Monthly Archives: October 2017


  • The Bear Market Growl Grows Louder
  • Daily, Weekly, Monthly View
  • Sector & Market Analysis
  • 401k Plan Manager

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Bear Market Growl Grows Louder

Several months ago, I penned an article about the problems with “passive indexing” and specifically the problem of the “algorithms” that are driving roughly 80% of the trading in the markets. To wit:

“When the ‘robot trading algorithms’  begin to reverse (selling rallies rather than buying dips), it will not be a slow and methodical process, but rather a stampede with little regard to price, valuation, or fundamental measures as the exit will become very narrow.”

Fortunately, up to this point, there has not been a triggering of margin debt, as of yet, which remains the “gasoline” to fuel a rapid market decline. As we have discussed previously, margin debt (i.e. leverage) is a double-edged sword. It fuels the bull market higher as investors “leverage up” to buy more equities, but it also burns “white hot” on the way down as investors are forced to liquidate to cover margin calls. Despite the two sell-offs this year, leverage has only marginally been reduced.

If you overlay that the S&P 500 index you can see more clearly the magnitude of the reversions caused by a “leverage unwind.”

The reason I bring this up is that, so far, the market has not declined enough to “trigger” margin calls.

At least not yet.

But exactly where is that level? 

There is no set rule, but there is a point at which the broker-dealers become worried about being able to collect on the “margin lines” they have extended. My best guess is that point lies somewhere around a 20% decline from the peak. The correction from intraday peak to trough in 2015-2016 was nearly 20%, but on a closing basis, the draft was about 13.5%. The corrections earlier this year, and currently, have both run close to 10% on a closing basis.

My best guess is that if the market breaks the October lows, which given the current state of the market is a very high probability, we will likely see an accelerated “sell off” as the realization a “bear market” starts to set in. If the such a decline triggers a 20% fall from the peak, which is around 2340 currently, broker-dealers are likely going to start tightening up margin requirements and requiring coverage of outstanding margin lines.

This is just a guess…it could be at any point at which “credit-risk” becomes a concern. The important point is that “when” it occurs, it will start a “liquidation cycle” as “margin calls” trigger more selling which leads to more margin calls. This cycle will continue until the liquidation process is complete.

The last time we saw such an event was here:

Notice that from January 1st through September of 2008 the market had already declined from the peak by 14.5%. This “slow-bleed” decline was dismissed by the bullish media as we were in a “Goldilocks economy:”

  • There was no sign of recession
  • Rates were rising due to a strong economy. 
  • Earnings expectations were high and expected to continue to expand bringing “Forward P/E ratios” down to historical norms.
  • Economic growth was robust and expected to accelerate in the next year.
  • Global growth was expected to pick back up.

Sound familiar?

Then, the “Lehman moment” occurred and the world changed and the realization we were in a recession would occur 3-months later.

From the end of September to March of 2009, the market lost an additional 46.1%. The bulk of the at loss occurred quickly as banks and brokerage firms scrambled to pull in margin lines.

The selling was relentless. It was also where many individuals found out there is a point where portfolios become an “Imported Rug Store” and “Everything Must Go.”  

This is the problem with “margin debt.”

This is why we continue to urge caution.

The “bear market” in stocks is growling more loudly.

Last week, we further reduced equity risk further bringing exposures down to just 43% of our portfolios. On a rally to the 200-dma which fails, we will reduce risk more.

Daily View

This week we are going to review our primary buy/sell indicator charts for the S&P 500.  As shown below, the daily chart is much more noisy in terms of signals and is meant for more short-term trading activity. However, what is important is the signals are fairly good (pink shaded bars) at catching downturns in the market and suggesting a reduction in overall risk exposure. That is the case once again over the last month.

We can slow the signals down reducing the signal to just breaks of the long-term moving average. Once again we see a fairly consistent ability to navigate the more important downturns in the market. Importantly, the sell-off in January did NOT violate the long-term moving average and therefore did not register a sell-signal. However, the current sell-off just triggered that signal to reduce equity risk this past week. 

Action: After reducing exposure in portfolios previously, we reduced risk further this past week. Sell weak positions into any market strength on Monday.

Weekly View

Since we prefer longer-term holding periods for our positions, we prefer to use weekly and monthly price periods as it reduces the number of  signals significantly. This allows us to capture the trends of the market while still managing to protect capital from more significant declines.

(Note: this does not mean we will miss ALL the declines. It simply means we will avoid the risk of a more substantial decline should one occur. We are NOT “market timers” but rather “risk managers.”)

As shown below, on a weekly basis, a “sell signal” has been registered for the second time this year suggesting that investors reduce equity risk in portfolios.

Again, we can reduce the number of signals further by using a confirmed cross of a long-term moving average. This process keeps portfolios primarily allocated toward equity risk over long periods of time. When “sell signals” occur, they tend to be important to pay attention to.

This past week a “sell signal” was issued.

I want to caution you that by the time longer-term sell signals are issued, the market tends to be more extremely oversold and due for a reflexive bounce. In 2015, we saw a significant bounce that was worth selling into before the next decline in 2016. It was the intervention of the global Central Banks in 2016 that kept a “bear market” from most likely ensuing.

Today, Central Banks are extracting liquidity and show no intent in coming to markets rescue. It is likely wise to use any bounce over the next few weeks to reduce risk and raise cash.

Action: Sell weak positions into any strength next week.

Monthly View

Moving back to a monthly view, signals become much slower and much more important. However, signals are ONLY VALID on the 1st trading day of each month. Therefore, while the markets have registered a monthly signal as of this week, it will ONLY be valid if the markets fail to rally enough to reverse it by the end of the month.

Nonetheless, the deterioration in the markets is extremely concerning and by slowing the signals down further to crosses of very long-term moving average, the risk to investors becomes much clearer.

Action: Reduce risk on rallies, as detailed above, and look to add hedges.

As always, the messages being sent by the market are more than just concerning and DO suggest, as we have stated on the last couple of weeks, that the bull market has indeed ended for now.

It is make or break for the markets over the next couple of weeks. If the markets fail to rally, more important long-term “sell signals” will be triggered which will likely suggest further declines in the markets are in the offing.

Of course, with a Fed bent on continuing to lift interest rates, earnings showing real signs of deterioration, ongoing trade wars and tariffs, continued reductions in Central Bank liquidity, and corporations curtailing share buybacks – the market appears to be finally starting to “run on empty.”

Next week, we will look to raise more cash and add hedges on any failed rally attempt at the 200-dma for now.

As always, we will keep you apprised of what we are thinking.

You can also follow our actual portfolio models and positioning at RIA PRO.

See you next week.


Market & Sector Analysis

Data Analysis Of The Market & Sectors For Traders


S&P 500 Tear Sheet


Performance Analysis


ETF Model Relative Performance Analysis


Sector & Market Analysis:

Sector-by-Sector

Discretionary and Technology Last week, we noted that both sectors rallied and failed at important overhead resistance at the 200-dma. We also suggested “taking profits and look at the 200-dma support as critical.” Last week both sectors broke back below the 200-dma and we sold our positions in XLK on that reversal.

Industrials, Materials, Energy, Financials, Communications – we are currently out of all of these sectors as the technical backdrop is much more bearish. While oil prices to bounce off important support last week, and is oversold, the energy sector has completely fallen apart. We continue to suggest reducing exposure on any rally next week.

Real Estate, Staples, Healthcare, and Utilities continue to be bright spots. Last week, these sectors pulled back some as there was a bit of rotation in the. We will look to increase our weightings to these areas opportunistically for now. However, if we get into a more protracted bear market, these sectors will not be immune to the decline so caution remains high.

Small-Cap and Mid Cap – Small-cap is extremely close to registering a macro sell signal as the 50-dma crosses below the 200-dma. Mid-caps already have. After having closed out of our positions in these areas we continue to look to reduce risk further on any rally in the markets next week.

Emerging and International Markets rallied last week a bit after recently hitting new lows but, like small and mid-cap markets continue to fail at declining resistance levels. With a major sell signal in place currently, there is still no compelling reason to add these markets to portfolios at this time. 

Dividends, Market, and Equal Weight – The overall market dynamic has changed for the negative in recent weeks. Currently, Dividends are outperforming Equal and Market Weight indices as the chase for yield and safety has weighed on more aggressive sectors of the market. Use the recent rally to reduce overall equity risk for now.

Gold – While the precious metal found a small “bit of love” last week, it was more like a “quick peck on the cheek” rather than a “passionate kiss.” Gold remains in a downtrend, but the good news is the 50-dma has turned up. We are still looking for a “sign” there is a committed trade to the metal before getting back in after having been out of the trade since 2013. Stops remain at $111 if you are still long the metal.

Bonds – rallied last week and are testing their declining 50-dma. With a short-term buy signal in place but very overbought, it is not yet time to lay on a trade just yet. We remain long our core bond holdings for capital preservation purposes but all trading positions are currently closed.

The table below shows thoughts on specific actions related to the current market environment. 

(These are not recommendations or solicitations to take any action. This is for informational purposes only related to market extremes and contrarian positioning within portfolios. Use at your own risk and peril.)

Portfolio/Client Update:

As noted last week, the market action remains troubling, to say the least. The bullish trend longer-term remains intact but more bearish dynamics are rising.

It is important we do not get OVERLY cautious right now, but we are comfortable holding some extra cash right now. Last week, we removed our overweight in Technology and will look to take some additional actions as needed this week in Discretionary holdings.

  • New clients: We will continue to sell down “out of model” holdings and raise cash on rallies.
  • Equity Model: After having sold some positions two weeks ago, we are maintaining a slightly higher weight in cash. We will be looking to sell two to three more positions next week on any strength.
  • Equity/ETF blended – Same as with the equity model. 
  • ETF Model: We sold XLK last week and will look to reduce XLY on any rally. With portfolios carrying a good bit of cash, we can just wait to see where the next opportunity emerges. 

While the pick up in volatility is certainly not enjoyable, we don’t want to let our emotions get the better of our discipline. We remain vigilant of the risk currently and are happy to err to the side of caution until a new trend emerges.


THE REAL 401k PLAN MANAGER

The Real 401k Plan Manager – A Conservative Strategy For Long-Term Investors


There are 4-steps to allocation changes based on 25% reduction increments. As noted in the chart above a 100% allocation level is equal to 60% stocks. I never advocate being 100% out of the market as it is far too difficult to reverse course when the market changes from a negative to a positive trend. Emotions keep us from taking the correct action.

401k-PlanManager-AllocationShift

Using Rallies To Reduce Risk Further

As I stated last week:

“Next week, it is critically important for the market to rally IF the bulls are going to regain control of the market.”

It didn’t and the bulls are in a very weak position currently.

We are also close to registering a much more important long-term signal to reduce risk in portfolios even more. As stated in the main body of this missive, there are mounting signs the bulls have lost control of the market.

Two weeks ago, we lowered the allocation model to 75% of target for now. As we said then:

“There is more risk to the downside currently than upside reward. But…let me repeat:

This does NOT mean immediately go out and sell 25% of your holdings. The model moves in 25% increments as signals are triggered. However, by the time a signal is triggered, the market tends to be very oversold which is why we wait for a bounce to opportunistically sell into. 

It also doesn’t mean to go liquidate 25% of your exposure all at once. These are just model targets that you ‘adjust’ into as market dynamics develop.

Last week, we will be reducing equity risk in our managed 401k portfolios by another 5% this week. As long as the market remains in a more negative trend we will continue to use rallies to reduce equity further as needed.

Continue to use rallies to reduce risk towards a target level with which you are comfortable. Remember, this model is not ABSOLUTE – it is just a guide to follow.

Defense remains our primary strategy for 401k-plans currently.

  • If you are overweight equities – reduce international, emerging market, mid, and small-capitalization funds on any rally next week. Reduce overall portfolio weights to 75% of your selected allocation target.
  • If you are underweight equities – reduce international, emerging market, mid, and small-capitalization funds on any rally next week but hold everything else for now.
  • If you are at target equity allocations reduce overall equity exposure to 75% of your allocation target on any rally next week.

Unfortunately, 401k plans don’t offer a lot of flexibility and have trading restrictions in many cases. Therefore, we have to minimize our movement and try and make sure we are catching major turning points. Over the next couple of weeks, we will know for certain as to whether more changes need to be done to allocations as we head into the end of the year.

If you need help after reading the alert; don’t hesitate to contact me.


Current 401-k Allocation Model

The 401k plan allocation plan below follows the K.I.S.S. principle. By keeping the allocation extremely simplified it allows for better control of the allocation and a closer tracking to the benchmark objective over time. (If you want to make it more complicated you can, however, statistics show that simply adding more funds does not increase performance to any great degree.)

401k Choice Matching List

The list below shows sample 401k plan funds for each major category. In reality, the majority of funds all track their indices fairly closely. Therefore, if you don’t see your exact fund listed, look for a fund that is similar in nature.

401k-Selection-List

As someone who has been warning heavily about dangerous bubbles in U.S. corporate bonds and stocks, people often ask me how and when I foresee these bubbles bursting. Here’s what I wrote a few months ago:

To put it simply, the U.S. corporate debt bubble will likely burst due to tightening monetary conditions, including rising interest rates. Loose monetary conditions are what created the corporate debt bubble in the first place, so the ending of those conditions will end the corporate debt bubble. Falling corporate bond prices and higher corporate bond yields will cause stock buybacks to come to a screeching halt, which will also pop the stock market bubble, creating a downward spiral. There are extreme consequences from central bank market-meddling and we are about to learn this lesson once again.

Interestingly, Zero Hedge tweeted a chart today of the LQD iShares Investment Grade Corporate Bond ETF saying that it was “about to break 7 year support: below it, the buybacks end.” That chart resonated with me, because it echos my warnings from a few months ago. I decided to recreate this chart with my own commentary on it. The 110 to 115 support zone is the key line in the sand to watch. If LQD closes below this zone in a convincing manner, it would likely foreshadow an even more powerful bond and stock market bust ahead.

Corporate Grade Bonds - LQD

Thanks to ultra-low corporate bond yields, U.S. corporations have engaged in a borrowing binge since the Global Financial Crisis. Total outstanding non-financial U.S. corporate debt is up by an incredible $2.5 trillion or 40 percent since its 2008 peakwhich was already a precariously high level to begin with.

Corporate Debt

U.S. corporate debt is now at an all-time high of over 45% of GDP, which is even worse than the levels reached during the dot-com bubble and U.S. housing and credit bubble:

Corporate Debt vs. GDP

Please watch my presentations about the U.S. corporate debt bubble and stock market bubble to learn more:

Billionaire fund manager Jeff Gundlach shares similar concerns as me, saying “The corporate bond market is going to get much worse when the next recession comes. It’s not worth trying to wait for that last ounce of return, or extra yield from the corporate bond market.” Another billionaire investor, Paul Tudor Jones, put out a warning this week, saying “it is in the corporate bond market where the first signs of trouble will emerge.” GE’s terrifying recent credit meltdown may be the initial pinprick for the corporate debt bubble, but make no mistake – it is not an isolated incident. GE may be the equivalent to Bear Stearns in 2007 and 2008 – just one of the first of many casualties. Anyone who thinks that the Fed can distort the credit markets for so long without terrible consequences is extremely naive and will be taught a lesson in the days to come.

Please follow me on LinkedIn and Twitter to keep up with my updates.

If you have any questions about anything I wrote in this piece or would like to learn how Clarity Financial can help you preserve and grow your wealth in the dangerous financial environment ahead, please contact me here.

With the mid-term elections now behind us, we can begin to better assess market dynamics using a known outcome. The Democratic party has regained control of the House of Representatives while at the same time Republicans extended their majority in the Senate. Nevertheless, the power shift in the House will certainly change the political dynamics and increase the level of acrimony on Capitol Hill. The pent-up frustrations of Democrats and their disdain for everything “Trump” seems certain to apply brakes to the agenda of the current administration.

Over the past two years, that agenda has demonstrated itself to be decidedly pro-growth by any means necessary. Of chief concern to us is that growth and prosperity are two very different things. Temporary growth by means of further expanding the country’s debt obligations, as has been the case since the financial crisis, will do nothing for long-term prosperity. Indeed, as the populist movement here and abroad demonstrates, we are already well down the path of sacrificing prosperity for growth.

This matters more so today than in prior years because of the problems we are beginning to see in capital markets as interest rates rise. The advancement of pro-growth strategies fueled by debt and non-productive expenditures by policy-makers has assured a widening of wealth inequality and the populist revolt (if there were another way for us to emphasize that statement, we would). Just to ensure readers do not think us partisan, this is the same strategy advanced to varying degrees by every President and Fed since Franklin Roosevelt in 1933. It certainly does not hold any promise of advancing prosperity to her citizens. Like the socialization of losses in the financial crisis, only a few benefit while the vast majority of the population bears the ultimate and eventual burden.

With Republicans now forced to share power and having less influence in pursuing the Trump plan, it raises an important question: What difference will the congressional split and resulting gridlock make for the economy?

The Signals

Even before the results of this election were known, the bond market was sending confounding signals about the direction of the economy. It can best be described by looking at short-term interest rates (Fed Funds, Eurodollars and 2-Year note Treasuries) on the one hand and longer-term interest rates (10-year notes and 30-year Treasury bonds) on the other. Traditionally, when economic growth picks up steam as an expansion advances, interest rates begin to rise to anticipate that growth may cause rising inflation. Investors’, concerned about the rate of inflation, demand a higher return. Historically, the Federal Reserve (Fed) would follow the markets lead by raising the Fed Funds rate. As higher interest rates begin to cause businesses to be more discriminating in their use of capital for projects, economic activity slows. Responding to that dynamic, long-term interest rates would stop rising and eventually begin to fall well before the Fed lowers short-term interest rates. This causes the yield curve to flatten (or invert).

Data Courtesy St. Louis Federal Reserve

What we see today, in a time when markets have become accustomed to the Fed leading the markets as opposed to following them, is an unusual contrast between the short-end and the long-end of the yield curve. Using the Eurodollar and Fed Funds futures complex as market-based indicators of short-term interest rates, investors imply that the Fed will hike interest rates two times (0.25% each) in 2019 and stop. Meanwhile, the Federal Reserve is telling us through their projection of rate hikes (the dot plot) that they intend to hike rates at least three times in 2019 and possibly more in 2020.

The long end of the yield curve, which is less responsive to Fed Funds expectations and more sensitive to fundamental economic activity like growth and inflation, has recently been steepening. That is to say, although short rates have continued to move higher, the longer end of the yield curve is also moving higher and by a greater magnitude. The 10-year and 30-year Treasury yields are either telling us that economic activity is durably robust and therefore threatens a rise in inflation and/or the longer maturity Treasuries are worried about the amount of issuance required to fund the coming trillion dollar deficits. But if that were the case, it seems the short end would also be mutually expressing those concerns.

Graph courtesy Bloomberg

The conflicting message is that while on the one hand, the market in short rates is underestimating what the Fed is telegraphing regarding rate hikes (2 versus 3), the long end is expressing a concern that the Fed is going to need to be more aggressive.

Summary

Like the tax cuts and budget deal passed a few months ago, incremental federal spending going forward can only be funded by expanding the deficit even further. The optics of more fiscal stimulus (i.e., infrastructure spending and tax cuts) will boost near-term estimates of economic growth and likely impose on the Fed to extend plans for rate hikes further. At the same time, larger deficits mean even more Treasury supply at a time when foreign interest is declining which also implies higher interest rates. For an economy so sodden with debt, higher interest rates are problematic which appears to be the outcome no matter what.

Democrats’ control of the House likely puts an end to any such plans as they seem determined to railroad any further stimulus efforts put forth by Trump. That may relieve bond markets from worrying about the risk of even more deficit spending, but it does not atone for past sins and the anvil of debt burdens now hanging around the country’s neck.

For anyone who is unclear about the idea that growth does not equal prosperity, we would argue that you are about to get a first-hand lesson in that difference. If you think Donald Trump and Bernie Sanders were outsiders in the 2016 campaign, the tone in Washington here forward is likely to fuel populist momentum. The only thing we are willing to predict is that of even bigger surprises heading into 2020.

 

 

After two significant corrections during 2018, this has to be the beginning of a “bear market,” right?

It certainly is possible given the headwinds that are starting to weigh on corporate outlooks such as ongoing trade wars, weaker revenue growth, a strong dollar, and higher interest rates. However, despite these concerns, there are three things which suggest the necessary psychological change for a more meaningful “mean reverting” event has yet to occur.

Interest Rates

During previous market declines, where “fear” was a prevalent factor among investors, money rotated from “risk” to “safety” which pushed Treasury bond prices higher and rates lower. Despite two fairly strong corrections in 2018, bonds have not attracted the “flight to safety” as investors remain complacent about the future prospects of the market.

VIX

A look at the Volatility Index (VIX) confirms the same as the bond market. Despite the two corrections, the VIX never spiked to levels consistent with “fear” that a correction was in process. Currently, the VIX remains below the average level of the index going back to 1995 and during the “October massacre” failed to even rise above the level seen in February of this year.

Gold

Another “fear trade” which has failed to show any fear is that precious yellow metal. Again, despite two major corrections, gold has failed to find buyers in a “safe haven” trade. In fact, despite consistent calls that gold was needed to offset inflation, it has failed to find any support from investors who continue to chase market returns.

Here is the point – the pickup in volatility this year should have dislodged investors out of their “passive investment slumber.” Yet, there is no anecdotal evidence that such has been the case. There are two possible outcomes from this current situation:

  1. The majority of investors are correct in assuming the two recent corrections are just that and the bull market will resume its bullish trajectory, or;
  2. Investors have misread the corrections this year and have simply not yet lost enough capital to spark the flight to safety rotations.

Historically speaking, the “herd” tends to be right in the middle of the advance at very wrong at the major turning points.

There is mounting evidence that we may indeed be at the beginning of one of those turning points in the market. If that is the case, investors are likely going to find themselves once again on the wrong side of history.

The “real” bear market hasn’t started yet. When it does we will likely see traditional “safe haven” investments telling us so. It will be worth watching gold and rates for clues as to when the masses begin to realize that “this time is indeed different.” 

Just something to think about as you catch up on your weekend reading list.


Economy & Fed


Markets


Most Read On RIA


Watch

 Interview with Mike “Mish” Shedlock


Research / Interesting Reads


Treat their incessant optimism, in the future, with skepticism. Watch what they do not what they say.” – Doug Kass

Questions, comments, suggestions – please email me.

TechCrunch recently posted a fascinating chart of the monthly count of global VC deals that raised $100 million or more since 2007. According to this chart, a new “unicorn” startup was born every four days in 2018. Unfortunately, this is even more evidence of the tech startup bubble that I have been warning about.

Big Funding Rounds

Here’s the list of “unicorn” companies worth more than $1 billion as of the third quarter of 2018:

unicorn-q1-3-2018

The world has gone completely startup crazy over the last several years. Spurred by soaring tech stock prices (a byproduct of the U.S. stock market bubble) and the frothy Fed-driven economic environment, countless entrepreneurs and VCs are looking to launch the next Facebook or Google. Following in the footsteps of the dot-com companies in the late-1990s, startups that actually turn a profit are the rare exceptions. Unfortunately, today’s tech startup bubble is going to end just like the dot-com bubble did: scores of startups are going to fold and founders, VCs, and investors are going to lose their shirts.

The chart below shows the Nasdaq Composite Index and the two bubbles that formed in it in the past two decades. Lofty tech stock prices and valuations encourage the tech startup bubble because publicly traded tech companies have more buying power with which to acquire tech startups and because they allow startups to IPO at very high valuations.

Nasdaq Composite Index

In the chart below, I compared TechCrunch’s monthly global VC deals chart to the Nasdaq Composite Index and they line up perfectly. Surges in the Nasdaq lead to surges in VC deals, while lulls or declines in the Nasdaq lead to lulls or declines in VC deals (yes, I’m aware that correlation is not necessarily causation, but there is a causal relationship in this case).

VC Deals vs. Nasdaq

Please watch my recent presentation about the U.S. stock market bubble to learn more:

I believe that a very high percentage of today’s startups are actually malinvestments that only exist due to the false signal created when the Fed and other central banks distorted the financial markets and economy with their aggressive monetary stimulus programs after the global financial crisis. See this definition of malinvestment from the Mises Wiki:

Malinvestment is a mistaken investment in wrong lines of production, which inevitably lead to wasted capital and economic losses, subsequently requiring the reallocation of resources to more productive uses. “Wrong” in this sense means incorrect or mistaken from the point of view of the real long-term needs and demands of the economy, if those needs and demands were expressed with the correct price signals in the free market. Random, isolated entrepreneurial miscalculations and mistaken investments occur in any market (resulting in standard bankruptcies and business failures) but systematic, simultaneous and widespread investment mistakes can only occur through systematically distorted price signals, and these result in depressions or recessions. Austrians believe systemic malinvestments occur because of unnecessary and counterproductive intervention in the free market, distorting price signals and misleading investors and entrepreneurs. For Austrians, prices are an essential information channel through which market participants communicate their demands and cause resources to be allocated to satisfy those demands appropriately. If the government or banks distort, confuse or mislead investors and market participants by not permitting the price mechanism to work appropriately, unsustainable malinvestment will be the inevitable result.

Rising interest rates and the overall tightening monetary environment will lead to the popping of today’s stock market bubble, which will then spill over into the tech startup bubble.

If you have any questions about anything I wrote in this piece or would like to learn how Clarity Financial can help you preserve and grow your wealth in the dangerous financial environment ahead, please contact me here.

In Tuesday’s technical update, I discussed the breakdown in the major markets both internationally as well as domestically. Of note, was the massive bear market in China which is currently down nearly 50% from its peak.

What is important about China, besides being a major trading partner of the U.S., is that their economy has been a massive debt-driven experiment from building massive infrastructure projects that no one uses; to entire cities that no one lives in. However, the credit-driven impulse has maintained the illusion of economic growth over the last several years as China remained a major consumer of commodities. Yet despite the Government headlines of economic prosperity, the markets have been signaling a very different story.

In the U.S., the story is much the same. Near-term economic growth has been driven by artificial stimulus, government spending, and fiscal policy which provides an illusion of prosperity. For example, the chart below shows raw corporate profits (NIPA) both before, and after, tax.

Importantly, note that corporate profits, pre-tax, are at the same level as in 2012.  In other words, corporate profits have not grown over the last 6-years, yet it was the decline in the effective tax rate which pushed after-tax corporate profits to a record in the second quarter. Since consumption makes up roughly 70% of the economy, then corporate profits pre-tax profits should be growing if the economy was indeed growing substantially above 2%.

Corporate profitability is a lagging indicator of the economy as it is reported “after the fact.” As discussed previously, given that economic data in particular is subject to heavy backward revisions, the stock market tends to be a strong leading indicator of recessionary downturns.

Prior to 1980, the NBER did not officially date recession starting and ending points, but the market turned lower prior to previous recessions.

Besides the stock market, economically sensitive commodities also have a tendency to signal changes to the overall trend of the economy given their direct input into both the production and demand sides of the economic equation.

Oil is a highly sensitive indicator relative to the expansion or contraction of the economy. Given that oil is consumed in virtually every aspect of our lives, from the food we eat to the products and services we buy, the demand side of the equation is a tell-tale sign of economic strength or weakness. This is shown in the chart below which shows oil prices relative to economic growth, inflation, and interest rates.

All this data is noisy, so the next chart combines rates, inflation, and GDP into one composite indicator to provide a clearer comparison. One important note is that oil tends to trade along a pretty defined trend…until it doesn’t. Given that the oil industry is very manufacturing and production intensive, breaks of price trends tend to be liquidation events which have a negative impact on the manufacturing and CapEx spending inputs into the GDP calculation.

As such, it is not surprising that sharp declines in oil prices have been coincident with downturns in economic activity, a drop in inflation, and a subsequent decline in interest rates. The drop in oil prices is also confirming the message being sent by the broader market as well.

Again, given the massive input that oil has on the overall economy, declines in oil prices have a much broader impact on the overall economy than just the energy sector. But the decline in oil isn’t the only issue weighing on our outlook for the markets.

A look at Baltic Dry Index, which is just a representation of the demand to ship dry goods, shows weakness has begun to spread globally. The Baltic Dry Index, which is a non-traded index, bounced from the lows in 2016 as global central banks infused massive amounts of liquidity into the system to offset “Brexit” risks. However, the index also suggests the “reflationary” surge has now ended.

The same goes for copper which is highly correlated to overall economic strength due to its massive use throughout the production cycle both domestically and globally. The surge in liquidity in early-2016 was reflected with the “reflation” in a global economy which now appears to have ended.

Investment Implications

There are numerous signs suggesting a more pervasive economic weakness is spreading globally.

This is coming at a time where Central Banks globally are trying to remove “emergency measures” and reduce “accommodative” policies in order to rebuild their “toolkits” for the next economic downturn when it comes.

Unfortunately, the Federal Reserve’s insistence on increasing interest rates has likely accelerated the onset of the next recession. As I stated previously:

“The chart below shows nominal GDP versus the 24-month rate of change (ROC) of the 10-year Treasury yield. Not surprisingly, since 1959, every single spike in rates killed the economic growth narrative.”

The markets, oil, copper, and the Baltic dry index are all suggesting that economic growth has peaked.

Furthermore, the rise in the dollar over the last several weeks already suggests that foreign capital is flowing into the U.S. dollar for safety as the rest of globe slows. This will ultimately accelerate as global markets decline as foreign capital seeks “safety” in U.S. Treasuries (the global storehouse for reserve currencies). 

As I have stated many times previously, as the economy slips into the next recession, interest rates will fall, and bonds will outperform equities as the reversion to the mean occurs.

From the equity perspective, this is a time to seriously consider reducing risk. While there is currently a rotation to more defensive areas of the market such as Staples, Utilities and Health Care currently, if a more negative overall trend develops in the markets these sectors will lose ground as well.

One of the big concerns remains overall valuations which are elevated in traditionally “more defensive” areas of the market due to the “yield chase” over the last decade. If there is a recessionary drag which causes a repricing of “value” in the market, there could be significant risk to these areas.

When there is uncertainty, particularly during a market topping process where trends are beginning to change direction, cash is the best option. It provides safety, liquidity, and opportunity. This particularly the case as the 2-year Treasury yields more than the S&P 500 index which provide an “alternative” to excessive risk.

The evidence continues to mount that “something has changed.” 

The only problem with waiting for absolute confirmation is the potential for significant capital destruction. As investors, our job is simply to weigh the risk and reward of each investment opportunity. Currently, there are significant “warnings” that suggest “risk” continues to outweigh “reward.”

That outlook will eventually change, When it does, and real opportunity presents itself, having liquid cash on hand provides the ability to be a “strong buyer from weak hands.”

A few weeks ago, I wrote a piece called “Why Bitcoin May Make A Powerful Move Soon.” In that piece, I gave two primary reasons why I believed that a major move was ahead: 1) because Bitcoin was forming a descending triangle pattern – and – 2) volatility had fallen to incredibly low levels, which is often what occurs before significant moves in the financial markets. On Wednesday, Bitcoin fell by nearly $1,000 or approximately 15% (at its worst levels of the day), which caused the cryptocurrency to break below the key $6,000 support level that I was watching. This is a very bearish sign, provided it isn’t negated by closing back above $6,000.Bitcoin triangle

The longer-term chart shows the descending triangle pattern and today’s breakdown under the $6,000 level. For now, the bias is clearly down. There is no telling how low Bitcoin can go from here, but it wouldn’t be surprising to see it trade in the low 000s or even under $1,000 as air continues to come out of the crypto bubble.

Bitcoin triangle chart 2

The ongoing cryptocurrency meltdown doesn’t surprise me in the least bit – I warned about this scenario heavily in late-2017 and early-2018 at the height of the bubble. I repeatedly claimed that cryptocurrencies would follow the same trajectory as dotcom stocks in the early-2000s:

crypto = dotcoms

I actually hope that Bitcoin falls under $1,000 because I’ve been saying for a long time (before the price explosion) that I like the idea of having some Bitcoin as a diversifier:

diversifier

For now, Bitcoin’s trend is down and it’s too early and unwise to try to call the bottom and catch the falling knife. I believe that a continuation of the cryptocurrency bear market will result in many altcoins becoming virtually worthless. I will publish updates from time to time to evaluate whether Bitcoin has stabilized yet.

If you have any questions about anything I wrote in this piece or would like to learn how Clarity Financial can help you preserve and grow your wealth, please contact me here.

“Only when the tide goes out do you discover who’s been swimming naked.” – Warren Buffett

Bear markets and steep corrections reveal the bad actors.

The recent market schmeissing has uncovered these market Fugazzis. I have in the past (and in today’s opening missive) hit these bad actors hard because of the damage they deliver. But, like Warren Buffett, I prefer to criticize by category and not by the individual. We should learn from this reveal in order to better navigate the market’s noise going forward:

* Corporate managements who never met an outlook they didn’t like. In my more than four decades I have interviewed hundreds of managements and observed, in the business media, thousands more. I can not recall one management in my career who had negative observations about his/her company’s secular growth prospects. To paraphrase the Oracle of Omaha again, “corporate managements often lie like ministers of finance on the eve of devaluation.” [Treat their incessant optimism, in the future, with skepticism. Watch what they do (e.g., insider buys) not what they say.] 

* Business media moderators who have no skin in the game and are quick to criticize when an investment professional makes an investor boner – reminding me of a wonderful (and oft repeated) quote by Mickey Mantle, “I never knew the game of baseball was so easy until I entered the broadcasting booth.(There are plenty of value added moderators on the three main business channels, but turn off the channel when these bad actors appear.)

* “Talking heads”– guests who parade in the media – and too often make smug observations and confident market forecasts. Like the bandleader Johnny Mercer they emphasize the positives… but deemphasize or “sweep under the carpet” the negatives, in an attempt to gain viewership, raise their assets under management and/or sell you a service. (Don’t fall for their gambit.)

* The “special sauce” guys who have a special formula to beat Mr. Market. The most venomous are the “unusual call activity” crowd – a constant diet of which will end most up in the poor house. Most have little skin in the game. But, importantly, their consistent failure to memorialize the results of their recommendations is testimony to the mug’s game they use as a “hook” to snare the unsuspecting. I have contempt and little respect for those that show the “rolls” of their winners and too often ignore their trades that go to zero (e.g. out of the money calls bought on (ROKU) , (SQ) , (AAPL) , (TSLA) , (NFLX) , (GS) and many other high beta stocks of that ilk that have recently collapsed).

(There is no special sauceI give these players – with limited accountability and selective disclosure – no respect at all – for basically trying to deceive the individual investor.)

* “Long only” investors who rationalize poor performance in a steep market decline to their “charter” and take credit for good performance in a broad market advance. (They will reappear in the next up cycle – ignore them and remember ‘what they have learned from history is that they haven’t learned from history.’)

* The hedge fund community that is again, despite a sky-high fee structure, underperforming the S&P Index.

* Leveraged players who dramatically underperform when the tide goes out and exhibit superior returns when the tide comes in. (They mostly will be entirely wiped out and typically will never reappear – as they have likely changed careers.)

* Market strategists who parade in the business media, like self professed investment icons, when the going is good – only to disappear at the end/close of every Bull Market when the seas get rough. (They, too, will return in the next cycle but hide your children and your portfolios from them.) 

Bottom Line

“When we ask for advice we are looking for an accomplice.” Saul Bellow

The investment mosaic is complex and Mr. Market is often unpredictable.There is no quick answer or special sauce to capture the holy grail of investment results – it takes hard work, common sense and the ability to navigate the noise.

The common thread of these naked swimmers are self confidence, smugness and the failure to memorialize their investment returns (because the typically are so inconsistent and dreadful).

They are bad and deceptive actors who are in denial to themselves and are artful and accountable dodgers to the investing masses.

“In my next life I want to live my life backwards.” – Woody Allen

Take Woody Allen’s advice (above) – be forewarned and learn from history as common sense is not so common as:

“A nickel ain’t worth a dime anymore.” – Yogi Berra

FOX BUSINESS


Impact Of The Fed Raising Rates On The Markets

Market Is Fearful Of Trump Administrations Hard Line On Trade

Technology has touched our lives in so many ways, and especially so for investors. Not only has technology provided ever-better tools by which to research and monitor investments, but tech stocks have also provided outsized opportunities to grow portfolios. It’s no wonder that so many investors develop a strong affinity for tech.

Just as glorious as tech can be on the way up, however, it can be absolutely crushing on the way down. Now that tech stocks have become such large positions in major US stock indexes as well as in many individual portfolios, it is especially important to consider what lies ahead. Does tech still have room to run or has it turned down? What should you do with tech?

For starters, recent earnings reports indicate that something has changed that deserves attention. Bellwethers such as Amazon, Alphabet and Apple all beat earnings estimates by a wide margin. All reported strong revenue growth. And yet all three stocks fell in the high single digits after they reported. At minimum, it has become clear that technology stocks no longer provide an uninterrupted ride up.

These are the kinds of earnings reports that can leave investors befuddled as to what is driving the stocks. Michael MacKenzie gave his take in the Financial Times late in October [here]:

“The latest fright came from US technology giants Amazon and Alphabet after their revenue misses last week. Both are highly successful companies but the immediate market reaction to their results suggested how wary investors are of any sign that their growth trajectories might be flattening.”

Flattening growth trajectories may not seem like such a big deal, but they do provide a peak into the often-tenuous association between perception and reality for technology. Indeed, this relationship has puzzled economists as much as investors. A famous example arose out of the environment of slowing productivity growth in the 1970s and 1980s [here] which happened despite the rapid development of information technology at the time. The seeming paradox prompted economist Robert Solow to quip [here],

You can see the computer age everywhere but in the productivity statistics.”

The computer age eventually did show up in the productivity statistics, but it took a protracted and circuitous route there. The technologist and futurist, Roy Amara, captured the essence of that route with a fairly simple statement [here]:

“We tend to overestimate the effect of a technology in the short run and underestimate the effect in the long run.” Although that assertion seems innocuous enough, it has powerful implications. Science writer Matt Ridley [here] went so far as to call it the “only one really clever thing” that stands out among “a great many foolish things that have been said about the future.”

Gartner elaborated on the concept by describing what they called “the hype cycle” (shown below).

The cycle is “characterized by the ‘peak of inflated expectations’ followed by the ‘trough of disillusionment’.” It shows how the effects of technology get overestimated in the short run because of inflated expectations and underestimated in the long run because of disillusionment.

Amara’s law/ the hype cycle

Source: Wikipedia [here]

Ridley provides a useful depiction of the cycle:

“Along comes an invention or a discovery and soon we are wildly excited about the imminent possibilities that it opens up for flying to the stars or tuning our children’s piano-playing genes. Then, about ten years go by and nothing much seems to happen. Soon the “whatever happened to …” cynics are starting to say the whole thing was hype and we’ve been duped. Which turns out to be just the inflexion point when the technology turns ubiquitous and disruptive.”

Amara’s law describes the dotcom boom and bust of the late 1990s and early 2000s to a tee. It all started with user-friendly web browsers and growing internet access that showed great promise. That promise lent itself to progressively greater expectations which led to progressively greater speculation. When things turned down in early 2000, however, it was a long way down with many companies such as the e-tailer Pets.com and the communications company Worldcom actually going under. When it was all said and done, the internet did prove to be a massively disruptive force, but not without a lot of busted stocks along the way.

How do expectations routinely become so inflated? Part of the answer is that we have a natural tendency to adhere to simple stories rather than do the hard work of analyzing situations. Time constraints often exacerbate this tendency. But part of the answer is also that many management teams are essentially tasked with the effort of inflating expectations. A recent Harvard Business Review article [here] (h/t Grants Interest Rate Observer, November 2, 2018) provides revealing insights from interviews with CFOs and senior investment banking analysts of leading technology companies.

For example, one of the key insights is that “Financial capital is assumed to be virtually unlimited.” While this defies finance and economics theory and probably sounds ludicrous to most any industrial company executive, it passes as conventional wisdom for tech companies. For the last several years anyway, it has also largely proven to be true for both public tech-oriented companies like Netflix and Tesla as well as private companies like Uber and WeWork.

According to the findings, tech executives,

“…believe that they can always raise financial capital to meet their funding shortfall or use company stock or options to pay for acquisitions and employee wages.”

An important implication of this capital availability is,

“The CEO’s principal aim therefore is not necessarily to judiciously allocate financial capital but to allocate precious scientific and human resources to the most promising projects …”

Another key insight is, “Risk is now considered a feature, not a bug.” Again, this defies academic theory and empirical evidence for most industrial company managers. Tech executives, however, prefer to, “chase risky projects that have lottery-like payoffs. An idea with uncertain prospects but with at least some conceivable chance of reaching a billion dollars in revenue is considered far more valuable than a project with net present value of few hundred million dollars but no chance of massive upside.”

Finally, because technology stocks provide a significant valuation challenge, many tech CFOs view it as an excuse to abdicate responsibility for providing useful financial information. “[C]ompanies see little value in disclosing the details of their current and planned projects in their financial disclosures.” Worse, “accounting is no longer considered a value-added function.” One CFO went so far as to note “that the CPA certification is considered a disqualification for a top finance position [in their company].”

While some of this way of thinking seems to be endemic to the tech industry, there is also evidence that an environment of persistently low rates is a contributing factor. As the FT mentions [here], “When money is constantly cheap and available everything seems straightforward. Markets go up whatever happens, leaving investors free to tell any story they like about why. It is easy to believe that tech companies with profits in the low millions are worth many billions.”

John Hussman also describes the impact of low rates [here]:

“The heart of the matter, and the key to navigating this brave new world of extraordinary monetary and fiscal interventions, is to recognize that while 1) valuations still inform us about long-term and full-cycle market prospects, and; 2) market internals still inform us about the inclination of investors toward speculation or risk-aversion, the fact is that; 3) we can no longer rely on well-defined limits to speculation, as we could in previous market cycles across history.”

In other words, low rates unleash natural limits to speculation and pave the way for inflated expectations to become even more so. This means that the hype cycle gets amplified, but it also means that the cycle gets extended. After all, for as long as executives do not care about “judiciously allocating capital”, it takes longer for technology to sustainably find its place in the real economy. This may help explain why the profusion of technology the last several years has also coincided with declining productivity growth.

One important implication of Amara’s law is that there are two distinctly different ways to make money in tech stocks. One is to identify promising technology ideas or stocks or platforms relatively early on and to ride the wave of ever-inflating expectations. This is a high risk but high reward proposition.

Another way is to apply a traditional value approach that seeks to buy securities at a low enough price relative to intrinsic value to ensure a margin of safety. This can be done when disillusionment with the technology or the stock is so great as to overshoot realistic expectations on the downside.

Applying value investing to tech stocks comes with its own hazards, however. For one, several factors can obscure sustainable levels of demand for new technologies. Most technologies are ultimately also affected by cyclical forces, incentives to inflate expectations can promote unsustainable activity such as vendor financing, and debt can be used to boost revenue growth through acquisitions.

Further, once a tech stock turns decidedly down, the corporate culture can change substantially. The company can lose its cachet with its most valuable resource — its employees. Some may become disillusioned and even embarrassed to be associated with the company. When the stock stops going up, the wealth creation machine of employee stock options also turns off. Those who have already made their fortunes no longer have a good reason to hang around and often set off on their own. It can be a long way down to the bottom.

As a result, many investors opt for riding the wave of ever-inflating expectations. The key to succeeding with this approach is to identify, at least approximately, the inflection point between peak inflated expectations and the transition to disillusionment.

Rusty Guinn from Second Foundation Partners provides an excellent case study of this process with the example of Tesla Motors [here]. From late 2016 through May 2017 the narrative surrounding Tesla was all about growth and other issues were perceived as being in service to that goal. Guinn captures the essence of the narrative:

“We need capital, but we need it to launch our exciting new product, to grow our factory production, to expand into exciting Semi and Solar brands.” In this narrative, “there were threats, but always on the periphery.”

Guinn also shows how the narrative evolved, however, by describing a phase that he calls “Transitioning Tesla”. Guinn notes how the stories about Tesla started changing in the summer of 2017:

“But gone was the center of gravity around management guidance and growth capital. In its place, the cluster of topics permeating most stories about Tesla was now about vehicle deliveries.”

This meant the narrative shifted to something like, “The Model 3 launch is exciting AND the performance of these cars is amazing, BUT Tesla is having delivery problems AND can they actually make them AND what does Wall Street think about all this?” As Guinn describes, “The narrative was still positive, but it was no longer stable.” More importantly, he warns, “This is what it looks like when the narrative breaks.”

The third phase of Tesla’s narrative, “Broken Tesla”, started around August 2017 and has continued through to the present. Guinn describes,

“The growing concern about production and vehicle deliveries entered the nucleus of the narrative about Tesla Motors in late summer 2017 and propagated. The stories about production shortfalls now began to mention canceled reservations. The efforts to increase production also resulted in some quality control issues and employee complaints, all of which started to make their way into those same articles.”

Finally, Guinn concludes, “Once that happened, a new narrative formed: Tesla is a visionary company, sure, but one that doesn’t seem to have any idea how to (1) make cars, (2) sell cars or (3) run a real company that can make money doing either.” Once this happens, there is very little to inhibit the downward path of disillusionment.

Taken together, these analyses can be used by investors and advisors alike to help make difficult decisions about tech positions. Several parts of the market depend on the fragile foundations of growth narratives including many of the largest tech companies, over one-third of Russell 2000 index constituents that don’t make money, and some of the most over-hyped technologies such as artificial intelligence and cryptocurrencies.

One common mistake that should be avoided is to react to changing conditions by modifying the investment thesis. For example, a stock that has been owned for its growth potential starts slowing down. Rather than recognizing the evidence as potentially indicative of a critical inflection point, investors often react by rationalizing in order to avoid selling. Growth is still good. The technology is disruptive. It’s a great company. All these things may be true, but it won’t matter. Growth is about narrative and not numbers. If the narrative is broken and you don’t sell, you can lose a lot of money. Don’t get distracted.

In addition, it is important to recognize that any company-specific considerations will also be exacerbated by an elemental change in the overall investment landscape. As the FT also noted, “But this month [October] can be recognised as the point at which the market shifts from being driven by liquidity to being driven by fundamentals.” This turning point has significant implications for the hype cycle: “Turn off the liquidity taps at the world’s central banks and so does the ability of the market to believe seven impossible things before breakfast.”

Yet another important challenge in dealing with tech stocks that have appreciated substantially is dealing with the tax consequences. Huge gains can mean huge tax bills. In the effort to avoid a potentially complicated and painful tax situation, it is all-too-easy to forego the sale of stocks that have run the course of inflated expectations.

As Eric Cinnamond highlights [here], this is just as big of a problem for fiduciaries as for individuals:

“The recent market decline is putting a growing number of portfolio managers in a difficult situation. The further the market falls, the greater the pressure on managers to avoid sending clients a tax bill.”

Don’t let tax considerations supersede investment decisions.

So how do the original examples of Amazon, Alphabet and Apple fit into this? What, if anything, should investors infer from their quarterly earnings and the subsequent market reactions?

There are good reasons to be cautious. For one, all the above considerations apply. Further, growth has been an important part of the narrative of each of these companies and any transition to lower growth does fundamentally affect the investment thesis. In addition, successful companies bear the burden of ever-increasing hurdles to growth as John Hussman describes [here]:

“But as companies become dominant players in mature sectors, their growth slows enormously.”

“Specifically,” he elaborates, “growth rates are always a declining function of market penetration.” Finally, he warns,

“Investors should, but rarely do, anticipate the enormous growth deceleration that occurs once tiny companies in emerging industries become behemoths in mature industries.”

For the big tech stocks, wobbles from the earnings reports look like important warning signs.

In sum, tech stocks create unique opportunities and risks for investors. Due to the prominent role of inflated expectations in so many technology investments, however, tech also poses special challenges for long term investors. Whether exposure exists in the form of individual stocks or by way of major indexes, it is important to know that many technology stocks are run more like lottery tickets than as a sustainable streams of cash flows. Risk may be perceived as a feature by some tech CFOs, but it is a bug for long term investment portfolios.

Finally, tech presents such an interesting analytical challenge because the hype cycle can cause perceptions to deviate substantially from the reality of development, adoption and diffusion. Ridley describes a useful general approach: “The only sensible course is to be wary of the initial hype but wary too of the later scepticism.” Long term investors won’t mind a winding road but they need to make sure it can get them to where they are going.

Throughout modern financial history, the ability to borrow at a 5% rate on a 30-year mortgage was considered a great deal. Over the past ten years, mortgage rates falling to between 3% and 4% have warped perceptions. Evidence of this fact can be found by the sticker shock and home buyer consternation that the currently available 5% mortgage rate is causing. The rate shock is not limited to home buyers; the home building sector has fallen over 30% since it recorded a record high in January 2018. Notably, a month before hitting that record, the popular SPDR S&P Homebuilders ETF (XHB) surpassed the previous record high established at the peak of the housing bubble in 2006.

Mortgage rates play a large role in housing affordability, which greatly affects housing sales and prices, economic growth and the profits or losses for those involved in the housing sector. We discussed and quantified housing affordability dynamics in our article, The Headwind Facing Housing. In this article, we consider whether the housing sector has fallen far enough to warrant investment consideration.

Headwinds Redux

In The Headwind Facing Housing, we produced two graphs that quantify the effect varying mortgage rates have on housing affordability. We modified those graphs, as shown below, to highlight how recent changes in 30-year mortgage rates have affected mortgage payments and housing affordability.

In the first graph, the monthly mortgage payment (excluding taxes, insurance, and other fees) for a buyer purchasing a $500,000 house has risen 12% since 2016. The second graph illustrates the purchase price a buyer can afford for a fixed $2,500 mortgage payment. Since 2016, the purchase price has dropped from $530,000 to almost $470,000. The data in both graphs are based on 30-year mortgage rates rising from 3.87% in January 2016 to 4.83% as of the most recent data from the Federal Reserve. Effectively, as the graphs show, a 1% rise in mortgage rates reduced affordability and increased monthly mortgage payments by about 10-12% in the current environment.

Higher mortgage rates dictate that buyers either take on larger mortgage payments or buy cheaper houses. The burden of higher rates does not solely fall on buyers; it also hurts sellers and those in the housing construction business.

Home Builders

Equity investors appear to be keenly aware of the toxic relationship between mortgage rates and homebuilder profits. The graph below compares the year to date price return for the S&P Homebuilders ETF (XHB) and the S&P 500.

Data Courtesy Bloomberg

Note that while XHB and the S&P 500 both fell in the first quarter, the S&P regained its footing and went on to new record highs before its recent stumble. Conversely, XHB drifted slightly lower following the first quarter decline. More recently, as interest rates rose, XHB fell precipitously. As shown, XHB is underperforming the S&P 500 by almost 25% year to date.

Looking back further, we find that since the recovery from the financial crisis beginning in March of 2009, XHB greatly outperformed the S&P 500. As shown below, in January of 2018, XHB had outperformed the S&P 500 by about 200% since March of 2009. That differential has collapsed over the last few months.

Data Courtesy Bloomberg

Statistically, XHB and the S&P have had a strong long-term correlation (2006-present) of +.71, meaning that 71% of XHB’s price can be explained by changes in the price of the S&P 500.

Interestingly, XHB has a +.21 correlation with ten-year U.S. Treasury yields over the same period. The positive relationship is not what one should expect as it implies that yields and XHB have risen and fallen together. Keep in mind, the relationship is not strong but the positive relationship is notable.

Recently, however, as bond yields broke out of ten-year ranges, reached five-year highs and brushed up against key long-term technical levels, XHB investors became concerned. Since September 2018, the correlation between XHB and ten-year Treasury yields has been -.58 and greatly reflects the lagged effects of rising interest rates on housing activity. We suspect this statistically relevant negative correlation will persist and perhaps strengthen as long as rates keep rising.

Investment Implications

The rest of this article, including our investment conclusions, is only available for subscribers of RIA Pro. To try out this new service with a 14 day free trial period visit us at RIA Pro.

 

 

 

Last week, I wrote a piece in which I warned about the risk of a sharp liquidation sell-off in the crude oil market as speculators are forced to jettison their massive 500,000 futures contract long position. Since then, crude oil continues to sell off very hard and was down nearly 8% on Tuesday alone. Crude oil is an economically sensitive asset and may be selling off as it prices in the rising risk of a recession in the not-too-distant future.

West Texas Intermediate (WTI) crude oil broke below its key $65 support level at the start of this month and tested the $55 support level during Tuesday’s sell-off. There is a good chance of a short-term bounce at the $55 level. If WTI crude oil eventually closes below the $55 support level in a decisive manner, it would likely foreshadow further weakness.

Crude Oil Daily

The weekly chart shows how WTI crude oil recently broke below its uptrend line that started in early-2016 (just like the S&P 500 did), which is a worrisome sign.

Crude Oil Weekly

As I’ve been pointing out since the start of this year, crude oil futures speculators or the “dumb money” (the red line under the chart) have built a massive long position in WTI crude oil of just under 500,000 net futures contracts. There is a very real risk that these speculators will be forced to liquidate if the sell-off continues, which would greatly exacerbate the sell-off.

Crude Oil Monthly

After going sideways for five months, the U.S. dollar has recently resumed its rally that started in the spring. On Monday, the U.S. Dollar Index broke above its key 97 resistance level that formed at the index’s peak in August. If the index manages to stay above this level, it may signal even more strength ahead. The dollar is strengthening because U.S. interest rates have been rising for the past couple years, which makes the U.S. currency more attractive relative to foreign currencies.

The U.S. Dollar Index is very important to watch due to its significant influence on other markets, particularly commodities and emerging market equities. Bullish moves in the U.S. dollar are typically bearish for commodities (including energy and metals) and emerging markets, and vice versa. If the U.S. Dollar Index continues to rise after Monday’s breakout, it would spell even more pain for commodities and EMs.

Dollar

For now, I am watching how WTI crude oil acts at its key $55 support level and if the U.S. dollar’s Monday breakout holds.

If you have any questions about anything I wrote in this piece or would like to learn how Clarity Financial can help you preserve and grow your wealth, please contact me here.

The world has gone completely startup crazy over the last several years. Spurred by soaring tech stock prices (a byproduct of the U.S. stock market bubble) and the frothy Fed-driven economic environment, countless entrepreneurs and VCs are looking to launch the next Facebook or Google. Following in the footsteps of the dot-com companies in the late-1990s, startups that actually turn a profit are the rare exceptions. Unfortunately, today’s tech startup bubble is going to end just like the dot-com bubble did: scores of startups are going to fold and founders, VCs, and investors are going to lose their shirts. In this piece, I wanted to show a collection of recent news headlines (all from Business Insider) that capture the zeitgeist of the tech startup bubble – please remember these when the bubble bursts and everyone says “what were we thinking?!”

These Silicon Valley venture capitalist trading cards should tell you where we are in the cycle (close to the end) (link):

VC Cards

When trillions of dollars worth of central bank “Bubble Money” is sloshing all over the globe looking for a home, startups are a popular holding container (link):

5 startups

Since when did throwing “insane” amounts of cash into a hot industry ever end well? It never does and this time will be no exception. Masayoshi Son is definitely “Bubble Drunk.” (link):

Masayoshi Son

So, she started as a VC at age 17?! And the companies she invested in are worth billions? That’s what happens when central banks hold interest rates at record low levels for a record length of time and flood the economy and financial markets with trillions of dollars worth of liquidity. As the old saying goes, “a rising tide lifts all boats.” Also, “never mistake a bull market for brains.” (link)

24 Year Old VC

During a bubble, it is common to see fantastical stories about young wunderkinds getting hired for grown-up jobs, starting companies, making fortunes, etc. in the industry that is experiencing a bubble. (Undoubtedly, the parents play a very large role in opening doors for these kids and getting them media coverage – “it’ll look great when applying to Harvard!” ). Another example of this is the story of the 11 year-old “cryptocurrency guru” that was circulating during the crypto bubble earlier this year before the crypto price implosion. (link)

Coder

Pretty soon, you will see many more headlines like this (link):

 

25 Most Valuable

I believe that a very high percentage of today’s startups are actually malinvestments that only exist due to the false signal created when the Fed and other central banks distorted the financial markets and economy with their aggressive monetary stimulus programs after the global financial crisis. See this definition of malinvestment from the Mises Wiki:

Malinvestment is a mistaken investment in wrong lines of production, which inevitably lead to wasted capital and economic losses, subsequently requiring the reallocation of resources to more productive uses. “Wrong” in this sense means incorrect or mistaken from the point of view of the real long-term needs and demands of the economy, if those needs and demands were expressed with the correct price signals in the free market. Random, isolated entrepreneurial miscalculations and mistaken investments occur in any market (resulting in standard bankruptcies and business failures) but systematic, simultaneous and widespread investment mistakes can only occur through systematically distorted price signals, and these result in depressions or recessions. Austrians believe systemic malinvestments occur because of unnecessary and counterproductive intervention in the free market, distorting price signals and misleading investors and entrepreneurs. For Austrians, prices are an essential information channel through which market participants communicate their demands and cause resources to be allocated to satisfy those demands appropriately. If the government or banks distort, confuse or mislead investors and market participants by not permitting the price mechanism to work appropriately, unsustainable malinvestment will be the inevitable result.

As I’ve explained in a recent Forbes piece:

When central banks set interest rates and hold them at low levels in order to create an economic boom after a recession (as our Federal Reserve does), they interfere with the organic functioning of the economy and financial markets, which has serious consequences including the creation of distortions and imbalances. By holding interest rates at artificially low levels, the Fed creates “false signals” that encourage the undertaking of businesses and other endeavors that would not be profitable or viable in a normal interest rate environment.

The businesses or other investments that are made due to artificial credit conditions are known as “malinvestments” and typically fail once interest rates rise to normal levels again. Some examples of malinvestments are dot-com companies in the late-1990s tech bubble, failed housing developments during the mid-2000s U.S. housing bubble, and unfinished skyscrapers in Dubai and other emerging markets after the global financial crisis.

The chart below shows how recessions, financial crises, and bubble bursts have occurred after historic interest rate hike cycles:

Fed Funds Rate

I believe that rising interest rates and the overall tightening monetary environment will lead to the popping of today’s stock market bubble, which will then spill over into the tech startup bubble.

Please watch my recent presentation about the U.S. stock market bubble to learn more:

 

If you have any questions about anything I wrote in this piece or would like to learn how Clarity Financial can help you preserve and grow your wealth, please contact me here.

Please note this article will be distributed on our free site tomorrow but the Investment Implications section is only available for RIA Pro subscribers.

Throughout modern financial history, the ability to borrow at a 5% rate on a 30-year mortgage was considered a great deal. Over the past ten years, mortgage rates falling to between 3% and 4% have warped perceptions. Evidence of this fact can be found by the sticker shock and home buyer consternation that the currently available 5% mortgage rate is causing. The rate shock is not limited to home buyers; the home building sector has fallen over 30% since it recorded a record high in January 2018. Notably, a month before hitting that record, the popular SPDR S&P Homebuilders ETF (XHB) surpassed the previous record high established at the peak of the housing bubble in 2006.

Mortgage rates play a large role in housing affordability, which greatly affects housing sales and prices, economic growth and the profits or losses for those involved in the housing sector. We discussed and quantified housing affordability dynamics in our article, The Headwind Facing Housing. In this article, we consider whether the housing sector has fallen far enough to warrant investment consideration.

Headwinds Redux

In The Headwind Facing Housing, we produced two graphs that quantify the effect varying mortgage rates have on housing affordability. We modified those graphs, as shown below, to highlight how recent changes in 30-year mortgage rates have affected mortgage payments and housing affordability.

In the first graph, the monthly mortgage payment (excluding taxes, insurance, and other fees) for a buyer purchasing a $500,000 house has risen 12% since 2016. The second graph illustrates the purchase price a buyer can afford for a fixed $2,500 mortgage payment. Since 2016, the purchase price has dropped from $530,000 to almost $470,000. The data in both graphs are based on 30-year mortgage rates rising from 3.87% in January 2016 to 4.83% as of the most recent data from the Federal Reserve. Effectively, as the graphs show, a 1% rise in mortgage rates reduced affordability and increased monthly mortgage payments by about 10-12% in the current environment.

Higher mortgage rates dictate that buyers either take on larger mortgage payments or buy cheaper houses. The burden of higher rates does not solely fall on buyers; it also hurts sellers and those in the housing construction business.

Home Builders

Equity investors appear to be keenly aware of the toxic relationship between mortgage rates and homebuilder profits. The graph below compares the year to date price return for the S&P Homebuilders ETF (XHB) and the S&P 500.

Data Courtesy Bloomberg

Note that while XHB and the S&P 500 both fell in the first quarter, the S&P regained its footing and went on to new record highs before its recent stumble. Conversely, XHB drifted slightly lower following the first quarter decline. More recently, as interest rates rose, XHB fell precipitously. As shown, XHB is underperforming the S&P 500 by almost 25% year to date.

Looking back further, we find that since the recovery from the financial crisis beginning in March of 2009, XHB greatly outperformed the S&P 500. As shown below, in January of 2018, XHB had outperformed the S&P 500 by about 200% since March of 2009. That differential has collapsed over the last few months.

Data Courtesy Bloomberg

Statistically, XHB and the S&P have had a strong long-term correlation (2006-present) of +.71, meaning that 71% of XHB’s price can be explained by changes in the price of the S&P 500.

Interestingly, XHB has a +.21 correlation with ten-year U.S. Treasury yields over the same period. The positive relationship is not what one should expect as it implies that yields and XHB have risen and fallen together. Keep in mind, the relationship is not strong but the positive relationship is notable.

Recently, however, as bond yields broke out of ten-year ranges, reached five-year highs and brushed up against key long-term technical levels, XHB investors became concerned. Since September 2018, the correlation between XHB and ten-year Treasury yields has been -.58 and greatly reflects the lagged effects of rising interest rates on housing activity. We suspect this statistically relevant negative correlation will persist and perhaps strengthen as long as rates keep rising.

Investment Implications

Despite its label of “Homebuilder ETF,” XHB holds many companies that are not homebuilders. For instance, Whirlpool, Williams Sonoma and the Home Depot represent three of the ETF’s top six holdings. These non-home builders, many of which are categorized as cyclicals, have helped buffet the recent decline. On average, the top five homebuilders in the ETF are down 34% year to date or about 7% more than the ETF.

While it is tempting to buy XHB given its sharp decline, the risks are onerous. The biggest risk is that yields keep rising. This will continue to be a headwind for home builders as housing affordability declines and mortgage payments rise. It will also further pressure the stock market and the economy in general which bodes poorly for the cyclical stocks in the ETF.

Higher mortgage rates will also make it less tempting for consumers to perform cash-out mortgage refinancings or take out home equity loans. Both have translated into a sizable source of revenue for Home Depot, Lowes and other companies in the ETF that profit from home remodeling and furnishing. Those sources of funding for consumer purchases is quickly drying up. Per the Mortgage Bankers Association (MBA): “MBA’s Weekly Applications Survey refinance index averaged 1,013 in June, the lowest monthly average since December 2000. The weekly index value dropped below 1,000 in three of the past six weeks, a level that it has not gone below since December 2000 as well.

Even if yields peak at current levels and begin to trend lower, we are concerned that the reason for such a reversal in yields would be economic weakness. Heavy stimulus in the form of tax cuts and fiscal spending have boosted GDP by 0.8% so far this year. As the benefits of the stimulus fade, as is widely expected, economic growth should slow and have adverse effects on consumers. The recent takeover of the House of Representatives by the Democrats make new stimulus much less likely to counteract economic weakness.

Despite being in the midst of the second longest economic expansion in modern U.S. economic history, the Congressional Budget Office (CBO) is not currently forecasting a recession for the next ten years as shown above. We, on the other hand, realize that such a forecast is idiotic and, even more concerning, believe the probability of a recession within the next year is significant. A recession would likely result in lower mortgage rates, but the benefits to homebuilders and buyers will likely be offset by job losses, weaker consumer activity and declining consumer sentiment(home buyers).

Despite the recent decline versus the S&P 500 and other sectors, we currently recommend selling or reducing exposure to the homebuilders and the XHB ETF. We believe it is best to wait until the interest rate and economic environment becomes more clear. In our opinion, it’s too early to catch the proverbial falling knife.

To stay abreast of the situation, we recommend following the weekly MBA purchase and refinance surveys as well as 30-year mortgage rates furnished by the St. Louis Federal Reserve (LINK). Other housing data, such as housing starts and new homes sales are helpful, but the data lags significantly, so caution is advised when using that data to infer something about the demand for housing.

 

 

 

After going sideways for five months, the U.S. has recently resumed its rally that started in the spring. On Monday, the U.S. Dollar Index broke above its key 97 resistance level that formed at the index’s peak in August. If the index manages to stay above this level, it may signal even more strength ahead. The dollar is strengthening because U.S. interest rates have been rising for the past couple years, which makes the U.S. currency more attractive relative to foreign currencies.

Dollar Daily

The weekly U.S. Dollar Index charts shows the key longer-term levels and price targets to watch. If today’s breakout above 97 holds, the next price target to watch is the 100 resistance level that has acted as a key support and resistance level for the past four years.

Dollar Weekly

Even if you do not trade currencies, the U.S. Dollar Index is very important to watch due to its significant influence on other markets, particularly commodities and emerging market equities. Bullish moves in the U.S. dollar are typically bearish for commodities (including energy and metals) and emerging markets, and vice versa. If the U.S. Dollar Index continues to rise after today’s breakout, it would spell even more pain for commodities and EMs. Further, approximately 40% of S&P 500 earnings come from abroad. Needless to say be on the lookout for earnings estimate downgrades over the coming months.

In this past weekend’s newsletter, I touched on the outcome of the mid-term elections and why it would likely not be as optimistic as the mainstream media was portraying it to be. To wit:

“It is likely little will get done as the desire to engage in conflict and positioning between parties will obliterate any chance for potential bipartisan agenda items such as infrastructure spending.

So, really, despite all of the excitement over the outcome of the mid-terms, it will likely mean little going forward. The bigger issue to focus on will be the ongoing impact of rising interest rates on major drivers of debt-driven consumption such as housing and auto sales. Combine that with a late stage economic cycle colliding with a Central Bank bent on removing accommodation and you have a potentially toxic brew for a much weaker outcome than currently expected.”

I also wrote:

“With portfolios reduced to 50% equity, we have a bit of breathing room currently to watch for what the market does next. It is EXTREMELY important the market rally next week above Wednesday’s highs or we will likely see another decline to potentially test the recent lows.”

Unfortunately, on Monday, nothing good happened. While the week is not over yet, the failure of the S&P 500 at the 50-dma now turns that previous support to important resistance. Furthermore, the failure of the market to hold the 200-dma also increases the downside risk of the market currently.

There is an important point here to be made about “bull markets” and “bear markets.”

While there is no “official” definition of what constitutes a “bull” or “bear” market, the generally accepted definition is a decline of 20% in the market.

However, since I really don’t want to subject my clients to a loss of 20% in their portfolios, I would suggest a different definition based on the “trend” of the market as a whole. As shown in the chart below:

  • If prices are generally “trending higher” then such is considered a “bull market.”
  • A “bear market” is when the “trend” changes from positive to negative.

The vertical red and green lines denote the confirmation of the change in trend when all three indicators simultaneously align.

  • The price of the market moves below the long-term moving average. 
  • The long-term overbought condition is reversed (top indicator) 
  • The long-term MACD signal changes from “buy” to “sell” X

Importantly, note that just a violation of the long-term moving average is not confirmation of a change to the ongoing bull trend. Over the last decade, there were several violations of the long-term moving average which were quickly reversed by Central Bank interventions (QE2 and Operation Twist).

In late 2015, all indications of the start of a “bear market” coincided as the Federal Reserve had launched into their rate hiking campaign. However, that bear market was cut short through the injections of liquidity from the ECB’s own QE program.

Currently, with Central Banks globally beginning to reduce or extract liquidity from the financial markets, and the Federal Reserve committed to hiking rates, there seems to be no ready “backstop” for the markets currently.

However, since this is a monthly chart, we will have to wait until December 1st to update these indicators. However, if the market doesn’t begin to exhibit a more positive tone by then, all three indicators of a “bear market” will align for only the 4th time in 25-years. 

But it isn’t just the S&P 500 exhibiting these characteristics.

The S&P 400 has not only failed at a retest of the longer-term moving average but mid-caps are close to registering a “change in the trend”  as the 50-dma crosses below the 200-dma.

(Note: we have previously closed all mid-cap positions in our portfolios)

While the S&P 600 is not a close as the S&P 400 to registering a “change in trend,” it likely won’t be long before it does. The failure of small-caps at the 200-dma is confirming additional downward pressure on those companies as concerns over ongoing “tariffs” and “trade wars” are most impactful to small and mid-sized company profitability.

(Note: we have previously closed all small-cap positions in our portfolios)

The Russell 2000 is also confirming the same. The index is extremely close to registering a “change in trend” as the 50-dma approaches a cross of the 200-dma. Also, with the index failing at the 200-dma and turning lower, just as with small and mid-cap indices above, a break of recent lows will confirm a “bear market” has started in these markets.

But what is happening domestically should not be a surprise. The rest of the world markets have already confirmed bear market trends and continue to trade below their long-term moving averages. (The very definition of a bear market.) While it has been believed the U.S. can “decouple” from the rest of the world, such is not likely the case. The pressure on global markets is a reflection of a slowing global economy which will ultimately find its way back to the U.S.

(Note: we closed all international and emerging market positions in our portfolios at the beginning of this year.)

Just as a side note, China has been in a massive bear market trend since 2015 and is down nearly 50% from its previous highs.

While much of the mainstream media continues to suggest the “bull market” is alive and well, there are a tremendous number of warning signs which are suggesting that something has indeed “changed.” 

“The tailwinds that existed for the market over the last couple of years from tax cuts, to natural disasters, to support from Central Banks have now all run their course.

The backdrop of the market currently is vastly different than it was during the “taper tantrum” in 2015-2016, or during the corrections following the end of QE1 and QE2.  In those previous cases, the Federal Reserve was directly injecting liquidity and managing expectations of long-term accommodative support. Valuations had been through a fairly significant reversion, and expectations had been extinguished.

None of that support exists currently.”

The ongoing deterioration in the markets continues to confirm, as I wrote back in April, the bull market that started in 2009 has ended. However, we will likely not know for certain until we get into 2019, but therein lies the biggest problem. Waiting for verification requires a greater destruction of capital than we are willing to endure.

(Note: Just because the bull market has ended doesn’t mean it will never resume again. It is simply a transition to remove excesses from the market. Bear markets are a good thing as it creates long-term opportunities.)

We have already taken steps to reduce equity risk and will do more on rallies that fail to re-establish the previous bullish trends in the market. If I am right, the more conservative stance will protect capital in the short-term. The reduced volatility allows for a logical approach to further adjustments as the correction becomes more apparent. (The goal is not to be forced into a “panic selling” situation.)

If I am wrong, and the bull market resumes, we simply remove hedges and reallocate equity exposure.

“There is little risk, in managing risk.” 

If you have taken NO actions in your portfolio as of yet, use rallies which fail at resistance to “do something.” I have reprinted our portfolio management rules as a guide.

RIA Portfolio Management Rules

  1. Cut losers short. (Reduce the risk of fundamentally poor companies.)
  2. Set goals and be actionable. (Without specific goals, trades become arbitrary and increase overall risk.)
  3. Emotionally driven decisions void the investment process.  (Buy high/sell low)
  4. Follow the trend. (80% of portfolio performance is determined by the long-term, monthly, trend. While a “rising tide lifts all boats,” the opposite is also true.)
  5. Never let a “trading opportunity” turn into a long-term investment. (Refer to rule #1. All initial purchases are “trades,” until your investment thesis is proved correct.)
  6. An investment discipline does not work if it is not followed.
  7. “Losing money” is part of the investment process. (If you are not prepared to take losses when they occur, you should not be investing.)
  8. The odds of success improve greatly when the fundamental analysis is confirmed by the technical price action. (This applies to both bull and bear markets)
  9. Never, under any circumstances, add to a losing position. (As Paul Tudor Jones once quipped: “Only losers add to losers.”)
  10. Markets are either “bullish” or “bearish.” During a “bull market” be only long or neutral. During a “bear market”be only neutral or short. (Bull and Bear markets are determined by their long-term trend as shown in the chart below.)
  11. When markets are trading at, or near, extremes do the opposite of the “herd.”
  12. Do more of what works and less of what doesn’t. (Traditional rebalancing takes money from winners and adds it to losers. Rebalance by reducing losers and adding to winners.)
  13. “Buy” and “Sell” signals are only useful if they are implemented. (Managing a portfolio without a “buy/sell” discipline is designed to fail.)
  14. Strive to be a .700 “at bat” player. (No strategy works 100% of the time. However, being consistent, controlling errors, and capitalizing on opportunity is what wins games.)
  15. Manage risk and volatility. (Controlling the variables that lead to investment mistakes is what generates returns as a byproduct.)

It should be remembered that all good things do come to an end. Sometimes, those endings can be very disastrous to long-term investing objectives. This is why focusing on “risk controls” in the short-term, and avoiding subsequent major draw-downs, the long-term returns tend to take care of themselves.

Everyone approaches money management differently.

This is just our approach and we are simply sharing it with you.

We hope you find something useful in it.

Not surprisingly, my recent article on “The Important Role Of Recessions” led to more than just a bit of debate on why “this time is different.” The running theme in the debate was that debt really isn’t an issue as long as our neighbors are willing to support continued fiscal largesse.

As I have pointed out previously, the U.S. is currently running a nearly $1 Trillion dollar deficit during an economic expansion. This is completely contrary to the Keynesian economic theory.

Keynes contended that ‘a general glut would occur when aggregate demand for goods was insufficient, leading to an economic downturn resulting in losses of potential output due to unnecessarily high unemployment, which results from the defensive (or reactive) decisions of the producers.’  In other words, when there is a lack of demand from consumers due to high unemployment, the contraction in demand would force producers to take defensive actions to reduce output.

In such a situation, Keynesian economics states that government policies could be used to increase aggregate demand, thus increasing economic activity, and reducing unemployment and deflation.  

Investment by government injects income, which results in more spending in the general economy, which in turn stimulates more production and investment involving still more income and spending and so forth. The initial stimulation starts a cascade of events, whose total increase in economic activity is a multiple of the original investment.”

Of course, with the government already running a massive deficit, and expected to issue another $1.5 Trillion in debt during the next fiscal year, the efficacy of “deficit spending” in terms of its impact to economic growth has been greatly marginalized.

The main issue is that government spending has shifted away from productive investments which create jobs (infrastructure and development) to primarily social welfare and debt service which has a negative rate of return. As I showed on Friday, according to the Center On Budget & Policy Prioritiesnearly 75% of every tax dollar goes to non-productive spending. 

Here is the real kicker,

Through the second quarter of this year, the Federal Government has spent $4.45 Trillion which was equivalent to 24% of the nation’s entire GDP. Of that total spending, only $3.47 Trillion was financed by Federal revenues leaving $983 billion to be financed with debt. In other words, it took all of the revenue received by the Government just to cover social welfare and service interest on the debt.

In the financial markets, when you borrow from others to pay obligations you can’t afford it is known as a “Ponzi-scheme.” 

Debt Is The Cause, Not The Cure

I am not saying that all debt is bad.

Debt, if used for productive investments, can be a solution to stimulating economic growth in the short-term. This past couple of quarters was a good example of this as the spending on defense and rebuilding from 3-major hurricanes last year pushed economic activity up in 2018. (Read: Tax Cuts Saved The Economy?)

“As we discussed recently with Danielle Dimartino-Booth, it came from a “sugar-high” created by 3-massive Hurricanes in 2017 which have required billions in monetary stimulus, created jobs in manufacturing and construction, and led to an economic lift. We saw the same following the Hurricanes in 2012 as well.”

However, these “sugar highs” are temporary in nature. The problem is the massive surge in unbridled deficit spending which provides the temporary illusion of economic growth simply “pulls forward” future consumption leaving a void that must be filled.

Since the bulk of the debt issued by the U.S. has been squandered on increases in social welfare programs and debt service, there is a negative return on investment. Therefore, the larger the balance of debt becomes, the more economically destructive it is by diverting an ever growing amount of dollars away from productive investments to service payments.

The relevance of debt growth versus economic growth is all too evident as shown below. Since 1980, the overall increase in debt has surged to levels that currently usurp the entirety of economic growth. With economic growth rates now at the lowest levels on record, the growth in debt continues to divert more tax dollars away from productive investments into the service of debt and social welfare.

It now requires nearly $3.00 of debt to create $1 of economic growth.

Another way to view the impact of debt on the economy is to look at what “debt-free” economic growth would be. In other words, without debt, there has actually been no organic economic growth.

In fact, the economic deficit has never been greater. For the 30-year period from 1952 to 1982, the economic surplus fostered a rising economic growth rate which averaged roughly 8% during that period. Today, with the economy expected to grow at just 2% over the long-term, the economic deficit has never been greater.

But it isn’t just Federal debt that is the problem. It is all debt.

When it comes to households, which are responsible for roughly 2/3rds of economic growth through personal consumption expenditures, debt was used to sustain a standard of living well beyond what income and wage growth could support. This worked out as long as the ability to leverage indebtedness was an option. The problem is that when rising interest rates hit a point where additional leverage becomes problematic, further economic cannot be achieved.

Given the massive increase in deficit spending by households to support consumption, the “bang point” between rates and the economy is likely closer than most believe.

What was the difference between pre-1980 and post-1980?

From 1950-1980, the economy grew at an annualized rate of 7.70%. This was accomplished with a total credit market debt to GDP ratio of less 160%. The CRITICAL factor to note is that economic growth was trending higher during this span going from roughly 5% to a peak of nearly 15%. There were a couple of reasons for this. First, lower levels of debt allowed for personal savings to remain robust which fueled productive investment in the economy. Secondly, the economy was focused primarily on production and manufacturing which has a high multiplier effect on the economy. This feat of growth also occurred in the face of steadily rising interest rates which peaked with economic expansion in 1980.

The obvious problem is the ongoing decline in economic growth over the past 35 years has kept the average American struggling to maintain their standard of living. As real wage growth remains primarily stagnate, consumers are forced to turn to credit to fill the gap in maintaining their current standard of living. However, as more leverage is taken on, the more dollars are diverted from consumption to debt service thereby weighing on stronger rates of economic growth. I have shown this gap previously.

Debt Doesn’t Create Real Growth

The massive indulgence in debt has simply created a “credit-induced boom” which has now reached its inevitable conclusion. While the Federal Reserve believed that creating a “wealth effect” by suppressing interest rates to allow cheaper debt creation would repair the economic ills of the “Great Recession,” it only succeeded in creating an even bigger “debt bubble” a decade later.

This unsustainable credit-sourced boom led to artificially stimulated borrowing which pushed money into diminishing investment opportunities and widespread mal-investments. In 2007, we clearly saw it play out “real-time” in everything from sub-prime mortgages to derivative instruments which were only for the purpose of milking the system of every potential penny regardless of the apparent underlying risk. Today, we see it again in accelerated stock buybacks, low-quality debt issuance, debt-funded dividends, and speculative investments.

When credit creation can no longer be sustained, the markets must clear the excesses before the next cycle can begin. It is only then, and must be allowed to happen, can resources be reallocated back towards more efficient uses. This is why all the efforts of Keynesian policies to stimulate growth in the economy have ultimately failed. Those fiscal and monetary policies, from TARP and QE, to tax cuts, only delay the clearing process. Ultimately, that delay only deepens the process when it begins.

The biggest risk in the coming recession is the potential depth of that clearing process. With the economy currently requiring roughly $3 of debt to create $1 of economic growth. A reversion to a structurally manageable level of debt would involve a nearly $40 Trillion reduction of total credit market debt from current levels. 

The economic drag from such a reduction would be a devastating process which is why Central Banks worldwide are terrified of such a reversion. In fact, the last time such a reversion occurred the period was known as the “Great Depression.”

This is one of the primary reasons why economic growth will continue to run at lower levels going into the future. We will witness an economy plagued by more frequent recessionary spats, lower equity market returns, and a stagflationary environment as wages remain suppressed while costs of living rise.

Debt – Is it just “correlation,” or is it “causation?”

You decide.

But one thing we know for sure is that “debt matters.” 

We’ve all been conditioned to think the balanced portfolio is a touchstone of investing. For many investors, it provides enough exposure to the stock market (60%) to produce a healthy return and enough exposure to the bond market (40%) to provide ballast and a little income to a portfolio. Along the way, advisors like to say that investors have counted on beating inflation by 4 or 5 percentage points. Supposedly.

But, as MarketWatch’s Brett Arends points out, a balanced portfolio hasn’t always performed as advertised, and the upcoming decade might be one of those times. That means investors should consider other allocations (depending on their individual circumstances, of course).

First, from 1938 to 1948, a balanced portfolio trailed inflation. Then, again, from 1968 through 1983, a balanced portfolio trailed inflation, eroding a third of its value in real terms, according to Arends. Basically, a balanced portfolio struggles against inflation. And while it’s obvious why inflation hurts bonds with their fixed dollar payments, it also tends to hurt stocks, despite their assumed ability to benefit from companies passing on higher costs to customers through price increases.

There aren’t easy ways for investors to combat inflation, if it should arise. Gold and commodities helped in the 1970s. Real estate can help too, as inflation can cause property price appreciation and push rents higher. Some foreign stock markets might help. Arends points out that Japanese and Singaporean stocks took off in the 1970s. Corporate bank loans and floating rate corporate debt might also help, though, Arends notes Ben Inker of Grantham, Mayo, van Otterloo (GMO) in Boston says credit protections aren’t what they once were. Finally, Inker notes that cash is a reasonable choice in times of inflation. And cash, as Arends says, doesn’t have to be in U.S. dollars. It can be in Swiss Francs, for example.

The 1970 also saw observers like Harry Browne advocate a different kind of portfolio mix – 25% each in cash, long-term bonds, stocks, and commodities. The cash and commodities would help in inflation, while the long-term bonds would help in times of deflation.

That leads me to the argument that, if you’re going to maintain a static portfolio allocation, something like 30% stock exposure, with the rest in short-term bonds and cash might be reasonable for someone about to retire soon. My reasons are that stocks are too volatile for a portfolio in distribution, and they’re likely too expensive to deliver good future returns in any case.

First, although I cherry-picked the start date so that two severe bear markets are baked into this hypothetical study, this portfolio in distribution phase shows that 30% stock exposure is better for a retiree in a bear market than a more aggressive portfolio. A balanced portfolio worked reasonably well, but only dropping down to 30% stocks allowed the portfolio to remain intact in a nominal sense (though not in an inflation-adjusted sense). Taking money from a portfolio during a volatile stock market is a tricky business. Too much stock exposure – even when using the famous “4% rule” (4% withdrawal the first year and 4% more than the first withdrawal annually thereafter) can destroy someone’s retirement.

Second, it’s not clear that stocks will outperform bonds over the next decade in any case. Even if you’re not in distribution phase, making volatility less of a concern, you may not add return to your portfolio by adding stock exposure. That’s because the Shiller PE (current price of stocks relative to past 10-year inflation-adjusted earnings) is over 30, meaning stocks have to remain more expensive than they have in history barring one other time for the next decade to deliver more than a 4% or 5% return.

And if you do add U.S. stocks to your portfolio, you’ll likely be adding the same old volatility stocks have delivered in the past. Modern academic finance like to use something called the Sharpe Ratio, which is a volatility-adjusted return or indicates how much return an investment achieved per unit of volatility. This view of the world has its problems, because risk might not be volatility, but it can be useful in helping you decide whether you want to add a certain asset to a portfolio or not. Getting, say, 4% or 5% annualized from stocks and assuming their historical volatility is a lot worse than getting the customary 10% from stocks and assuming their customary volatility. Adding U.S. stocks to a portfolio at current prices makes for what modern academic finance would call an inefficient portfolio.

Foreign stocks are cheaper than their U.S. counterparts, but they’re not screamingly cheap. If a balanced portfolio seems reasonable to you, it may not be under today’s circumstances. Consider trimming at least some of that stock exposure and adding a few other asset classes. Those new additions may not shoot the lights out, but, chances are, neither will U.S. stocks for the next decade. Above all, don’t think there’s some rule that says you need half your money in stocks. The idea of the balanced portfolio has become so popular that it feels like heresy to some people to deviate from it. But investing isn’t about faith; it’s about assessing the circumstances and likely returns in as rational a way as possible. Remember also to get some help from an adviser in constructing a portfolio and completing a financial plan. Many asset classes that weren’t available in the past to retail investors are available now. An experienced adviser can help you use them well and manage the risks they contain.


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Market Rally Fails Key Resistance

Last weekend I discussed the fact we had started using the rally to lift some exposure out of portfolios ahead of the mid-term elections simply as a hedge for the “unknown.”

Well, on Tuesday, the ballots were cast and while the Republicans were able to hold onto the Senate, they lost the House. As I wrote on Tuesday, where the markets are concerned, that may not be a bad thing.

The safest outcome for the markets, and the economy, is what is most likely. The Republicans will likely retain control of Congress but will lose enough seats in the House to make passage of any of the ‘Trump agenda’ unlikely. This will result in Congressional gridlock which will limit any substantive changes over the next couple of years. The markets have historically favored gridlock and would likely be a short-term positive for stocks.”

That was indeed the “sigh of relief” seen by the markets on Wednesday as the bulls created a massive one day advance that pushed the markets above key resistance levels. Unfortunately, it didn’t take long for investors to return their focus back to the things which are going to matter the most – corporate earnings and monetary policy.

As I noted in Thursday’s missive on rising headwinds to the market, earnings expectations have already started to get markedly ratcheted down for the end of 2019.

More importantly, beginning in 2019, the quarterly rate of change in earnings will fall back to the expected rate of real economic growth. (Note: these estimates are as of 11/1/18 from S&P and are still too high relative to expected future growth. Expect estimates to continue to decline which allow for continued high levels of estimate “beat” rates.)

So, really, despite all of the excitement over the outcome of the mid-terms, it will likely mean little going forward. The bigger issue to focus on will be the ongoing impact of rising interest rates on major drivers of debt-driven consumption such as housing and auto sales. Combine that with a late stage economic cycle colliding with a Central Bank bent on removing accommodation and you have a potentially toxic brew for a much weaker outcome than currently expected.

As my friend and mentor Doug Kass recently noted, the election has only served to “poison” the political pot even further.

“The ugliness of the political scene over the last two years is likely to get more ugly. Though Trump will likely be emboldened – there is now a fundamental difference and divide from the recent past (“checks and balances”). The President no longer has a subservient (Republican) House to deal with anymore – the new (Democratic) House is in marked opposition to his agenda. The President will continue to argue that he is at the epicenter of power – but he no longer is.

 As we move towards 2020, the U.S. political scene is headed for a period of elevated animus (even more than we have seen in the past few months) between the Democratic and Republican parties. Whether it’s the affirmation/restoration of voting rights, gerrymandering, infrastructure, the border wall (and other immigration moves), healthcare, etc. – rhetoric will grow even more heated.

In the lame duck session, there will be plenty of fighting over the border wall and other Trump initiatives – it will get messy.

I suspect little, administratively, will be achieved over the next 12-18 months.”

He is most likely correct. It is likely little will get done as the desire to engage in conflict and positioning between parties will obliterate any chance for potential bipartisan agenda items such as infrastructure spending.

Furthermore, there is more than a significant risk to the financial sector with the Democrats now in control of the house. The financial services committee has the support of Democratic members of both the House and the Senate to launch new regulations aimed at increasing oversight on major banks. Given the amount of leverage currently being used to support the financial markets – this could pose a real threat to both the sector, the economy, and the overall markets.

Note: we sold our financial holdings last week.

With portfolios reduced to 50% equity, we have a bit of breathing room currently to watch for what the market does next. 

Daily View

Despite the decline of the market during October, investors really never showed much in terms of “fear.” Volatility never spiked much above the long-term average of 20, interest rates didn’t decline much, and investor’s quickly got back their bullish attitudes.

However, despite the lack of concern, as noted previously the market has now violated its longer-term bullish trend which is concerning and, as noted last week, downside risk through the end of the year continues to outweigh the potential reward.

It is EXTREMELY important the market rally next week above Wednesday’s highs or we will likely see another decline to potentially test the recent lows.

Action: After reducing exposure in portfolios previously, we will look for opportunities to reduce risk further as needed. Sell weak positions into any market strength on Monday.

Weekly View

The action this past week continues to confirm the change in the backdrop of the markets from bullish to bearish.

The failure of the market to break out of the current trading range this past couple of weeks sets investors up for disappointment. It is critically important the market does not violate the trading range lows on a weekly closing basis. As stated above, the market must rally next week, and close above the current trading range, or things will likely become more difficult. As we saw this past week, there is significant resistance to any potential rally both at the short-term moving average and the running bullish trend line. Therefore, upside remains limited currently.

(Also note that a major difference between the current selloff and that in February is the break of the bullish trend line. This is symptomatic of a market topping process.)

Action: Sell weak positions into any strength on Monday and reduce exposure as needed.

Of much greater concern currently is the breakdown in crude oil prices. There is a very high historical correlation between the direction of oil prices and the economy. (Since just about everything economically is touched by oil in some capacity the relationship makes sense.)  The chart below shows oil versus a composite index of interest rates, GDP, and CPI.

The decline in oil suggests that economic growth over the next couple of months is likely to be substantially weaker than current projections. Weaker economic growth will also show up in further declines in forward operating estimates which are already under pressure. This will continue to erode one of the key underpinnings of the bulls which has been “stocks are cheap based on forward estimates.” 

Lastly, participation in the markets remains extremely weak. This is just another indication of the change in the “tenor” of the market to a more bullish backdrop.

Monthly View

On a monthly basis, the backdrop has also worsened. RSI has dropped into correction territory along with a confirmed monthly sell signal. As I noted back in both December and September, extensions of the market that move 3-standard deviations above the long-term mean are unsustainable.

The chart below is a broad technical look at longer-term indicators. Notice that these indicators have only previously unanimously aligned when the market was reversing its trend. That global alignment is occurring once again.

Action: Reduce risk on rallies, as detailed above, and look to add hedges on any breaks of long-term support

None of this should be misconstrued as an alarm to go “sell everything you own and buy gold” tomorrow. However, there are increasing indications that such could be the case sooner than many expect.

Let’s review our actions for next week.


Actions To Take Next Week

The failed rally on Wednesday continues to suggest the broader market complex remains substantially weak for now. This keeps our portfolio management practices more focused on capital preservation currently rather than trying to capture short-term gains.

As noted we have already taken the following actions:

  1. Reduced overall portfolio exposures to 50/50 from 60/40. Allocations will be reduced further upon increased technical deterioration.
  2. Rebalanced bond exposures and reduced risk. We improved credit quality and are positioning for economic weakness and lower yields by managing durations(Read:The Upcoming Bond Bull Market)
  3. Raised cash levels to 10%. (Cash is a risk-free portfolio hedge)
  4. Reviewed all positions We sold several positions which were underperforming the broader market to reduce portfolio drag. 
  5. Planed for further hedges to portfolios (Short term treasuries, cash, and short positions on breaks of support)
  6. Drastically tightened up stop losses. (We  had previously given stop losses a bit of leeway as long as the bull market trend was intact. Such is no longer the case.)

We are reviewing our bond allocations further to set portfolios in the right position for a sharp reversal in rates.

We are also looking opportunities in other distressed areas of the market which may provide a both a “safe haven” against further market declines and also an opportunity for capital appreciation.

As always, we will keep you apprised of what we are thinking. You can also follow our actual portfolio models and positioning at RIA PRO.

See you next week.


Market & Sector Analysis

Data Analysis Of The Market & Sectors For Traders


S&P 500 Tear Sheet


Performance Analysis


ETF Model Relative Performance Analysis


Sector & Market Analysis:

Sector-by-Sector

Discretionary and Technology rallied last week above the 200-dma. However, the 50-dma is important overhead resistance and both sectors turned lower on Friday. Take profits and look at the 200-dma support as critical.

Industrials, Materials, Energy, Financials, Communications – we are currently out of all of these sectors as the technical backdrop is much more bearish. The breakdown in Energy is the most concerning as oil prices, as stated above, are suggestive of more economic weakness. Reduce exposure on any rally next week that fails at resistance.

Real Estate, Staples, Healthcare, and Utilities have held their ground during the rough month of October and continue to catch money flows during the recent push higher. Importantly, despite the many “bullish calls” for the markets currently, it remains the more “defensive” sectors of the market which continue to perform. There is likely a message here we need to pay close attention to.

Small-Cap and Mid Cap – indices rallied a bit this past week but both failed as they approached the 200-dma. MOST IMPORTANTLY – both indices are very close to registering a macro sell signal as the 50-dma crosses below the 200-dma. If this occurs, it will be an important confirming indicator of an end to the current “bull market” in stocks. We have no positions currently is these markets.

Emerging and International Markets rallied last week a bit after hitting new lows but, like small and mid-cap markets failed at the declining 50-dma. With a major sell signal in place currently, there is still no compelling reason to add these markets to portfolios at this time. 

Dividends, Market, and Equal Weight – The overall market dynamic has changed for the negative in recent weeks. Currently, Dividends are outperforming Equal and Market Weight indices as the chase for yield and safety has weighed on more aggressive sectors of the market. Use the recent rally to reduce overall equity risk for now.

Gold – despite the disruption in the markets, the brief spurt of life in Gold has faded as the price fell back below its 50-dma. The breakout of Gold failed to occur so remain on the sidelines awaiting an opportunity that has yet to present itself. Stops remain at $111 if you are still long the metal.

Bonds – continue to base and have registered a short-term buy signal. However, there is not enough conviction just yet to add a trading position for a bonds. All trading positions are currently closed.

The table below shows thoughts on specific actions related to the current market environment. 

(These are not recommendations or solicitations to take any action. This is for informational purposes only related to market extremes and contrarian positioning within portfolios. Use at your own risk and peril.)

Portfolio/Client Update:

With the mid-term elections now behind us, we are starting to focus on the end of the year and the potential change in the market from bullish to bearish. While that transition has not fully occurred as of yet, we must remain aware of the potential risk. The market action remains troubling but, for now, the bullish trend longer-term remains intact. However, we are comfortable holding some extra cash right now.

Please review the “Checklist Of Actions To Taken” in the main missive above. We will continue to apply these guidelines to our portfolios over the next few weeks. There were no new actions in portfolios this week.

  • New clients: We will look to onboard new accounts into models opportunistically.
  • Equity Model: After having sold some positions two weeks ago, we are maintaining a slightly higher weight in cash. We are looking for opportunistic additions currently. 
  • Equity/ETF blended – Same as with the equity model. 
  • ETF Model: With portfolios now primarily weighted to domestic markets and carrying a bit heavier weight in cash, we can just wait to see where the next opportunity emerges. 

While the pick up in volatility is certainly not enjoyable, we don’t want to let our emotions get the better of our discipline. We remain vigilant of the risk currently and are happy to err to the side of caution until a new trend emerges.


THE REAL 401k PLAN MANAGER

The Real 401k Plan Manager – A Conservative Strategy For Long-Term Investors


There are 4-steps to allocation changes based on 25% reduction increments. As noted in the chart above a 100% allocation level is equal to 60% stocks. I never advocate being 100% out of the market as it is far too difficult to reverse course when the market changes from a negative to a positive trend. Emotions keep us from taking the correct action.

401k-PlanManager-AllocationShift

Rally Fails 

The rally following the mid-term elections last week was a “one-day wonder.” Next week, it is critically important for the market to rally IF the bulls are going to regain control of the market.

Last week, we lowered the allocation model to 75% of target for now. There is more risk to the downside currently than upside reward. But…let me repeat from last week:

“This does NOT mean immediately go out and sell 25% of your holdings. The model moves in 25% increments as signals are triggered. However, by the time a signal is triggered, the market tends to be very oversold which is why we wait for a bounce to opportunistically sell into.”

It also doesn’t mean to go liquidate 25% of your exposure all at once. These are just model targets that you “adjust” into as market dynamics develop.

As we stated last week, we reduced equity risk in portfolios by 10%. As long as the market remains in a more negative trend we will continue to use rallies to reduce equity further until we get to the 25% target.

With BOTH of our primary SELL SIGNALS in place, it is prudent to adjust the model lower. However, continue to use rallies to reduce risk towards a target level with which you are comfortable. Remember, this model is not ABSOLUTE – it is just a guide to follow.

Defense remains our primary strategy for 401k-plans currently.

  • If you are overweight equities – reduce international, emerging market, mid, and small-capitalization funds on any rally next week. Reduce overall portfolio weights to 90% of your selected allocation target.
  • If you are underweight equities – reduce international, emerging market, mid, and small-capitalization funds on any rally next week but hold everything else for now.
  • If you are at target equity allocations reduce overall equity exposure to 90% of your allocation target on any rally Monday. 

Unfortunately, 401k plans don’t offer a lot of flexibility and have trading restrictions in many cases. Therefore, we have to minimize our movement and try and make sure we are catching major turning points. Over the next couple of weeks, we will know for certain as to whether more changes need to be done to allocations as we head into the end of the year.

If you need help after reading the alert; don’t hesitate to contact me.


Current 401-k Allocation Model

The 401k plan allocation plan below follows the K.I.S.S. principle. By keeping the allocation extremely simplified it allows for better control of the allocation and a closer tracking to the benchmark objective over time. (If you want to make it more complicated you can, however, statistics show that simply adding more funds does not increase performance to any great degree.)

401k Choice Matching List

The list below shows sample 401k plan funds for each major category. In reality, the majority of funds all track their indices fairly closely. Therefore, if you don’t see your exact fund listed, look for a fund that is similar in nature.

401k-Selection-List

After plunging for most of October, the U.S. stock market rebounded sharply in the last two weeks in anticipation of the U.S. mid-term elections. Though the market soared the day after the election, the rally petered out on Thursday and Friday. This means that the breakdown from the important three-year old uptrend line is still valid. The fact that the market was unable to close above this level on the weekly chart after testing it is quite concerning and may foreshadow further weakness ahead. 

S&P 500

We at Clarity Financial LLC, a registered investment advisory firm, specialize in preserving and growing investor wealth in times like these. If you are concerned about your financial future, click here to ask me a question and find out more. 

After selling off this summer, copper has been consolidating over the last couple months and appears to be forming a wedge-type pattern that may indicate another strong move when the metal breaks out from it one way or another. Copper has a reputation for leading the global economy and is known as “the metal with a PhD in economics.” As our Chief Investment Strategist Lance Roberts recently showed, there is a rising risk of a recession, and the financial markets may be starting to price this in.

If copper breaks down from its most recent wedge pattern, it would be a worrisome sign for the global economy. The next price target and support level to watch is the $2.5 per pound support level that came into play over the last couple years.

Copper Daily Chart

The weekly chart below puts the current wedge and support levels into perspective. If copper breaks down from its wedge, the next support to watch is $2.5 and, after that, $2 per pound.

Copper Weekly Chart

We at Clarity Financial LLC, a registered investment advisory firm, specialize in preserving and growing investor wealth in times like these. If you are concerned about your financial future, click here to ask me a question and find out more. 

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