Consumer spending keeping the stock market up

The 3rd quarter earnings report of most of the reporting companies in the S&P 500 beat analysts’ estimates.  This is due to a combination of higher sales due to more consumer spending and reduction of expenses because companies have become more efficient.  This combination of more revenue and less expenses is giving many companies a healthy cash flow that should find its way into capital investments and stock purchase.

What is fueling consumer spending?  It seems that Americans are resigned to a Hillary Clinton presidency and they think it won’t be so bad.  There also has not been any terrible news lately. In addition to the good earnings reports, oil is holding at about $50 per barrel and copper price has been hovering around $2 per pound. The doom sayers are wrong again about the big stock market crash that they predicted would happen before the U.S. presidential elections.  The BIG CRASH will happen but it will not be before November 8.  Folks, it may not even happen until 2018.  I see the road to the next recession as a slow bleed not a heart attack. We are due for a 10-20% correction since the last correction was in the middle of February this year.  We will discuss this on the next blog.  Stand by.

Countdown to the next stock market crash

We did it once before in 2007, we can do it again!  The countdown has begun to the next bear market, a 10% to 20% correction.  The Dow reached an all-time high on August 15, 2016 of 18,723.  Since then it has not breached that resistance level.  A 10% correction from this resistance level would bring the Dow down to 16,851 and a correction of 20% would bring the Dow down to 14,978.  Friends, I do not think we will experience a correction that will breach the 52-week low of 15,451.  It may breach this support level if the interest rate curve inverts which portends a recession in which case the Dow may lose 40-60% of its value.

I just don’t see it yet folks, no matter what the gloom and doomers say.  The interest rate curve is not flattening, the economy is sluggish and the Feds will not soon raise interest rates.  But even if the Feds raise the interest rate by 100 basis points right now, it is still sustainable in this current economic climate and it will not cause a negative yield curve.

Standby folks.  Those who made a lot of money in 2009 just by following my posts, will do it again when the next recession hits.  Meanwhile, be happy to be earning 4-8% with your money invested in VTSAX and other S&P 500 Index funds just like many other investors.  When the bear market that follows a recession hits, that is when we will make our real money.

Follow this blog and we will keep monitoring economic indicators that may cause the breach of the resistance and support levels in the Dow, S&P and NASDAQ.

Happy fishing!!!!


Living Rich & Loving It

The book I wrote, "Living Rich & Loving It" which is available on Amazon Kindle strives to develop a vision that being rich is not only about achieving financial independence.  It’s about living a happy, healthy, simple, balanced and fulfilling life with minimal stress.  This is a cradle to grave guide to life book.  If you have goals, dreams and aspirations in life, you have a sense of direction but you still need a road map to take you from here to there. I hope this book will serve as that road map for you.

Learn how to:

  • Find a job you love. If you cannot wait to get up and get to work every morning, then you’ve found the job you love.  Otherwise, you need to read the chapter, “Find a Job You Love” and the chapter, “Increase Your Income with these Ideas”.
  • Create a budget so that you will always have a surplus at the end of each month.
  • Maximize contributions to your retirement account and accumulate more than a million dollars for retirement.
  • Determine if converting to a Roth IRA or Roth 401k is right for you. Ed Slott, the IRA guru says converting your IRA to a Roth IRA is tantamount to moving your account from “accounts that are forever taxed to accounts that are never taxed”. WRONG!  See Chapter, “Your Retirement Plan”.
  • Never lose money in the stock market by using “The KISS Principle” and “Auto-Pilot Strategy”.
  • Predict the next recession by watching the “yield curve”. It is so simple yet so effective.
  • Calculate the amount of life insurance you need. Insurance brokers will hate this chapter. The answer will surprise you.
  • Avoid Veblen Goods – the savings will amaze you.
  • Shop around for everything. If you are struggling to make ends meet, this chapter will show you why.  Learn how to save more and spend less.
  • Purchase your primary residence – Pros and cons of owning vs. renting. The analysis chart shows the clear winner which will surprise you.
  • Distinguish good debt from bad debt---when borrowing makes sense. Analysis table proves that some debts are good.
  • Never take unnecessary risks. Don’t do anything stupid. This chapter shows that stupidity is the great equalizer in life.  Doing any of the things on the list may change your life or worse may end your life in the blink of an eye.
  • Stay away from rental properties. This chapter tells you why it is not worth being an absentee landlord.
  • Handle emergencies without an emergency fund. The analysis chart shows why you should not have an emergency fund. The figures will astound you. This chapter also shows the reader where to get cash for emergencies once you get rid of your emergency fund.
  • Never ever listen to Suze Orman that 401k loans are taxed twice. 401k loans are not taxed twice. This chapter proves it.
  • Plan for college. How will you pay for your children’s college education? Read the many different ideas in this chapter on how to increase your children’s chances of getting offers from good colleges and universities.  See the 9 simple steps you can take in chapter, “Planning for College”.
  • Increase your income. Make more money in your spare time with these ideas. When you read the money-making ideas in this chapter, you will scratch your head and say, “why didn’t I think of that?”
  • Create a document storage and retrieval system. So simple yet so effective. It will free up a lot of your limited living space.
  • Implement a stress-free personal time management system. This system will organize your day and free up plenty of your time for use at your leisure.
  • Store and safeguard passwords – Simple trick will help you create and remember strong passwords.
  • Maximize your Social Security benefits – In light of the elimination of “File and Suspend” and “Restricted Application” strategies, the chart shows claiming strategies for 1) Single never married, 2) currently married, 3) married at least 10 years, divorced at least 2 years, currently single, 4) divorced, has remarried and currently married, 5) widow/widower, 6) surviving divorced spouse, married at least 10 years, currently single or remarried after the age of 60.
  • Find the best places for retirement – Some of these retirement communities are surprising. Some viable locations have ½ the cost of living of most U.S. cities.
  • Pay for nursing home and long-term care. The cost of nursing home and long term care can wipe out your entire estate.  Read this chapter for solutions.
  • Qualify for Medicaid benefits for LTC. You do not have to spend down your savings.  This chapter explains many different ways other retirees have been dealing with the “spend down” dilemma.
  • Establish estate planning. How to protect your estate from estate tax and inheritance tax.
  • Enrich Your Life by Exploring the World – Travel as soon as you can while you are still young. This chapter discusses why the money you spend traveling and exploring the world is money well spent.
  • Stay Healthy and Fit as You Age – There are a few minor behavior modification changes that you can put into practice that will keep you healthy throughout your retirement years.

Ready to live a Rich, Happy, Healthy, Simple and Balanced Life?

Buy this book here!

QE2 = Printing Money

Just as gay no longer means happy, QE2 no longer means Queen Elizabeth II.  Lately, the business world has been using the term QE2 a lot.  QE2 is short for the second round of the United States Federal Reserve’s (“Fed”) Quantitative Easing (“QE”).  This second round of QE is estimated to total $600 billion.  The first QE which was spaced out over one year, between 2008 and 2009 totaled almost $2 trillion.

Bloomberg News reports that the average person does not understand the function of the Federal Reserve.  Therefore, it is easy to conclude that QE is even less understood by the average person.  It is my goal to unravel the mystery of QE in this article.  To simplify, QE is another term for “printing money”.  The Fed, which is the Central Bank of the United States, regulates the amount of money in the economy by selling and buying bonds and by increasing and decreasing interest rates to member banks. The Fed has several ways of printing money.  It can issue Treasuries, i.e. notes, bills and bonds and it can also just credit itself as in this case of Quantitative Easing.  The Fed simply credited its balance sheet for the amount it needs to buy bonds from banks and other financial institutions.  The assets the Fed will buy with the money it credited itself are not limited to government bonds but are expanded to include mortgage backed securities and corporate bonds.  The Fed’s objective is to stimulate the economy by encouraging lending.  Reducing interest rates to almost nil has not worked to stimulate lending so this is the last resort for the Fed.  When the Fed buys idle assets such as treasury and corporate bonds, the banks and financial institutions such as Goldman Sachs receive liquid assets on their balance sheets in exchange for idle assets thus increasing the amount of cash at their disposal.  The Fed is hoping that the banks would ease up on lending and lend this new found cash to businesses and individuals. The assumption is that businesses that can borrow would use the money to increase capital investments, expand operations and hire more workers. For the banks to profit on QE, the newly found cash will have to be invested somewhere, i.e. by lending it to credit worthy borrowers or by putting the money in other investments such as into the stock market.  This is the main reason of the sudden surge in equity prices at Bernanke’s announcement of QE2. The Dow Jones Industrial Averages (DJIA) increased by 11% since August in anticipation of the announcement which happened in early November.

QE2, a.k.a. “printing money”, a.k.a. “expansion of the money supply” will reduce the value of the dollar.  This is basic Economics; The Law of Supply and Demand.  The dollar has been losing value against major currencies since the announcement of QE2.  Increasing the money supply will also increase inflation.  The word “inflation” is just as mysterious to most people as any economics term although it is one of the most overused words today.  To simplify what it means, imagine you are 1 of the 5 remaining finalists on the CBS show SURVIVOR.  You have not eaten any solid food in 5 days.  Jeff Probst, the host brings out a slice of pizza and gives each person $100.  He asks the players to bid an amount for the slice of pizza and the highest bidder wins.  Since there is only one slice, it is safe to say that each player would scramble to bid $100 for that single slice even though that slice normally costs only $2 in any fast food court, because once that slice of pizza is gone, it’s gone.  What if there are 6 or 7 slices?  What if there are 20 slices?  Then the bidders will not have to bid so much because there are more than enough slices to go around. Everyone can get a slice even with a low ball offer.  Let us get back to the single slice example but add quantitative easing to the scenario.  5 players have $100 each to buy up a single slice of pizza but you just happen to have a checkbook in your back pocket.  Every player bids $100 but you hand over $100 cash and a $100 check.  You get the slice of pizza.  That my friends is how QE works.  With your checkbook in hand, you are the Fed.

The Fed is hoping to stimulate the sluggish economy with its QE2 move but many economists think that the move may only spur inflation, not the growth needed to reduce the high rate of unemployment.  Officials of other countries including China, Brazil and the EU were quick to criticize Bernanke’s move arguing that QE2 only serves to promote currency wars.  After all, Japan’s decade long QE did not work, why should it work here? A cheap dollar is not good for foreign exporters of goods into the United States because their products become more expensive for Americans which causes higher inflation.  I am of the opinion that QE2 is not a good idea.  QE1 was necessary to restore stability to the banking system but I find this second round of QE as an arrogant and a largely political move.  Arrogant because Fed’s Chairman Bernanke knows that the dollar is the global reserve currency so the printing of money can be done without bankrupting the dollar.  Political because President Obama’s popularity will keep plunging unless the 9.6% unemployment rate is reduced.  The Fed’s QE2 move seems to be calculated to substantially reduce unemployment before the next presidential campaign goes into full swing.

Finally for investors, be cautious.  If you are invested in the stock market, watch the market carefully.  This newly printed money will be looking for a home.  Some of it will inevitably find its way into the stock market driving equity prices up.  The “feel good  effect” of seeing your investment or retirement account go up in value may indeed spur an increase in your consumption pattern contributing to the growth in GDP but this “feel good effect” is not a long term condition.  This intervention in an economy that is slowly but surely on the way to recovery is unjustified.  It may lead to the next bubble burst.

This article is not intended to provide financial advice.  Please consult your financial advisor before acting on any advice provided herein.

Any opinions and views expressed herein are the sole responsibility of the writer.

Bank Stress Tests & Other Terms

The political talk shows this past weekend generated lots of economic, financial and accounting terms such as Bank Stress Tests, Mark to Market Valuation, Cash Flow Valuation, Positive Yield Curve and 3rd Tier (Capital) Assets to name a few.  I wonder how many viewers understood those terms.  I would like to take this opportunity to simplify them for the reader.

The bank stress test is what the Treasury Department will conduct on banks and other financial institutions to determine which institutions are undercapitalized and whether they have enough reserves to weather adverse scenarios such as the rise and fall of the stock market, interest rates and currency fluctuations and exposure to undisclosed risks.  Initially the Obama Administration indicated that the stress test would only apply to financial institutions with over $100 billion in assets, but due to the worsening economic outlook, all bets are off.

Mark to market valuation is the current FASB (Financial Accounting Standards Board) and SEC (Securities and Exchange Commission) standard of valuation of bank assets.  As an example, if Citibank is holding a mortgage derivative which was valued at $600,000 before the bubble burst, but is now only $200,000, regulations require the bank to report this asset (Capital) at Mark to Market which is $200,000.  If the bank is holding many of these derivatives, Geithner’s office may declare the bank as “in distressed” and force it to take additional capital from the government in bail out money.  Many economists such as Larry Kudlow and Lou Dobbs now advocate the Cash Flow Valuation instead of  Mark to Market on the ground that the $600,000 asset still yields the same return for the bank although it is now only valued at $200,000.

The Positive Yield (interest rate) Curve is the normal yield of investments.  Longer term maturities usually have a higher yield than shorter term.  When the yield becomes negative or inverted, it spells trouble for the banking system as what started happening in late 2006.  The incentive for depositors to leave their money with the bank for longer periods of time, say 5 to 10 years is to earn a higher interest rate.  If the interest rate is the same for 5 years as it is for 1 year, this incentive is gone.  Geithner’s job now is to classify banks’ assets into tier 1, 2 or 3.  If Geithner’s agents reclassify too many of a particular bank’s assets from tier 1 to tier 3, that bank may be classified as a distressed bank and may be forced to take bail out money as additional capital.  Tier 3 assets or capital are the most risky investments the bank holds.  Examples of these are uncollateralized debts such as credit card debts and unsecured personal and business loans.

What we have seen from Bush and Paulson to Obama, Geithner and Pelosi is that our government tends to overreach in its desire to restore stability.  The Obama administration goes one step further by taking advantage of the crisis to put through its social agenda.  As Rham Emmanuel clearly stated, “we should not let a crisis go to waste.”   As recently as a week ago, many banks including Citibank and Bank of America announced that they are not in bad shape; that they are actually making money; and that they don’t need any more government bailout money.  I hope, for our own good, that such announcements and the positive yield curve will prompt investors to pull their cash out of their mattresses and home safes and hand it over to their friendly neighborhood bank.

Any opinions and views herein are the sole responsibility of the writer.