Wednesday, December 5, 2018

How the Economy Works -- In 30 Minutes

Explained so just about anyone can understand.

Raymond Dalio is an American billionaire investor, hedge fund manager, and philanthropist. Dalio is the founder of investment firm Bridgewater Associates, one of the world's largest hedge funds. As of January 2018, he is one of the world's 100 wealthiest people, according to Bloomberg.

Why Did Markets Get Hammered Yesterday?

First, most markets are closed today in honor of President Bush, or "Daddy Bush," as we call him in Texas. 

The New York Stock Exchange (NYSE:ICE) and Nasdaq (NASDAQ:NDAQ), will be closed, while SIFMA recommended that bond markets should close, meaning the 10-year Treasury note could see limited action. CME Group (NASDAQ:CME) will also shut down trading of futures and options products at 8:30 am ET, though energy and metals futures will have a regular session.

The theories being presented for yesterdays "crash" are among these. My sources are Barron's and CNBC. Also some analysis available from Schwab. Personally, from a technical stand point, the market was showing weakness anyway, even with Monday's short-lived rally, and these issues just became reasons to trigger big money movements. 

  • The supposed trade truce between China and the U.S. began to look more like a vague agreement to do nothing concrete. A Sunday night rally in S&P 500 futures that topped 2 percent got wiped out by midday Tuesday.
  • The first inversion of any portion of the Treasury yield curve in more than a decade awoke the specter of a recession, while the relentless flattening of the slope elsewhere sent financial shares careening to the worst day since February. On Monday, JPMorgan Asset Management said cash will likely outperform equities.

  • Technical levels buckled, then broke. The 50-day average in the S&P 500 was first to go, then the 200-day got obliterated. “There was some forced selling as we got to important technical levels,” Tom Essaye, a former Merrill Lynch trader, said. “It wasn’t a specific event that caused it, it’s just been building all morning.”

  • Angst that the housing market is ill resurfaced. Toll Brothers, one of the high-end builders, posted results that pointed to softening fundamentals.
  • Momentum names from Square to Advanced Micro plunged the most. Apple didn’t help. Another iPhone supplier cut forecasts after the close Monday, the latest in a string of cautious pre-announcements that suggest the tech giant faces slowing sales.
  • Geopolitics lingered in the background, with NATO and the U.S. Secretary of State issuing concerns about Russia’s compliance with the treaty on nuclear forces.
  • The never-ending Brexit negotiations joined the list of worries after the U.K prime minister’s government was found in contempt of Parliament after refusing to release the attorney general’s legal advice on the divorce, raising prospects for a potential “hard” exit.
  • Forced selling added to the woes. According to Charlie McElligott, cross-asset strategist at Nomura Securities, trend-following quant funds are in the process of shedding over $50 billion in notional exposure to U.S. equities on Tuesday.
  • JPMorgan Chief Executive Jamie Dimon said at an investor conference that he saw the fourth-quarter trading environment as flat, adding to woes in the financials.
In reference to the yield curve inversion, I would always try not to read too much into any one number, however, and overstate its predictive ability. There have also been several occasions when a yield curve inversion was not followed by a recession, and the two-year and 10-year yields haven't actually flipped.

Click for larger version

So while today's moves don't necessarily mean a recession is coming, the market's reaction shows just how scared investors are that one might be.

I'll be on the road for a few days, but will try to keep everyone updated as time permits. 

Tuesday, December 4, 2018

Markets Were Up. Is it Time to Celebrate?

Just hold your horses there buddy. Markets may open slightly lower this morning. But, someone is having a party. As summarized by Barron's last night:
Jubilation. Stock indexes worldwide followed up one of their best weeks of trading in seven years with another day of gains. President Donald Trump and his Chinese counterpart Xi Jinping agreed a three-month trade war ceasefire at Saturday's dinner meeting, giving investors optimism that it's just the first step in de-escalating a conflict that has weighed heavy on stocks in recent months.
But none of the indexes held their opening prices yesterday. By noon they'd given up almost 200 points from the open.  Bad sign or good sign? Time will tell. Maybe it was the big money guys and gals covering their short positions. Hard for us little guys to know.

I do know not to get to "jubilant" and go crazy here. While I did move some cash into a dividend paying stock ETF (SCHD), I did not go hog wild. Remember, pigs get fat, hogs get slaughter. 

I looked to move into some blue chips that pay dividends, in case this is not an uptrend and if the market goes sideways again for a time, I'll pick up some dividends along the way. I'm waiting for more confirmation before I go with the growth hi-fliers. But that's just me. 

I talked with a "Professional Financial Advisor" last week for over an hour who would have me in 70 percent stocks and 20 percent bonds and 10 percent "alternatives" (like gold) all the time. I'll repeat: ALL THE TIME. Bull markets, bear markets, side-winders, ALWAYS BE FULLY INVESTED. Just re-balance your portfolio and you'll do fine. While he's laughing all the way to the bank with the fees he's collected from me...

This is the way they operate. I've only met one (Ken Moraif) so far who'd actually get you out of the market and into cash or bonds in a bear market, rather than watch his client's portfolios go down an average of 37 percent (the average bear market). He can't time the markets better than anyone else, but a 10 percent loss is better than some bear markets that are 50 or 60 percent losses. He had all his clients in cash during the 2007-2009 bear market for 18 months.
Back to present reality, according to the futures outlook, markets look to open lower this morning. And note the last bar on the right. It's red. We might must wait for it to turn green.  While the weekly SPY chart looks a bit bitter, it's only been one day. 

Sunday, December 2, 2018

Temp Trade War Truce Called: Now What

Futures markets were up last I checked. The Dow E-Mini was up 400+ at 8:30 CST. the S&P 500 E-Mini was up 44. 

Very briefly, from Barron's. 

Trump and China Called a Truce in the Trade War. Now What?

From Investor's Business Daily:

I wouldn't use the word "skyrocket", but tomorrow should be interesting. My suggestion, don't buy at the open. Wait to see what happens.

Random Thoughts for the Day

How can we solve racism? Quit talking about. Quit making it the most important issue. Not everything is about race. 

Sunday morning news: U.S. President Donald Trump and Chinese President Xi Jinping agreed to keep their trade war from escalating with a promise to halt the imposition of new tariffs for 90 days as the world’s two largest economies negotiate a lasting agreement. (Maybe that that should have been the lead.)

When you get into a trade, start looking for signs right away that you are wrong. If you see them, then get out before your stop is hit. When in doubt, get out.

Call someone. Have a voice conversation. 

Pigs get fat. Hogs get slaughtered. Don't be greedy. 

Government-run (single payer) health care is not good idea. How's the post office and VA doing? How are most government-run programs going? 

Saturday, December 1, 2018

Weekly Market Wrap and a Challenge to You

When I was in the Air Force during the First Gulf War, George H.W. Bush was my Commander-in-Chief. Rest in peace. He was a good C-in-C. Second only to Ronald Reagan, who took a demoralized military and made us proud to wear our uniforms again.

President Bush had four principals he followed as Commander if he had to go to war: 1) It was a last resort, 2) Form an overwhelming collusion, 3) Go to war with overwhelming force, and 4) Have an exit strategy. He stuck to all four. It was called the Powell Doctrine

In other news this week, markets were up. Investor's Business Daily called it the best weekly raise since March. They changed their market watch from "market in correction" to "confirmed uptrend." This indicator is worth watching, but aren't the only indicators out there. 

IndexNov 23Nov 30+/-+/- %
S&P 500
- 103.71+ 4.93
+ 159.03+ 2.32
+ 1252.51+5.15

Just because IBD changes tune, don't throw caution to the wind. Dip your toes into the water first. Follow your plan. You do have a plan, right? If you don't, keep your money buried in the back yard. It will be safer; though inflation will burn it all up in 10 years. Think of this: You put $1,000 in a bucket in your back yard 10 years ago. That buys you about $800 worth of stuff today. That's not my plan. My plan is for my $1,000 today to be worth $1,800 (assuming 6% growth) -- and that's without saving any extra. 

If I add just $1,200 to that each year: $18,000. Now let's say that I have $1,000, I'm going to earn the average market rate of about 8 percent a year, and I'm going to save $5,000 a year. Know what that's worth after 20 years? About $200,000. 

You feel me now? Pass by the Starbucks and start now.

Here's the overall market as of yesterday. I don't think there is anything wrong with waiting until all the bullshit politics are over this weekend and the markets have a chance to shake it out. 

But the bottom line: If here are more buyers, the market goes up. If more want to sell, the market goes down. I can make no recommendations. Neither legally nor ethically, excpet for this: If you're in the market, stay. If you're out, dip a toe in. 

SPY Weekly. Click for larger version

What I'm reading today:

Wall Street Breakfast: What moved markets this week
Investopedia: The importance of a trade plan
Barrons: The Best Reason for Optimism? The Meeting of Trump and Xi

Investor's Business Daily: Pelosi: Republicans Only Win Elections When They Cheat

I challenge you to watch this video five times over the next five days. That's 10 minutes a day.

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