stock market Archives

June 16, 2017 – Do you notice the Yield Curve narrowing?

Do you notice the Yield Curve narrowing?

Hi Folks,

As I’ve explained in my book, “Dow to Drop 80% Soon?” one of the best predictors of a recession is a negative yield curve. The yield curve is inverted when long term yields are lower than short term yields. The yield curve inverted just prior to every U.S. recession in the past 50 years.

https://www.amazon.com/Dow-drop-80-soon-Protect-ebook/dp/B01KPQB0OS/ref=sr_1_3?s=digital-text&ie=UTF8&qid=1497621601&sr=1-3&keywords=didosphere

As of June 15, 2017, the yields between the 10-year and 30-year treasuries have been narrowing, i.e. 10-year is now 2.16% and 30-year is now only 2.78%. See the government website below:

https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield

When the yield becomes negative or inverted, market sentiment suggests that the long-term outlook is poor and the yields offered by long-term fixed income will continue to fall. It also spells trouble for the financial sector 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 of return is the same or less for 5 years compared to 1 year, this incentive is gone. This means that profit margins fall for companies that borrow cash at short-term rates and lend at long-term rates, such as hedge funds, banks and mortgage companies. Equity lines of credit and adjustable rate mortgages (ARMs) which are periodically adjusted usually go up since they are based on short-term interest rates. Debtors who got stuck with these loans will need more money to pay for additional interest. They will need to tighten their belts since they will have less money to spend on consumer goods that is why recessions follow an inverted yield curve.

Although we are at record high territories in the stock market, with the Dow trying to breach the new resistance level of 21,700, we live in dangerous times. I see the Dow can quickly lose 3,000 in just a period of 10 to 20 days. The reason for this stock market high is the pro-business stance of this administration even though not very much has come to fruition yet, i.e. the talk about curtailing burdensome regulations, lowering corporate, capital gains and repatriation taxes and increasing the defense and infrastructure budgets. Investors are optimistic that Trump’s government technocrats will continue to develop policies that will increase our GDP which should keep recession farther away in the horizon.

Correction before Dow 20,000?

Dear Readers,

Just like I said in my previous post, we may experience a 5-10% correction before breaking through the resistance level of Dow 20,000. It has been 2 weeks now that the Dow has been hovering around the resistance level of Dow 20,000 but has not closed above that. We may be in dangerous waters although in the long run I still feel bullish about stocks. Read my book “Living Rich and Loving It”, to find out when you should really get out of stocks and put your money into a money market fund. Merry Christmas, happy holidays and a prosperous New Year!!!

Don’t mix investing with politics

November 22, 2016

As of today’s closing, all the U.S. stock market major indices reached record highs. The Dow closed above the resistance level of 19,000. In the short run, the stock market will not have a “stairway to heaven” type of climb. I guarantee there will be dips at the slightest whiff of any bad news. Remember the first quarter of this year when the price of crude dipped below $35 per barrel? Moreover, there will be profit taking by the Gnomes of Wall Street.

The new resistance level we are looking for on the Dow is 19,500. There may be a 10% correction before reaching this resistance level. The climate has suddenly changed with the election of Trump. The Gnomes of Wall Street, or perhaps we should call them the shepherds leading the flock suddenly decided that a Trump presidency is good for the economy. Does anyone even remember that the Dow futures were 800 points down on election night as Trump started winning the battleground states one by one? What was that all about? Even though the market opened higher on the day after Election Day, my friend Jake got out of the market as soon as it opened at 9:30, Wednesday morning and put his entire portfolio into a money market fund. He voted for Hillary and was afraid that Trump’s victory would precipitate a global equity sell-off because he believed that Trump is an unpredictable, unstable and unqualified leader who’s the laughing stock of the whole world. Even after the Dow gained 1,000 points, my friend Jake is still out of the stock market. He told me last night he “cannot believe why the market keeps going up”. Don’t mix investing with politics, folks. Happy thanksgiving!!

Most Economic Indicators Pointing Upwards

It has only been over a week since the voters elected Trump and housing starts are up, unemployment claims have been the lowest since the great recession, retail sales look strong, corporate profits are up, the Dow gained more than 5% since the election. Happy days are here again? We’ll see. The uncertainty of the US elections kept the stock market stagnant for almost a year. So this is a post-election bump that still has legs. Trump’s pro-business policies of curtailing government regulations, lowering corporate, capital gains and foreign earnings taxes are meeting with great enthusiasm from the gnomes of Wall Street. Look for a correction around Dow 19,500. The correction could be 5-10%. Follow this blog so we may discuss the possibilities.

After the dust settled…

Wednesday morning after Election 2016, the 1,000 point drop in the Dow that many so-called experts predicted as they were watching Trump beat Clinton one battle ground state after another did not happen after all. In fact stocks are not only in the positive territory at noontime eastern standard time but had healthy gains of 1-1.5%. Still Myles Udland, a financial writer for Yahoo Finance says, “…don’t mistake Wednesday’s rally for an “all clear” sign from markets. The unknowns around any new presidency are considerable, and perhaps no recent administration presents more question marks for investors than a Trump White House”. Adam Parker, a strategist at Morgan Stanley, wrote in a note to clients on Wednesday that, “We are more bearish today than we were yesterday because of increased uncertainty.”

Frankly, I am tired of listening to these geniuses and shame to investors who blindly listen to them. These are the same type of geniuses who led investors on the wrong path in 2008. After investors lost 50% of their savings during the bear market that followed the great recession, these geniuses told them to get out of stocks.

Go ahead, listen to Udland and Parker. Get out of the stock market now and you’ll be sorry. I say this because Trump’s fiscal policy is pro-growth. Low taxes, less government regulations, repatriation of foreign profits, possible repeal of Obamacare, infrastructure investments, etc. Of course I am concerned about a few uncertainties such as Trump’s promise to replace Janet Yellen whom I think is doing a great job and protectionism but I don’t think Trump would act recklessly with regard to these two concerns. He has VP Pence and other technocrats to hold his hands. So when will the stock market crash? We will exchange thoughts and ideas. Follow this blog and learn.

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!!!!

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.

10% Unemployment not enough to derail recovery

When I wrote my article entitled “SLUGGISH RECOVERY, GOOD FOR INVESTORS” in July before I went on my summer vacation, many “gloom and doomers” thought I was crazy. In fact I was bold enough to predict an 11,300 Dow for the end of September. That was on July 21 when the DJIA closed at 10,120. We are not quite at 11,300 yet but the DOW closed up at 10,860 last Friday, September 24, 2010.

The direction of the market is really not hard to predict. Now that the NBER has ruled out a double dip recession, stock prices will keep going up unless there is a new recession. Yes there will be days when stocks will go up, down and sideways but investors will continue to be bullish if the economy is still expanding. 1% to 2% GDP growth is good enough to continue an upward trend in stock prices. This statement is easily proven. In the beginning of the year, many economists predicted the economy to grow 4% to 5% this year. The projection had been revised downward several times and stocks tumbled each time the lower projection was announced. The knee jerk reaction of investors is to dump equities in favor of bonds and tangible assets upon hearing a lower growth rate. Then investors become accustomed to the sluggish growth, after which they start buying stocks again. The bullish trend will not stop unless there is another recession. Even if there is negative growth in one month, 2 months or even in an entire quarter if the economy recovers again in subsequent months to show growth in GDP, the market will come back. There will be fluctuations and corrections in the market but the sophisticated investor will remain invested in equities unless signs point to another recession. At the risk of repeating myself, commodity prices are up, corporate profits are up, many publicly held corporations including numerous financial institutions have resumed paying dividends because of their huge profits, many publicly traded stocks of companies in a wide assortment of industries have hit a 52-week high. These are not signs that there is another recession just around the corner. Another proof is that inflation is back. It means that the deflationary period is gone and the economy is starting to heat up again. Foreclosures are up and housing starts are down, but this is a normal cycle after homeowners enjoyed double digit increases in home prices for many years.

The not so rosy sector of the economy is the high unemployment rate. 1% to 2% GDP growth will only make a small dent in the unemployment. We need 8% GDP growth like in the Reagan expansion years to reduce unemployment to 5%. Many economists are of the opinion that the reason for the high unemployment rate is the reluctance of small businesses to invest and expand because of the uncertainty in taxes and new regulations. I disagree with their opinion. In a free market economy like ours, the desire to make money is so intense and the chance of success is so high compared to a government controlled economy that most smart entrepreneurs will not postpone their plan for growth and expansion just because of regulations and a few percentage increase in taxes. However, I agree with Rep. Paul Ryan (R-Wisc) that keeping the Bush Tax Cuts and reducing spending will accelerate business investments. Paul Ryan who is a ranking member of the Congressional Budget Committee and Ways and Means Committee is a Reagan conservative who is touted as a rising star in the Republican Party and possible nominee for the 2012 presidential election.

Now that the “great recession” is over, it is wise to review what caused it. The NBER, a historical recorder of past events declares the recession started in December 2007 and ended in June 2009. The “great recession” was caused by the consumer who stopped spending, caused by worries of the stability of the banking and financial system, caused by massive default of derivatives issued by the financial institutions, caused by the housing bubble burst, caused by massive default of homeowners in payment of their mortgages, caused by increase in mortgage rates and high fuel prices. What could be so simple?

I went to a party last Saturday night. The state of the economy became the dominant subject of conversation because many of the guests were sophisticated entrepreneurs and economists. I found that the adage “ask 10 economists a question and you will get 10 different answers” is really true. Most of them disagreed on the state of the economy and how to “fix” the nation’s economic problems. However, the wife of the CEO of a popular restaurant chain offered her solution in the form of a question in between sips of mimosa. She asked “why doesn’t Obama give every American citizen, man, woman, child $100,000 each? If the population of America is now 350 million, wouldn’t one hundred thousand dollars for each person cost much less than the new stimulus of 50 billion dollars the Obama administration had been dangling about? “It suddenly became quite, although some of the party goers dismissed “her solution” with some condescending remarks. I quickly excused myself, went to the men’s room, locked myself inside a stall and pulled my new iPhone which has a calculator. Lo and behold, $100,000 x 350 million is indeed $35 billion…less than the $50 billion Obama stimulus package. When I came out of the men’s room I was surprised that most of the guests continued to discuss and debate her solution. A CFO of an oil refining company said her idea is great because those who deserve the money will find a way to legally take the money away from those who do not deserve it. To me, the idea of this lady, a trophy wife who is relegated to ribbon cutting ceremonies and home decorating made as much sense as ideas from her husband and the other guests.

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

Sluggish Recovery, Good for Investors

If you read the headlines right after Federal Reserve Board Chairman Ben Bernanke testified before the Senate Banking Committee today, July 21, 2010, you would think the world is coming to an end. AP prints, “STOCKS FALL SHARPLY….” while Reuters states, “OUTLOOK UNUSUALLY UNCERTAIN….” The fact is that a sluggish economy will benefit smart investors. Smart investors do not act solely on emotion and fear because they are savvy enough to know that harbingers of gloom and doom who write about the stock market, the economy and investments know just as much as Mr. Adam Monk, the stock-picking monkey who reportedly made a lot of money for those who followed his picks. Harbingers of gloom and doom quickly reverse themselves the moment the wind changes direction. It is like following the herd which is not hard to do.

The fact is that a sluggish economy will keep inflation and interest rates down making it easier for consumers to purchase. Prices of goods especially large ticket items such as automobiles, home appliances, furniture and computers will be kept in check. The price of real estate had been rolled back to a decade ago in many areas of the country. This, coupled with low mortgage rates should encourage first time homebuyers and real estate investors alike to snap up bargains. A sluggish recovery will put more pressure on this administration to rethink its goal of increasing taxes. A sluggish recovery would prove to this administration that taxing the rich and increasing entitlements is not the way to economic recovery and prosperity. A sluggish recovery means the consumer is not spending as much as expected in a typical expansion. Hence, the consumer has more money to pay down his debt and to increase his savings. He is poised to spend. He may go out on a spending spree at the onset of any type of good news because in our culture, in a free market society, the consumer has an intrinsic need to keep up with the Joneses. Another important factor is that many businesses are reporting record profits but are reluctant to invest and hire due to uncertainty about taxes, Europe’s debt crisis and more government regulations. When the uncertainty goes away, the recovery may catch fire quickly and may even overheat. The European bank stress test results to be disclosed this Friday, July 23 may add to more uncertainty which may cause investors to dump stocks. But the savvy investor can look beyond the horizon.

Geithner and Bernanke know what is going on with the economy and they have the power to change things. Bernanke told lawmakers today, "If the recovery seems to be faltering, we have to at least review our options but no further action is planned for now because the economy is still growing”. Geithner has the power to counsel President Obama with regard to taxes and he must have told Obama that the private sector does not like tax increases. I predict that this administration will take appropriate action if signs point to another recession which President Obama will have to own. He will not let this fragile recovery slide back into a recession because that would most likely seal his fate as a one-term president. To me, fixing this economy is as simple as following what JFK, Reagan and Clinton did, and that was to reduce corporate and capital gains taxes. Obama may be compelled to follow the same route if the economy appears to be sliding back into a recession and once again, that would be good for investors.

If this recovery continues to be sluggish but does not fall back into a recession, stock prices will continue to rise even though they may turn sideways some days and drop halfway to the floor other days. Yes stocks will rise and fall but they will not sink to recession level prices unless there is another recession. Economics 101 and plain common sense.

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.

The Obama Recession

According to the Wall Street Journal, there have been 11 recessions in the United States since World War II. These recessions lasted between 8 months and 2 years, the longest being the Carter-Reagan recession. This Bush-Obama recession has a potential for lasting longer than that. I believe this because the Obama Administration appears to be in a state of chaos. It is sending mixed messages and appears to be playing it by ear, making adjustments as it stumbles along. If Obama is having problems dealing with the economic crisis, I shudder to think how he could deal with an international crisis if one develops.

If Obama allocated the bulk of the $800 billion stimulus package to tax cuts and in rebuilding infrastructure and schools, as I thought he would, consumer confidence would have gone up. Instead, a big chunk of the stimulus package is going towards pork barrel spending. To make matters worse, the Obama Administration is talking about taxing the rich, those making over $250,000 by removing the taxable income limit for Medicare Tax and limiting the mortgage and charitable contribution deductions. Geithner does not even have a deputy secretary yet. He appears to be working alone, formulating policy and making anti free market suggestions that the Administration will increase taxes on capital gains, corporate profits and foreign investments. There is no doubt in my mind that the stock market plunge of over 3,000 points in the Dow since the election is a direct result of investors’ lack of confidence in the Obama Administration. When retirement accounts lose 50% of their value, consumers get scared and postpone spending. It so ironic that China, a communist country has no capital gains tax which must be the primary reason their stock market has recorded the highest gains this year.

When will the left wing radicals learn that taxing the rich will hurt the poor people more? The rich are the ones who eat at expensive restaurants, go on vacations, buy luxury items and employ people. I am not rich but I do not envy the rich because my goal is to get rich myself. We all have an equal opportunity to acquire wealth in this country provided the government does not stand in our way.

Our free market economy will recover despite Obama. Recessions are part of a normal economic cycle. Soon consumers will come back and resume buying necessities such as refrigerators, TVs, computers, cell phones, furniture and cars. 42% of stocks in the S&P 500 gained since the beginning of the year. Energy costs have only increased a little bit since sinking to their lowest level last December. According to the Los Angeles Times, the highest concentration of foreclosures and decline in property value are in 5 states; California, Nevada, Florida, Michigan and Ohio. 90% of homeowners are still paying their mortgages on time. The dollar has recovered nicely against major foreign currencies which means anything we import is costing us less. Still, stumbling and uninspiring Obama can prolong this recession by talking down the economy.

If Obama and his cabinet members are listening, I have a sure fire way of ending this recession immediately. Geithner has no plan yet on how to use the $300 billion allocated to fix the banking system. So these are my suggestions. 1) Announce the formation of RTC2 (Resolution Trust Corporation) to take over toxic assets from ailing banks. This move is similar to what solved the Savings and Loan crisis of the early 90s. This will restore confidence in our banking system. 2) Announce the reduction of the capital gains tax from 28% to 7%. This will attract local and foreign capital back into the stock market which would increase the value of stocks. 3) Announce the reduction of corporate tax from 34% to 10%. This will stimulate business activity and companies will start hiring again.

What are the chances that the Obama Administration will follow my advice? I will not hold my breath. They are a group of ideological left wing intellectuals who have their own agenda of equal wealth distribution and of government intrusion into our lives. Therefore let us prepare ourselves for more pain and say hello to the Obama Recession.