks it would serve as a magnet for sidelined money. One thing that investors can’t stand more
than anything else is watching an historic rally while they’re sitting in cash
and not participating. A breakout above
20,000 would likely trigger the primal instincts of these
non-participants. <o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";">Although
the 20,000 level carries great psychological significance its technical
significance hasn’t yet been cemented.
In order for 20,000 to become technically significant it must be
established as a “seldom crossed line.”
A seldom crossed line is a concept developed by the late market
technician P.Q. Wall. Wall emphasized that
when an individual stock or market index crossed an important price level only
a few times in its history, the level takes on added significance as both a
support and resistance level. He wrote:<o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";">“If
cycles exist at all there must by that very fact be equidistant lines of price
on a vertical scale that rise as more energy enters the market. These should be seldom crossed lines between
which price tends to cluster about equilibrium points that mathematicians would
call strange attractors but that we call magnetic midpoints….Electrons in an atom
rise and fall in just such stair steps.”<o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";">Take
for example the chart of the Dow Industrials shown below. While many investors touted Dow 10,000 as a
critical level back in the late ‘90s and early 2000s, that particular level was
actually crossed many times on both the upside and the downside. By Wall’s reckoning, this invalidated the
10,000 level as having major significance as a long-term support or resistance
level – as history subsequently proved. <o:p></o:p></span></div>
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<br /></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgxUKtaI9HJdTEAgmLy2TFLWiqt0uD1OjrmKNJoSFnqB7GPyzsh3HDPPQdIlMM4KY9-DuF3HtpWM3t83rDpLP6RpUX7MfPHemkAOj34NJc_-RftrM7r7uNqg7wV9d5r7agSDk2w1x0jT1Ft/s1600/dow.gif" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="231" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgxUKtaI9HJdTEAgmLy2TFLWiqt0uD1OjrmKNJoSFnqB7GPyzsh3HDPPQdIlMM4KY9-DuF3HtpWM3t83rDpLP6RpUX7MfPHemkAOj34NJc_-RftrM7r7uNqg7wV9d5r7agSDk2w1x0jT1Ft/s400/dow.gif" width="400" /></a></div>
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<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";">Wall
believed that when a stock’s price encountered resistance at a key level
without breaking above it then finally succeeded in breaking out the rally that
followed would be noteworthy. For the
Dow, the closest thing to a seldom crossed line is the 14,000 level. This was established as a pivotal level when
the Dow broke out above it in 2013, then proceeded to rocket all the way to the
18,000 level before wavering. In the
future, any major decline that tests 14,000 is likely to be turned back due to
the established technical significance of this level.<o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";">As
for Dow 20,000 you can see in the following snapshot of the last three months’
worth of trading action that the level in question hasn’t been penetrated on
the upside yet. This is an important
first step toward the establishment of a seldom crossed line. The Dow has yet to lay claim to this
important designation of the 20,000 level, however. The key ingredient here is time and the
reaction of the Dow’s price line to this pivotal level in the coming days.<o:p></o:p></span></div>
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<br /></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj212yHxrAEsTLzob6Ym90WyvJwcPLVZtG4jHoIq-4mmYmhNgYTr6V8cxZX3C0RIKmrtc09EbN9hmbKyKWYfgs5puX2HcN6fbmUynTPvMKOHtnN0MKUb9gk-0j2osxBwzUKdv0-3zKJz1Fr/s1600/dow2.gif" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="231" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj212yHxrAEsTLzob6Ym90WyvJwcPLVZtG4jHoIq-4mmYmhNgYTr6V8cxZX3C0RIKmrtc09EbN9hmbKyKWYfgs5puX2HcN6fbmUynTPvMKOHtnN0MKUb9gk-0j2osxBwzUKdv0-3zKJz1Fr/s400/dow2.gif" width="400" /></a></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<span style="font-family: arial, sans-serif; text-align: justify;">If
Dow 20,000 turns out to be a seldom crossed line then the next attempt at
breaking above this level should see an explosive rally with no immediate
reversal. In other words, it should
cross above 20,000 only once and not look back for a while. Accordingly, the next few weeks should be
quite interesting and potentially historic depending on how the market behaves
once 20,000 is finally crossed.</span>Clif Drokehttp://www.blogger.com/profile/14608461795434758077noreply@blogger.com0tag:blogger.com,1999:blog-6396508525872754044.post-19056289574142274052017-01-12T12:52:00.005-08:002017-01-12T12:53:28.661-08:00Biggest challenge of 2017 directly ahead for gold, stocks<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , sans-serif;">If
you thought the pace of the head-spinning political events of the last two
months couldn’t get any faster, think again.</span><span style="font-family: "arial" , sans-serif;">
</span><span style="font-family: "arial" , sans-serif;">One of the most critical decisions of President-Elect Trump’s reign will
soon be decided.</span><span style="font-family: "arial" , sans-serif;"> </span><span style="font-family: "arial" , sans-serif;">The final verdict will
have a direct impact on the direction of stocks, gold, and the economy in the
months to come.</span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";">The
decision in question is the Congressional challenge being made against the
Affordable Care Act (ACA), also known as Obamacare. Specifically, the requirement that individual
Americans carry health insurance or else pay a stiff financial penalty is being
challenged. Earlier this week, Trump
directed the Republican-led Congress to begin efforts at repealing and
replacing the health care law “very quickly.”<o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";">The
mainstream news media is sparing no expense in its efforts at turning public
sentiment against a repeal of the healthcare law. CNBC reports that “the number of people who
owed Obamacare fines last year dropped by about 20 percent, while the number of
Americans who benefited from financial aid for Obamacare plans grew to more
than 5 million.” The latest data was
culled from 2015 tax returns to the Internal Revenue Service. <o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";">IRS
Commissioner John Koskinen said the number of people receiving Obamacare
subsidies was up from 3 million in 2014.
For that year, customers got more than $10 billion in tax credits, with
an average subsidy of $3,430 annually, according to the IRS. Obamacare subsidies are available to wage earners
with low and moderate incomes. People
who earn less money get more in assistance than higher earners.<o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";">Koskinen
wrote that about 6.5 million taxpayers last tax season reported owing a total
of $3 billion in such tax penalties for failing to have coverage in 2015. In contrast, about 8 million people owed an
Obamacare fine for lack of coverage in 2014.
Fines related to lack of coverage in 2014 totaled $1.6 billion.<o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";">CNBC
reported that some 12.7 million people claimed one or more exemptions from the
ACA-coverage mandate when they filed their taxes last year. “The exemptions are wide ranging and can
include having very low income, being incarcerated or having a close family
member die recently,” according to CNBC.
<o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";">While
pro-Obamacare media outlets such as CNBC are touting this news as confirmation
that the ACA is “working,” the gorilla in the room is conveniently
ignored. The reason for the decline in
Obamacare fines last year is that millions of Americans experienced a
significant drop in income, which ironically is a direct result of the economic
damage inflicted on businesses by the financial strictures of the ACA. <o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";">CNBC
also reported that the Republican-led Congress last week began taking steps
toward repealing key parts of the ACA, which include the funding of premium
subsidies and the individual mandate.
For the middle class’s economic sake, let’s hope the effort is
successful.<o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";">You
may be asking what all of this has to do with the price of gold or the stock
market. The answer is “everything!” Repealing the individual mandate would serve
as a huge catalyst for the U.S. economy and financial market. It would lift a grievous burden from the
shoulders of working-class Americans and would serve as a stimulus to consumer
spending. Economics 101 establishes that
when wage earners are allowed to keep more of their income, they’re less likely
to think twice about spending and investing it.
<o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";">One
of the big reasons for the Nowhere-ville sideways trend in stock prices in the
last couple of years is because people have been forced to think twice before
spending or allocating money into investments due to the constraints of the
ACA. Pollsters have consistently
underestimated the number of healthy individuals who choose not to carry
expensive health insurance because they don’t consumer healthcare
services. Now those healthy individuals
are being punished for their lifestyle choices by being forced to pay upwards
of $1,000 per year in the Obamacare tax simply because they choose not to be
insured. This is an assault on personal
liberty and common sense, and it has created a massive obstacle to full
economic recovery. <o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";">What
can investors expect if the Obamacare tax penalty is soon repealed? First, there will be an immediate uptick in
consumer spending and overall economic activity. Americans are always looking for an excuse to
spend, and if they’re provided with what amounts to a massive tax cut they’ll
express their relief by purchasing the items on their wish list that they’ve
held off on buying due to personal budget constraints. Businesses, moreover, will begin to pick up
the pace of hiring since the healthcare mandate is no longer acting to suppress
business investment spending. <o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";">A
repeal of the ACA’s individual mandate would also revive the fortunes of
publicly traded companies which serve the middle class. Many of these companies’ stocks are
components in our Middle Class Index (below).
The Index has been languishing for the last two years, but I’d venture
that an upside breakout from the lateral trading range would shortly follow an
Obamacare repeal.<o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjsDq_RGjbnRBs2aQfVUHpkv9FEsZo4ukwrIskA7NRaoq6ZbD8ccHoj51lxqi7Ys9K-_camjYRQnyCCm-hgLR7U8hG6N11ysHn8Xmq5dKodp1-UjSS9ZhdM0DICJmpVK74-1RWpWBh3UJUp/s1600/middleclass.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="270" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjsDq_RGjbnRBs2aQfVUHpkv9FEsZo4ukwrIskA7NRaoq6ZbD8ccHoj51lxqi7Ys9K-_camjYRQnyCCm-hgLR7U8hG6N11ysHn8Xmq5dKodp1-UjSS9ZhdM0DICJmpVK74-1RWpWBh3UJUp/s400/middleclass.jpg" width="400" /></a></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";">As
for gold, a repeal of the individual mandate would also likely have
far-reaching consequences. Gold’s
fortunes would be helped, ironically, by success in getting the Obamacare tax
removed. While gold is primarily a
safe-haven asset which feeds off investors’ concerns about the economic and
political outlook, gold’s moves over the last two years have been closely
correlated to the direction of the Middle Class Index. As the fortunes of companies which serve
middle class consumers have risen, so has gold’s price. Conversely, last year’s major peak and
subsequent decline in the Index has coincided with the July 2016 peak in the
gold price and corresponding mini-collapse.</span></div>
<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj4VFYFDRnNV3SsLstbLqEkDgDCyQsW1aJ8NeSZ3bZhi_53jreGTd4uFni5NWAZHAwt18eIicTHFDMot5WTHT4YWrR1wmM9k6tvZXD6Ea-FalcuIXubB8ChQFUIiiZn3SV-k-G0tYkgIJEx/s1600/gold.gif" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="207" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj4VFYFDRnNV3SsLstbLqEkDgDCyQsW1aJ8NeSZ3bZhi_53jreGTd4uFni5NWAZHAwt18eIicTHFDMot5WTHT4YWrR1wmM9k6tvZXD6Ea-FalcuIXubB8ChQFUIiiZn3SV-k-G0tYkgIJEx/s400/gold.gif" width="400" /></a></div>
Clif Drokehttp://www.blogger.com/profile/14608461795434758077noreply@blogger.com0tag:blogger.com,1999:blog-6396508525872754044.post-30099021227711244502017-01-11T13:51:00.003-08:002017-01-11T13:52:19.621-08:002017: Year of extremes<div class="MsoNoSpacing">
<span style="font-family: "arial" , sans-serif; text-align: justify;">Now
that another New Year is upon us, it’s time to reflect on what the coming
months might unfold.</span><span style="font-family: "arial" , sans-serif; text-align: justify;"> </span><span style="font-family: "arial" , sans-serif; text-align: justify;">Normally when
market analysts try their hand at predicting the year ahead it involves either
wild guessing or linear extrapolation based on prevailing trends.</span><span style="font-family: "arial" , sans-serif; text-align: justify;"> </span><span style="font-family: "arial" , sans-serif; text-align: justify;">I tend to eschew both methods and instead
focus on comparing past events in comparable time frames.</span><span style="font-family: "arial" , sans-serif; text-align: justify;"> </span><span style="font-family: "arial" , sans-serif; text-align: justify;">This method is based on something known as
Kress cycle “echo” analysis and was pioneered by my late mentor, Samuel J.
Kress.</span><span style="font-family: "arial" , sans-serif; text-align: justify;"> </span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";">The
year 2016 was filled with ups and downs, but was mainly a torpid year with
stock prices stuck in a dull trading range for much of the spring and
summer. It continued a theme of
directionless and no progress from the prior year, which, combined with the
after-effects of the preceding slow-growth years, culminated in a disaffected
mindset on the part of the masses. The
result was clearly seen in the outcome of the 2016 U.S. presidential election.<o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";">One
of the most reliable of the long-term market rhythms (or “echoes”) is the
10-year (decennial) pattern. This is
often erroneously referred to as a “cycle” despite not fitting the technical
definition of one. The 10-year rhythm was
famously expounded by the late market analyst Edson Gould and by Edgar Lawrence
Smith in his book, <i>Tides in the Affairs
of Men</i>.<o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";">The
seventh year of the decade tends to be tempestuous and often sees extraordinary
volatility. It’s a year filled with
extreme ups and downs and not uncommonly witnesses both a major high and a
major low within the year. </span><span style="font-family: "arial" , "sans-serif"; mso-fareast-font-family: Calibri;">In
recent decades, the seventh year has witnessed the market making impressive
strides, yet not without its share of turmoil.
Crashes, mini-crashes and panics are quite common in the seventh year
(e.g. September 1987, October 1997, February/August 2007). It will do us well to keep this in
remembrance as we enter what promises to be a year filled with tremendous
opportunity for making money in the stock market – in both directions. <o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif"; mso-fareast-font-family: Calibri;">For 2017, the 10-year rhythm equates to
2007. As you recall, 2007 was a
momentous year characterized at once by great volatility alternating between
great fear and euphoria. It was the year
that saw the last major stock market top and also the onset of the credit tsunami
which overwhelmed the market the following year. If the decennial pattern holds true, 2017
should witness both a meaningful rally to new all-time highs as well as a
decline of potentially major proportions later in the year. In short, it could turn out to be a big year
for the bulls as well as the bears.<o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";">Now
what about the economy in the coming year?
Year 2016 ended on a positive note, with the last meaningful economic
news in late December being the revelation that U.S. consumer confidence had
hit a 15-year high. The Consumer Confidence
Index hit 113.7 in December, exceeding economists’ expectations of a 109
reading. The reading was the highest
since August 2001. Rising sentiment
among consumers implies an optimistic economic outlook in the wake of Donald
Trump’s election win. The following
graph is courtesy of the Trading Economics website (www.tradingeconomics.com).<o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi6GNXuJelicusI2-QlsFClvkIC8UiujWJq6551DiVla0SR5T5OJukDHxao3K0LY_qTCM1aS-0T6vYIv1wbpu_2gyFvcL1HH0V-ywrQxGfCBMeh06CmUHrGG8T0ANcx_Xyp5IcMFv8V655A/s1600/consumer.gif" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="186" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi6GNXuJelicusI2-QlsFClvkIC8UiujWJq6551DiVla0SR5T5OJukDHxao3K0LY_qTCM1aS-0T6vYIv1wbpu_2gyFvcL1HH0V-ywrQxGfCBMeh06CmUHrGG8T0ANcx_Xyp5IcMFv8V655A/s400/consumer.gif" width="400" /></a></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";">For
many in the middle class, Trump’s win has provided a reason for genuine hope
for the first time in years. Whether
this hope will ever be fulfilled is a matter for conjecture. What’s important from a market perspective is
how consumers and investors respond to that hope. To that end the appropriate question to ask
is, “Will 2017 be the year that retail investors finally return from the
sidelines?” <o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";">For
the year-seven decennial pattern to repeat, as it has in the three prior
decades there must be not only a continuation of rising consumer confidence,
but an acceleration in investor optimism as well. To this end, it would seem necessary that
small investors return from the sidelines and put their money back into the
stock market. After years of being stuck
in the bomb shelter of low-yielding bonds, this important group of participants
is no doubt feeling the urge to grow their money. <o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";">To
that end, the stock market is beckoning to them – especially with so many major
indices at or near all-time highs. The
fact that the man who they believe represents their interests as an economic
class will be in the White House will serve to stimulate their confidence in
the economic outlook. History shows that
when consumers feel good about their intermediate-term economic prospects they
are more likely to invest in stocks. <o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";">Here
is what investor sentiment currently looks like according to the Rydex Ratio of
investor sentiment. We should ideally
see a major spike higher in this ratio sometime this year, ideally by late
summer, to let us know that the historical pattern for Year Seven is on track
for being repeated.<o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi2jQJwp06TcJtyzmd35a8-h5fJSnOOWDF201xdiyC-VX-rGzZIu4jwMzYhiUPULHBewnoCkqhyrjzSDCCctfDktxRwTg6QGzUblRZ1xIR_GOkGrhFR3oTOaf59yL9J_uGe_lF-P8-T_Z9Z/s1600/rydex.gif" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="186" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi2jQJwp06TcJtyzmd35a8-h5fJSnOOWDF201xdiyC-VX-rGzZIu4jwMzYhiUPULHBewnoCkqhyrjzSDCCctfDktxRwTg6QGzUblRZ1xIR_GOkGrhFR3oTOaf59yL9J_uGe_lF-P8-T_Z9Z/s400/rydex.gif" width="400" /></a></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , sans-serif;"><br /></span>
<span style="font-family: "arial" , sans-serif;">Whether
or not 2017 will prove to be the exception to the “rules” of the decennial
“echo” established in the prior decades remains to be seen.</span><span style="font-family: "arial" , sans-serif;"> </span><span style="font-family: "arial" , sans-serif;">We are certainly living in exceptional times,
so it’s possible that 2017 will in effect throw the historical playbook out the
window.</span><span style="font-family: "arial" , sans-serif;"> </span><span style="font-family: "arial" , sans-serif;">But as the last several years
have resonated to the tune of the Kress cycle echoes to some degree or other, I
have to assume that there will be at least some validity to the decennial
rhythm for 2017.</span><span style="font-family: "arial" , sans-serif;"> </span><span style="font-family: "arial" , sans-serif;">Remember, while history
doesn’t always repeat it does usually rhyme.</span><span style="font-family: "arial" , sans-serif;"> </span></div>
Clif Drokehttp://www.blogger.com/profile/14608461795434758077noreply@blogger.com0tag:blogger.com,1999:blog-6396508525872754044.post-44594904252806225532016-12-13T12:51:00.003-08:002016-12-13T12:52:09.612-08:00Why collapse isn’t on the menu<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";">The
word “collapse” instantly conjures primal feelings of both fear and excitement
whenever we hear it. We fear it because it evokes our collective
belief that collapse is fatal and final, yet it excites our imagination to the
possibility, however, remote, that perhaps we’ll be among the lucky few to
survive and even prosper from it. <o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";">Whether
in reference to a financial market crash or the collapse of government, the
very idea has given birth to a plethora of writings on the
subject. Indeed, some of the top selling books in the financial
literature category in recent years have had collapse as the subject matter,
for writers instinctively know they can always count on a visceral reaction
from their readers whenever they write of it.<o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";">Laying
aside the fear it evokes, the study of collapse is a fascinating and rewarding
endeavor. Historians have long known what financial writers have
only recently discovered, viz. that writing about collapse is a lucrative
industry. Consider the hundreds of books dedicated to the decline
and fall of the Roman Empire, or to any number of past civilizations (Aztec,
Egyptian, Babylonian, etc.). One of the great preoccupations of
writers of this genre is the guessing game of what exactly causes a society, or
an economy, to collapse. There is invariably no consensus among
historians as to how, or even when exactly, it happens. <o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";">Consider
the famous example of ancient Rome. What was it that actually
precipitated the decline and fall of this mighty empire? While there
have been hundreds of reasons offered by specialists as to the cause(s), the
most commonly assigned factors can be generally summarized as follows: 1.)
Immigration and assimilation of foreigners (i.e. barbarians), 2.) Failure to continue
expanding the frontiers via military conquest, 3.) Loss of personal discipline
and liberty; 4.) Corruption on both the administrative and personal
levels. <o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";">Even
if we accept any, or all, of these reasons as being legitimate, it still
doesn’t answer the perennial question of what led the Romans to decide on
making such a fateful decision. In other words, what was the
ultimate reason for the decline and fall?<o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";">Financial
writers are plagued by the same lack of agreement as to what causes markets to
collapse. The reasons they offer range from the prosaic to the
profound. Most commonly they assume that a market collapse is the
result of asset prices being “too high” or unsustainably expensive relative to
valuation. What many don’t realize is that demand for any given
asset can extend well beyond the boundaries of normal valuation for years, or
even decades, at a time. We need look no further than the Treasury
bond market to see an example of this. <o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";">It
has become fashionable among collapse historians to assume that collapse often
occurs without warning out of a clear blue sky as it were. Nothing could be further from the truth. Collapses are invariably preceded by long
periods of internal weakness, whether it’s the financial market or any other social
system. This explains why strong societies, much like strong
markets, can withstand any number of external shocks without
toppling. It’s only when weakness is entrenched that one can expect
external pressure to cause serious damage to a structure. <o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";">An
example of this is the stock market plunge of late 2015/early 2016. In the months leading up to it there was a
sustained period of internal weakness and technical erosion in the NYSE broad
market. The number of stocks making new
52-week lows was well over 40, and often in the triple digits, which was a
clear sign of distribution taking place in some key industry groups. This weakness was evident in the NYSE Hi-Lo
Momentum (HILMO) indicators, which depicted a downward path of least resistance
for stocks. The following graph is a
snapshot of what the HILMO indicators looked like in the weeks just prior to
the January 2016 market plunge.<o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgMz_4fp5eI5v9wwxTOZ4VsmEiSbnEZBmJJVgwqZIkd2dbdq_M2FlpIOdb7oeNz7YoPhZSJOhWGCWFrnLwCWa92nNEXJU5URohUAGcbADWtDsGlvyizzW83F6xiBHg8OCpE9h_eJySzYC2r/s1600/hilmo1.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="268" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgMz_4fp5eI5v9wwxTOZ4VsmEiSbnEZBmJJVgwqZIkd2dbdq_M2FlpIOdb7oeNz7YoPhZSJOhWGCWFrnLwCWa92nNEXJU5URohUAGcbADWtDsGlvyizzW83F6xiBHg8OCpE9h_eJySzYC2r/s400/hilmo1.jpg" width="400" /></a></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";">This
is also what stock market internal momentum looked like prior to the 2008
credit crash. In fact, it’s what
precedes every major collapse and it’s also a good representation of the
internal weakness which takes place before markets, societies and empires
collapse. Look below the surface and
you’ll always see the internal decay which paves the way for the coming
destruction. A healthy and thriving
system, by contrast, is simply not conducive for a collapse to occur.<o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";">When
we view the internal structure of the current NYSE stock market through the
lens of the HILMO indicator, what do we see?
A market ripe for collapse? Far
from it, we see overall signs of technical health – even if the market isn’t
firing on all cylinders. Below are all
six major components of HILMO. The
orange line is the longer-term momentum indicator, which is one of the most
important one for discerning whether or not the market has been undergoing
major distribution (i.e. internal selling).
It has been rising for several months now and is the polar opposite of
what it looked like heading into 2016.<o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhNchiYd1B2l9CUdEF72zAIu0eVEg-Bc6mtTJQTjlAeVeyGKV8E3diQNVoSS24DoCPeX-HGP49YbcOuqHN1dYpIcHFGmo3FFz7r1UltH5gf8ZMkauQnEpFHeROkDmVgWDHGFI_HQGp-3YpI/s1600/hilmo2.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="265" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhNchiYd1B2l9CUdEF72zAIu0eVEg-Bc6mtTJQTjlAeVeyGKV8E3diQNVoSS24DoCPeX-HGP49YbcOuqHN1dYpIcHFGmo3FFz7r1UltH5gf8ZMkauQnEpFHeROkDmVgWDHGFI_HQGp-3YpI/s400/hilmo2.jpg" width="400" /></a></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , sans-serif;"><br /></span>
<span style="font-family: "arial" , sans-serif;">It
would appear then that a collapse isn’t on the menu right now, at least not in
the intermediate term outlook.</span><span style="font-family: "arial" , sans-serif;"> </span><span style="font-family: "arial" , sans-serif;">If it
happens at all it will require a significant reversal of the market’s
longer-term internal momentum currents, which in turn would likely take several
months.</span><span style="font-family: "arial" , sans-serif;"> </span><span style="font-family: "arial" , sans-serif;">The weight of evidence suggests
that the doom-and-gloomers who are predicting collapse are much too early and
should save their apocalyptic warnings for a more propitious time.</span></div>
Clif Drokehttp://www.blogger.com/profile/14608461795434758077noreply@blogger.com0tag:blogger.com,1999:blog-6396508525872754044.post-30274638384008706362016-12-07T21:18:00.004-08:002016-12-08T11:01:50.229-08:00The great middle class revolt gets bigger<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , sans-serif;">With
the U.S. presidential election now behind us, many investors feel they can
finally breathe easy again after a nail-biting period of uncertainty since last
year. The rally in the major equity market indices since Nov. 9 has
been in large part a relief rally of sorts and has been
broad-based. The sell-off in bonds has also been an indication of
this collective relief. </span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";">Despite
the powerful stock market rally, not everyone is relieved about the election’s
outcome. There is some evidence that a large segment of the U.S.
population is still feeling uneasy about the incoming president. I’m
referring specifically to the upper-middle class, which by some measures hasn’t
expressed any enthusiasm in the way of increased spending patterns since the
election. Indeed, many in this socio-economic group have expressed
an unwillingness to make major purchases until they see evidence that
President-elect Trump’s policies are beneficial for the economy. <o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";">The
upper-middle class is roughly defined as those individuals that earn from
around US$85,000 to $150,000 per year. Based on one measure of upper-middle
class retail spending, they’ve noticeably curtailed their discretionary
spending for at least the last two years. Middle class spending also
remains below its 2014 peak. <o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";">Here’s
a theoretical question: If it were possible to invest in either the middle
class or the upper-middle class as if both were individual stocks or ETFs,
which would you choose? Logic would
dictate the latter group since we are assured by economists that the
upper-middle class has actually grown in recent years while the middle class
has allegedly shrunk. Moreover,
upper-middle class members typically earn on average at least twice as much as
the middle class average income. So
given a choice between the two, which do you think has performed better in the
last couple of years?<o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";">The
answer will no doubt surprise many of you; it’s the middle class. Here’s what a middle class “ETF” would look
like:<o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjbLrSEAux8a-0OxVLpCb6D3ubzIDssm56yrk-WHLs6vhWUr6zeYEQXo2XDdl3pn_UtNq_1wH7bB-vYufz8n-6HgB6sDV1ZRAvCZp9v6f43kg6fsjEGQyMt9H2xBrdcQhERL1jhlzo3A7BP/s1600/middleclass.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="272" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjbLrSEAux8a-0OxVLpCb6D3ubzIDssm56yrk-WHLs6vhWUr6zeYEQXo2XDdl3pn_UtNq_1wH7bB-vYufz8n-6HgB6sDV1ZRAvCZp9v6f43kg6fsjEGQyMt9H2xBrdcQhERL1jhlzo3A7BP/s400/middleclass.jpg" width="400" /></a></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";">This
theoretical class index is comprised of several companies which cater mainly to
the middle class, including WalMart, Dollar General, McDonalds, Ford, and JC
Penny. Notice in the above chart that
while most of the middle class-oriented stocks peaked in 2014, many of these
stocks have actually held their own and have been trending more or less
sideways since last year. Some of them
have even shown an upward bias since this year.<o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";">Now
for the upper-middle class “ETF.” Here’s
the chart:</span><span style="font-family: "arial" , sans-serif;"> </span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgYNJdBwH_AK2b4_j5sc5Nbj65nbPpe6mQ_V3UCH0Ifzr6OaJi4x0qNUjcF5SSPOmDPrK6IaMCWPHRlQ_L5ZIvwhJUzsKckHIQH3PV1uvuA8GQS5NjGBgUVX9thIWCwr-xr1vWQv4nWX6Kd/s1600/uppermiddle.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="273" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgYNJdBwH_AK2b4_j5sc5Nbj65nbPpe6mQ_V3UCH0Ifzr6OaJi4x0qNUjcF5SSPOmDPrK6IaMCWPHRlQ_L5ZIvwhJUzsKckHIQH3PV1uvuA8GQS5NjGBgUVX9thIWCwr-xr1vWQv4nWX6Kd/s400/uppermiddle.jpg" width="400" /></a></div>
<br />
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: arial, sans-serif;">As
you can see, the upper-middle class hasn’t exactly felt ebullient since their
discretionary spending peaked in 2014.
This index is comprised of stocks which cater mainly to members of the
upper-middle, including Target, Starbucks, BMW, Whole Foods, Apple, and
Chipotle Mexican Grill. Evidently, the
upper-middle class has felt less than enthusiastic in the last two years as the
overall trajectory of most publicly traded companies who serve this sector has
been, surprisingly, downward trending. </span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";">This
is not to imply that the fortunes of the upper-middle have been declining;
economic statistics suggest the opposite.
Yet a distinction must be made when performing this type of analysis
between <i>having</i> money and the
willingness to spend it. Clearly the
upper-middle class has been, by and large, less willing to spend than in the
years prior to 2015. <o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";">It
would be tempting to lump the trends shown in the above charts together and
label them collectively as a great “middle class revolt.” Undoubtedly that could be said about the way
the middle class feels, for they made their grievances known in the recent
election. As I’ve demonstrated many
times in the past, nothing is more devastating to the mass psyche than a
prolonged sideways trend in the equities market. The directionless stock market trend visible
in the NYSE Composite Index (NYA) since 2014 is a case in point. I believe that this, more than perhaps any
other factor, has engendered the spirit of revolt among the middle class.<o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg0UTISacCekAaYSDo1Vdh7u1K6xHjcD8vxiojKAA364x1sTp7qwiGB88GOOM86h2tHEQiHgZ1araBGB_0y3w6z5y3jXZpGBkofyM86iqAFZ0LfDU4FHzkW_0xhAtOGhSCrsKSKmJQddhRg/s1600/nya.gif" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="231" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg0UTISacCekAaYSDo1Vdh7u1K6xHjcD8vxiojKAA364x1sTp7qwiGB88GOOM86h2tHEQiHgZ1araBGB_0y3w6z5y3jXZpGBkofyM86iqAFZ0LfDU4FHzkW_0xhAtOGhSCrsKSKmJQddhRg/s400/nya.gif" width="400" /></a></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";">Human
nature is so constituted that if progress isn’t evident over a certain period
of time, people become restless. The
longer that people feel they aren’t progressing, the more restless they become. This explains why, almost without exception,
every political or military revolution in industrialized countries occurs after
a prolonged trading range in that country’s equity market. In the case of the U.S. middle class, it’s
not that this class is actually getting poorer; rather, they only feel they’re
not progressing. The above middle class
“ETF” chart only serves to underscore that belief. <o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";">I
would also make one more observation about both the above mentioned
“ETFs.” The middle class and
upper-middle class charts suggest that investors in both classes have been
underperforming the major averages.
Perhaps this is another factor behind the widespread notion that the
middle class is “shrinking.” While their
collective earnings have either stayed the same or increased in recent years,
their potential earnings (via the investment markets) have declined. This can only feed into the growing sense of
disillusionment that many within the middle class are feeling. What comes as a surprise, however, is that
the same might also be said of the upper-middle class. <o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";">The
next few months will be extremely interesting from the standpoint of middle
class investor sentiment. Should the
middle class index fail to break out from its 2+ year trading range soon, the
middle class may show further signs of discontent next year – especially if
President Trump fails to deliver on his promises to the middle class. </span><span style="font-family: "arial" , sans-serif;"> </span></div>
<br />
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , "sans-serif";">Moreover,
a failure of the upper-middle class index to significantly reverse its downward
trend fairly soon could potentially cause problems with the broader economy
given their outsized impact on consumer spending. Needless to say, the next few
months will be very informative on a number of levels.<o:p></o:p></span></div>
Clif Drokehttp://www.blogger.com/profile/14608461795434758077noreply@blogger.com0tag:blogger.com,1999:blog-6396508525872754044.post-4190892689192559592016-12-01T10:14:00.005-08:002016-12-01T10:14:34.883-08:00Will real estate tank in 2017?<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "Arial","sans-serif";">In
many ways, 2016 has been a banner year for U.S. real estate. Housing prices continued to strengthen in
several major metropolitan markets and even reached frothy proportions in at
least three major markets. Below the surface
of an otherwise healthy market, however, lies a set of factors that could cause
problems for the housing market in 2017.<o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "Arial","sans-serif";">Like
most financial assets, home prices have been stuck in a sideways trend since
2014 and by all appearances weren’t going anywhere anytime soon. The
chart shown here from the Calculated Risk blog shows the CoreLogic Home Price
Index from a yearly percentage change standpoint. The dramatic
increase in the tax and regulatory burden courtesy of the outgoing regime
contributed to this standstill. In the last several months it was
the uncertainty over the November presidential election which contributed to
subdued speculative activity in the financial markets. <o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhfH6HBGmUsHy5yVyR9rW2IJ0T1HKNjQVtHBCvhkIPsgDLYSCBMTINUpYTQ_v3iHHnOuQdKl2t6qPxdH5xNk_SvLwCEoq73rwPriCED-2sWNtEYEDwNjBsfjwtA_kZg4chKQ_tzTN6Mu-Hp/s1600/homeprices.gif" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="246" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhfH6HBGmUsHy5yVyR9rW2IJ0T1HKNjQVtHBCvhkIPsgDLYSCBMTINUpYTQ_v3iHHnOuQdKl2t6qPxdH5xNk_SvLwCEoq73rwPriCED-2sWNtEYEDwNjBsfjwtA_kZg4chKQ_tzTN6Mu-Hp/s400/homeprices.gif" width="400" /></a></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "Arial","sans-serif";">Now
that the uncertainty has lifted to a large degree, asset prices are breaking
out from their constrictive trading ranges, with many stock market sectors
making nominal new highs. Investors are hopeful that the incoming
administration will be more pro-business than the last one. Even
real estate prices have ticked higher on a year-over-year basis, as shown by
the above chart. <o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "Arial","sans-serif";">With
continued strength in real estate prices comes an increase in home equity
wealth for homeowners. According to CoreLogic, home equity wealth
has doubled since 2011 to $13 trillion due mainly to the housing market
recovery. Moreover, CoreLogic has forecast that a continued five percent
rise in home values in the coming year would create an additional $1 trillion
in home-equity wealth for homeowners. <o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "Arial","sans-serif";">The
current supply/demand balance for U.S. residential real estate is still
favorable for a rising market. Existing home sales and new home
building permits are on the rise, with existing home sales rising in recent
months by positive increments. The National Association of Realtors
recently reported that the supply of homes was a 4.5-month supply at the
current level of sales. This means that supply has decreased 7
percent in the past year.<o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjhJUy_mRBPFw0_reECUUHPxlieKLAMpSKR0i8hZFrBFjHFVWrbbrPCez0piGSqI9rcIJSb0zuB-QqcN-38kgDMEs_Edm3qCttts-lXAQSnuQRsh55Mq4l7I8qQoChD9DMwGW2vXuHIefib/s1600/homesales.gif" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="186" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjhJUy_mRBPFw0_reECUUHPxlieKLAMpSKR0i8hZFrBFjHFVWrbbrPCez0piGSqI9rcIJSb0zuB-QqcN-38kgDMEs_Edm3qCttts-lXAQSnuQRsh55Mq4l7I8qQoChD9DMwGW2vXuHIefib/s400/homesales.gif" width="400" /></a></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "Arial","sans-serif";">Up
until now the rally in bond yields (and fall in bond prices) hasn’t had much of
a discernible impact on mortgage rates.
That may be in the process of changing, however. The U.S. 30-Year Fixed Mortgage rate rose to
4.03% from last week’s 3.94%. In doing
so it pushed the year-over-year percentage change in the mortgage rate above
the “zero” line and into positive territory.
Whenever this has happened in the past it tends to create weakness for
the real estate-related stocks in the market.
It can even negatively impact the overall broad market for equities if
mortgage rates continue rising over several months. Rising mortgage rates can also be quite
detrimental for the overall real estate sector if they persist long
enough. <o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj-9uIR5DCfWYJ4Dg1Ie9WE0j_MEPqeCaBlzwBkOHRxJqK4qLxZBCyl6cpR5hJJPGtqhh3mUZq3ipSE-EC6TSycrC-g3B6t00sCVwO8Ft_jkKHQ-OHNR60OWbersHQFReofwaPKV8lLjLWT/s1600/mortgage.gif" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="153" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj-9uIR5DCfWYJ4Dg1Ie9WE0j_MEPqeCaBlzwBkOHRxJqK4qLxZBCyl6cpR5hJJPGtqhh3mUZq3ipSE-EC6TSycrC-g3B6t00sCVwO8Ft_jkKHQ-OHNR60OWbersHQFReofwaPKV8lLjLWT/s400/mortgage.gif" width="400" /></a></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "Arial","sans-serif";">It’s
also worth pointing out that three-month Libor rates, which are the benchmark
cost of short-term borrowing for the international banking system, have nearly
tripled in the last 12 months. As Steen
Jakobsen of Saxo Bank has observed, “The Libor rate is one of the few
instruments left that still moves freely and is priced by market forces. It is effectively telling us that the Fed is
already two hikes behind the curve.” <o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhRNSbTlq7_pw6iIBwppuziBogS0470eovYcB7fFVGmlZFE9mjwIpZ_hr_-oEqPluzmckeCpoOuQioOIejWqIyjzDjXBEjuICLiz2-z5WIbSTkZ5d_0e7bcW15vitmUljvJrWkhqK8ER-W5/s1600/libor.gif" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="153" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhRNSbTlq7_pw6iIBwppuziBogS0470eovYcB7fFVGmlZFE9mjwIpZ_hr_-oEqPluzmckeCpoOuQioOIejWqIyjzDjXBEjuICLiz2-z5WIbSTkZ5d_0e7bcW15vitmUljvJrWkhqK8ER-W5/s400/libor.gif" width="400" /></a></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "Arial","sans-serif";">My
colleague Robert Campbell, who writes <i>The
Campbell Real Estate Timing Letter</i> (<a href="http://www.realestatetiming.com/">www.RealEstateTiming.com</a>) had this
to say in his November newsletter: “Current real estate valuations are
justified only if rates stay low – and if the Fed does raise rates in December
as the financial markets currently expect, housing prices could start adjusting
downward.” This is certainly worth
pondering as we head into 2017, especially if the interest rate uptrend
continues. </span><span style="font-family: Arial, sans-serif;"> </span></div>
<br />
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "Arial","sans-serif";">Real
estate has been on a solid footing in the last few years but looks to encounter
some turbulence at some point next year. The increase in market interest
rates may well pressure the homebuilding sector, especially given the
vertiginous levels which bond prices have soared to in recent
years. Any continued weakness in the bond market will only increase
the pressure on housing loan demand. <o:p></o:p></span></div>
Clif Drokehttp://www.blogger.com/profile/14608461795434758077noreply@blogger.com0tag:blogger.com,1999:blog-6396508525872754044.post-40094224064195370132016-11-15T14:57:00.000-08:002016-11-15T14:57:03.175-08:00U.S. economy at major long-term pivotal point<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: Arial, sans-serif;">As
the dust settles from the U.S. presidential election, multitudes of political
analysts and news commentators continue to scratch their heads wondering “what
went wrong?”</span><span style="font-family: Arial, sans-serif;"> </span><span style="font-family: Arial, sans-serif;">The collective question
they’re asking of course is in reference to the candidate who was elected
President.</span><span style="font-family: Arial, sans-serif;"> </span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "Arial","sans-serif";">This
is the wrong question to ask, however.
What they should be asking is what led millions of (mostly) middle class
voters to rise up against the favored establishment candidate and voice their
disapproval with the incumbent party. As
is normally the case with anything relating to politics, the answer is to be
found in the realm of economics. <o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "Arial","sans-serif";">It’s
no secret that the main source of the middle class revolt is that class’s overall
lack of strong participation in the economic recovery of the last seven
years. Pundits have tended to put the
blame for this squarely on the shoulders of middle class workers. They never tire of repeating the mantra that
the middle class’s skill set is fast becoming obsolete due to the evolution of
technology and increased globalization.
This, though, has been true for at least the last three decades, so it
hardly qualifies as a prescient insight.
<o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "Arial","sans-serif";">No,
the root of middle class revolt is far more contemporary in origin and is much
easier to isolate than the pundits think.
Let’s ask ourselves, in political terms, what is it that the middle
class demands more than anything else?
The political philosopher Niccolò Machiavelli
provided the answer to this rhetorical question centuries ago: the working
class want nothing more than to be left alone by the ruling class. In other words, they don’t want to be
excessively taxed. <o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "Arial","sans-serif";">Without
almost a single exception, any revolution in any country – be it political or
military – has begun when the people were over-taxed and their cost of living
became too high to support without undue strain. It isn’t as much a lack of skills which has
led to the middle class’s troubles as it is a drastic increase in their cost of
living, thanks largely to an extraordinary increase in taxes in recent
years. And the main source of their tax
trouble can be pointed to a single source, viz. the Affordable Care Act (a.k.a.
Obamacare). <o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "Arial","sans-serif";">Regardless
of what your opinion might be as to the efficacy of this legislation, the
undeniable fact remains that for millions in the middle class it has
effectively drained their earnings by inflicting a hefty a penalty on those who
don’t wish to purchase health insurance.
It enacts an even stiffer drain on consumers’ earnings by encouraging
the young and healthy to purchase costly medical insurance when they don’t
really need it. <o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "Arial","sans-serif";">As
Machiavelli himself wryly observed, history does tend to repeat and most
political rulers fail to learn from its precepts. One would think the Democrats would have
learned a valuable lesson about forcing healthcare upon an unwilling populace
in 1993, when the Clinton Healthcare Plan (a.k.a. Hillarycare) was first
proposed. It basically amounted to a
forced attempt at socialized healthcare in the U.S., and it was staunchly
opposed by millions of (mostly) middle class voters. A vigorous initiative against the plan
launched by the Christian Coalition effectively sealed the fate of the Clinton
Healthcare Plan, allowing the economy a narrow escape from a substantial tax
increase.<o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "Arial","sans-serif";">A
rudimentary lesson of Economics 101 is that unwarranted taxes always hinder
productivity to some degree or other, for taxes are a disincentive to
produce. The more taxes government
implements to remove money from the pockets of wage earners, the less incentive
they have to work hard and make even more money. Thus the velocity of money decreases, which
is the basis behind a sluggish economy (as we’ll see here). <o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "Arial","sans-serif";">The
Obamacare penalty must certainly rank as one of the biggest tax increases in
U.S. history. One simply cannot tax the
American middle class like that and expect to that economic growth will
continue unimpeded. This is a big reason
why the Democrats lost big in the latest election: it was the middle class’s
repudiation of the Obamacare tax more than perhaps any other factor. <o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "Arial","sans-serif";">Although
the economy has certainly made significant strides since the depths of the
Great Recession, there’s no denying that it hasn’t regained its luster from the
heady years prior to the crash.
Economists often lament the lack of money velocity in the U.S., which is
depicted in the following graph. <o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjvTgdH9KuyuLrMyvItPkZQ95Z6YoeYOZGOnUECZxC1mmMaKcyyOUxhc0paTiX9f8p3YsdUkKHIn8i2Go8NJM5R9osdHwEbZVty7W5-5R2vGUBwHtJMpCgyTUYT1xcSMLfoGn1Qh2Yue2-7/s1600/velocity.gif" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="153" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjvTgdH9KuyuLrMyvItPkZQ95Z6YoeYOZGOnUECZxC1mmMaKcyyOUxhc0paTiX9f8p3YsdUkKHIn8i2Go8NJM5R9osdHwEbZVty7W5-5R2vGUBwHtJMpCgyTUYT1xcSMLfoGn1Qh2Yue2-7/s400/velocity.gif" width="400" /></a></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "Arial","sans-serif";">Velocity
is simply a measure of how quickly money is changing hands in the U.S. The above chart is a snapshot of the annual
percentage change in money velocity. The
picture speaks for itself and is a perfect reflection of the residual anxiety
still very much present within the middle class economy. Money simply isn’t changing hands fast enough
among typical wage earners and this has kept the economy from what could have
been a vigorous expansion. <o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "Arial","sans-serif";">The
blame for that can be put largely on the biggest tax increase in decades
previously mentioned. As long as the
Obamacare tax remains on the shoulders of non-healthcare consumers it will
continue to create a drag on the economy and prevent the kind of efflorescence
historically associated with the strongest rebounds. <o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "Arial","sans-serif";">Beyond
the impact that the Obamacare penalty laid upon millions in the middle class,
it has also had repercussions for investors and business owners. The drag created upon business by Obamacare
requirements has almost certainly contributed to the lack of forward momentum
in the stock market these last two years.
It can be seen most clearly in the NYSE Composite Index (NYA), below,
which is the broadest measure of the U.S. equity market. <o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjwV8CH0oIXZGHAnfVrnDO2H6hleJqpyYjga2hyphenhyphenfpu7Yjuat8aiUOwrUVbvgHgd0APHB3TBicKExxyPyGcicomxUrzX2y_7Nut6dD1J3NmD0EFTnNtLwkrG-fP7BI0CTwHS4O35Q9MV-KgF/s1600/nya.gif" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="231" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjwV8CH0oIXZGHAnfVrnDO2H6hleJqpyYjga2hyphenhyphenfpu7Yjuat8aiUOwrUVbvgHgd0APHB3TBicKExxyPyGcicomxUrzX2y_7Nut6dD1J3NmD0EFTnNtLwkrG-fP7BI0CTwHS4O35Q9MV-KgF/s400/nya.gif" width="400" /></a></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "Arial","sans-serif";">The
breakout to new highs in several of the major indices, excluding the NYA, may
indeed prove to be an anticipatory move in response to expectations that the
Trump Administration will relieve business of its excessive tax and regulatory
burden. In order for the breakout to
give way to a continued boom, however, this expectation should become
reality. <o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "Arial","sans-serif";">Now
that Republicans control both chambers of Congress they have a chance to redeem
themselves from their lack of a concerted effort against the Obamacare
vote. Regardless of whether they support
the law remaining intact, to acknowledge the middle class constituents who
voted for them they can, and should, send an undeniable message of
support. By eliminating, or at least
significantly lowering, the penalty for not buying health insurance they will
have given the middle class the best possible gift they can give. In doing so they will be lifting a huge
hindrance to the economy and allow it to truly take off in 2017. <o:p></o:p></span></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<br /></div>
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "Arial","sans-serif";">The
60-year economic cycle of inflation/deflation which bottom a couple of years
ago hasn’t had a chance to work its magic on the U.S. economy by lifting the
deflationary currents from the last two decades. The early years of the new 60-year cycle tend
to exert a benign inflationary impact by gradually lifting prices without
creating the problems associated with too much inflation. The up-phase of a new 60-year cycle also
tends to stimulate consumer spending and investment within the economy due to
the gradual increase of benign inflation.
Yet the cycle hasn’t been allowed to do its work thanks to the grievous
burden of taxation imposed by Obamacare. </span><span style="font-family: Arial, sans-serif;"> </span></div>
<br />
<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "Arial","sans-serif";">If
this tax is reversed by the incoming Congress, it’s highly likely that we’ll
witness a magnificent flowering of the economy in the years that follow. While the economic recovery since 2009 can be
likened to foliar growth in a fruiting plant, the second and most important
phase of the recovery must involve flowering.
Only then can the plant bear its fruit.
To date there has been much leafy growth, yet little flowering. The stimulant required for this flowering is
the lifting of the excessive burdens placed upon it by the previous
caretakers. <o:p></o:p></span></div>
Clif Drokehttp://www.blogger.com/profile/14608461795434758077noreply@blogger.com0tag:blogger.com,1999:blog-6396508525872754044.post-57469900570792533742016-11-10T11:35:00.005-08:002016-11-10T11:36:18.634-08:00What investors can expect from the Trump revolution<div class="MsoNoSpacing" style="text-align: justify;">
<span style="font-family: "arial" , sans-serif;">They’re
calling it the Great Revolution, and rightfully so.</span><span style="font-family: "arial" , sans-serif;"> </span><span style="font-family: "arial" , sans-serif;">Donald Trump’s earth-shattering victory over
Hillary Clinton on Nov. 8 must surely rate as one of the greatest political
upsets in U.S. history.</span><span style="font-family: "arial" , sans-serif;"> </span><span style="font-family: "arial" , sans-serif;">It stretches the
mind to recall the last time a true political outsider won the Oval
Office.</span><span style="font-family: "arial" , sans-serif;"> </span><span style="font-family: "arial" , sans-serif;">The prospects of what an
independently wealthy and politically unattached President can do for the
country are tantalizing to consider.</span><span style="font-family: "arial" , sans-serif;"> </span></div>
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<span style="font-family: "arial" , "sans-serif";">Let’s
leave the hyperbole and political predictions to others, though, and focus on
what little can be discerned in the wake of Trump’s historic win. There’s a saying we’re all familiar with:
“Don’t listen to what they say, follow the money trail.” That bromide has never been more relevant
than it is right now. With that as our
starting principle, let’s examine what the “smart money” thinks about Trump’s
presidential victory. They’re the ones,
after all, who determine the financial market’s course and it’s their opinions that
will likely prove most accurate. <o:p></o:p></span></div>
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<span style="font-family: "arial" , "sans-serif";">In
the wake of Mr. Trump’s victory of the U.S. presidency we’re seeing an
avalanche of predictions and commentaries from all sides of the political
spectrum as to what the President-Elect will do once in office. His opponents vehemently assert he will drag
the country into an economic recession – or worse – with his proposed
policies. His supporters maintain he
will restore American greatness and revitalize the nation’s struggling middle
class. Not in ages has there been a more
polarized response among both sides of the political divide.<o:p></o:p></span></div>
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<span style="font-family: "arial" , "sans-serif";">Since
no one but Trump himself and perhaps a few insiders can possibly know exactly
what his true intentions are, any attempt by outsiders such as me at predicting
the coming months would be mere speculation.
That doesn’t mean we’re completely without guidance, however. The old tried-and-true bromide that every
successful investor knows by heart can always provide valuable insights on what
likely will be next, viz. “The tape tells all.”<o:p></o:p></span></div>
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<span style="font-family: "arial" , "sans-serif";">What
exactly does “The tape tells all” mean?
It means that while individuals may cast votes on a ballot and share
their opinions with pollsters, the only votes that really count are the ones
they make with their money. After all,
when one’s hard-earned dollars are at stake you tend to think long and hard
before placing your “vote” in the marketplace.
Campaign promises can be broken and good intentions are ephemeral, but
investment decisions typically have bigger consequences. As such, they tend to be made with far
greater forethought and longevity than mere spoken words. With that said, let’s examine what the smart
boys and girls who vote with their dollars actually think about the prospects
of President-Elect Trump’s upcoming reign.<o:p></o:p></span></div>
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<span style="font-family: "arial" , "sans-serif";">One
assumption that many held about a Trump victory was that the global markets
would plunge and the economy would deteriorate.
Already there were some headlines appearing after the election
forecasting a “Trump recession.” The
stock market “tape” doesn’t indicate that informed investors are concerned
about the prospects of recession under Trump.
In fact, the market crash that many had predicted failed to materialize
and instead a vigorous rally greeted Wall Street on Wednesday morning after the
election. The stock market gained 1.43%
on Wednesday despite S&P 500 futures being down 5% at one point
overnight. This isn’t the money voting
action of a group of insiders concerned about imminent recession or a bear
market; it suggests that cooler heads have prevailed against last night’s
emotional reaction in the futures market.<o:p></o:p></span></div>
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<span style="font-family: "arial" , "sans-serif";">One
of the best ways of anticipating a president-elect’s policies is to take notice
which industry groups are outperforming in the days immediately prior to and
following the election. This technique
works especially well if the industries in question have been underperforming
for an extended period. Again, the
rationale behind this is that informed investors are better equipped than
outsiders to predict a president’s trade and economic policy intentions. Sudden and dramatic shows of relative
strength prior to, and in the wake of, an election are signs that the insiders
are buying stocks poised to benefit from those policies. <o:p></o:p></span></div>
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<span style="font-family: "arial" , "sans-serif";">A
couple of weeks ago we discussed the strong performing defense sector and the
implication it held for potential military activity in the coming 1-2
years. While my assumption for this was
predicated on a Clinton victory, a Trump presidency may still hold the
prospects for militarism. Note the stunning
performance of the Dow Jones U.S. Defense Index (DJUSDN) on Wednesday in the
wake of the election. Defense stocks
were one of the top-performing groups for the day as the Defense Index posted a
6.21% gain. The smart money apparently
sees the potential for military action even in spite of the President Elect’s
dovish rhetoric. <o:p></o:p></span></div>
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<span style="font-family: "arial" , "sans-serif";">The
financial sector has been a star performer since before the election and had
another blowout day on Wednesday after the election. Led by the big institutional financial firms
like Goldman Sachs (GS), the bank stocks gained an average of 5% for the day
while the broker/dealers were up 6% on average.
Here’s what the PHLX Bank Index (BKX) looks like as of Wednesday. The index made a new 52-week high as you can
see, quite impressive given that the average NYSE stock is still below a 2-year
trading range ceiling. <o:p></o:p></span></div>
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<span style="font-family: arial, sans-serif; text-align: justify;">This
is an important consideration since leadership and relative strength in the
broker/dealer and banks normally carries bullish implications for the broad
market. It also tells us that, far from
being disturbed by the threatening aspects of a Trump presidency, Wall Street
(or at least a large faction of the Street) is apparently enthusiastic about
the prospects for success under his administration. Time doesn’t permit a more extensive analysis
of the many industry groups and their reactions to Trump’s victory, but we’ll
take a closer look at them in the next commentary. </span>Clif Drokehttp://www.blogger.com/profile/14608461795434758077noreply@blogger.com0