Friday, August 30, 2019

Preparing for a Recession

I was asked the question on Quora: Is there an impending recession in 2020, and if so, how do we prepare for it?

Here's my answer:

While there is a lot of talk about a recession coming in 2020 or 2021 or 2022, no one really knows for sure. Some of this excitement is over the yield inversion, but while all recessions follow a yield inversion, not all yield inversions precede a recession. So it’s a correlation, not a causation.

However, you should always be prepared. I like to think one should hope for the best, plan for the worst. By following basic principles of personal finance, you should be able to get through any recession, or any hard times that may come your way, allowing an event of this kind to be not so bad.
  1. Have a financial plan and follow it. Use a budget. Create a net worth statement. Always use a budget. This is important and a basic step that a lot of people don’t follow.
  2. Have a budget and follow it. Did I repeat myself? Yes. It’s that important. How to create a budget.
  3. Have an emergency fund of 3 months (or better) in living expenses. I finally built mine to 6 months. I sleep well at night. Do not think that credit cards can be used for emergencies. This will lead to more troubles.
  4. Get out of debt and stay out of debt. Consumer debt will kill any household financial plan, especially if you lose a job or there’s a recession. The only debt you should have is a mortgage on your house.
  5. Once you’ve covered 1 through 4, save/invest 10 percent of your income in a retirement fund.
  6. You can find more information on this blog. 

Thursday, August 29, 2019

What's Happening with the Economy?

Gross Domestic Product

Consumer spending was stronger than previously estimated in the second quarter, rising at an annual 4.7 percent inflation-adjusted pace. This pace is a reminder that the strong labor market is underpinning the consumer and helping to offset weakness in global growth and the resulting weakness in domestic manufacturing. Overall GDP was shaved by 1 tenth in the second estimate for the second quarter though still managed a respectable 2.0 percent showing.

The key for the second quarter was consumer spending and so far in the third quarter strength here appears to be solid once again and may well offset uneven readings for other components, whether business investment or residential investment which are two areas where recent indications have been up and down.

Jobless Claims

Unemployment claims did edge higher in the latest data but remain favorable, indicating strong demand for labor and pointing to another solid showing for the monthly employment report. New claims in the August 24 week rose 4,000 to 215,000 with the 4-week average at 214,500 and slightly lower than the prior week. Continuing claims in lagging data for the August 17 week did rise 22,000 but the 4-week average, at 1.697 million, nevertheless edged lower. The unemployment rate for insured workers is unchanged at 1.2 percent.

Home price indexes

Both this yesterday's (Aug 28) FHFA and Case-Shiller reports show very weak price traction in the housing market during June. Shiller's adjusted 20-city index for June came in below Econoday's consensus range at no change. The year-on-year rate of 2.2 percent is the lowest pace of price growth in seven years. FHFA's data, also released yesterday, are at a five-year low. Yet both of these reports are lagging, tracking way back in June which was before what is an ongoing and steep decline in mortgage rates which is very likely to provide firmer support to underlying housing demand and prices with it.

Consumer Confidence

Despite stock market volatility and escalating trade tensions, the consumer confidence report from the Conference Board did not give back very much of July's gain at all in August, easily beating high-end expectations with a 135.1 showing versus a revised 135.8 in July. The present situation component, in fact, jumped more than 6 points to 177.2 and a 19-year high. What weakness there is in today's report is on the expectations side, down more than 5 points but at a still strong 107.0.

EIA Petroleum Status Report

Crude oil inventories fell 10.0 million barrels in the August 23 week to 427.8 million, 5.4 percent above their level last year at this time. Product inventories also declined, with gasoline down 2.1 million barrels to 232.0 million, 0.3 percent lower than last year at this time, while distillates fell 2.1 million barrels to 136.1 million, 4.7 percent above their level a year ago. The outsized crude oil draw was nevertheless smaller than the decline of 11.1 million barrels reported Tuesday by the American Petroleum Institute, a private industry group, which also reported a draw of 0.3 million barrels for gasoline and a 2.5 million draw for distillates. WTI prices jumped about 25 cents per barrel higher to around $56.65 per barrel immediately following the release of the EIA data but quickly retreated to pre-release levels.

Keep track of economic reports -- both U.S. and Global) at Econoday.

Tuesday, August 27, 2019

Socialism, Democrats and Recessions

Why Socialism, and Why Now? 

(by Victor David Hanson) Today's students romanticize Che Guevara and Fidel Castro because they are clueless about their bloody careers. The Castro government for over a half-century was responsible for the murders of thousands of Cubans and Latin Americans in efforts to solidify Cuban "socialism" throughout Latin America.

When our schools and colleges do not teach unbiased economics and history, then millions of youth have no idea why the United States, Great Britain, Germany and Japan became wealthy and stable by embracing free-market capitalism and constitutional government. Few learn why naturally rich nations such as Argentina, Brazil, Mexico and Venezuela -- or entire regions such as Central America, Eastern Europe and Southeast Asia -- have traditionally lagged far behind due to years of destructive central planning, socialist economics and coerced communist government.

The handmaiden of failed socialist regimes has always been ignorance of the past and present. And that is never truer than among today's American college-degreed (but otherwise economically and historically illiterate) youth.

Democrats rooting for recession

(by Stephen Moore) Last week I gave a talk to high-wealth investors in San Francisco — not exactly an audience of left—wing activists — and people kept asking me the question of the day: “Will there be a recession?” My reply: I would never say never, but I don’t see a recession in 2020. And if we get a trade deal with China the economy is going to soar.

What was disconcerting was the audience reaction. Many people frowned. One woman shouted at me: “I want a recession so we can get rid of Trump.”

I said to her as nicely as possible that even if you don’t like the president, you don’t want to root against America. Do you really want millions of people to lose their jobs? Do you really want people to earn less money? That doesn’t sound very patriotic or compassionate.

The woman crossed her arms and scoffed.

Bill Maher roots for recession so that Trump loses in 2020

(The Hill) Comedian Bill Maher on Friday said he "really" wished there was another economic recession, arguing such an event would ruin President Trump's chances of winning reelection.

During a discussion on his show with panelists including former Virginia Gov. Terry McAuliffe (D), Maher said the U.S. could "survive" another recession but warned it would not withstand a second term of a Trump presidency.

The exchange began with commentator Tom Nichols remarking about Trump's trade policies, saying "I'm not wishing for a recession, but if the farmers want to keep touching the hot stove."

“Well, you should be," Maher interjected. "Because that will definitely get him unelected."

"But Bill, you don’t really want a recession," shot back Anthony Scaramucci, Trump's former White House communications director and a now occasional critic of the administration.

“I really do. We have survived many recessions. We can’t survive another Donald Trump term,” Maher responded.

Friday, August 23, 2019

A New New Green Deal

The sub-head on this reads: Bernie Sanders Unveils His $16 Trillion Green New Deal. 

I don't normally cover politics, but when candidates start promoting plans that have dire economic consequences, I think we should all pay attention. I'll list some of his proposals and why they are not tenable.

But first, let's look the progress that has been made and what plentiful energy has done for our Gross Domestic Product and overall well-being. The following two charts show this.

Now that this is out of the way, let's look at Bernie's plan: 
  • No more fossil fuels. “Reaching 100 percent renewable energy for electricity and transportation by no later than 2030 and complete decarbonization by 2050 at latest.”  I don't know what decarbonization actually means, since it's really not a word. I assume it means no use of carbon-based fuels. Also, most studies show that 100 percent renewable for electricity and transportation is not technically feasible in 10 years; we probably can't afford it anyway. I live in Georgetown, Texas, which claimed at one point to have 100 percent renewable sources. Yet the city utility system is going broke because of the higher cost of renewable energy, and when the wind doesn't blow and/or the sun doesn't shine, the city must buy electricity off the grid. To make matters worse, the city contracted for so much renewable energy, that when supply outstrips demand, the utility system must sell back the excess to the grid at lower prices. Residents are now paying the most per kilowatt hour of anyone in the state of Texas. The left-wing Vox magazine doesn't think it's possible in 10 years, and maybe not even in 30.
  • No nuclear power. "To get to our goal of 100 percent sustainable energy, we will not rely on any false solutions like nuclear, geoengineering, carbon capture and sequestration, or trash incinerators." This limits our options. Let's take France, for example. Nuclear power is the largest source of electricity in France, about 70 percent. France's carbon emission per Kwh are less than 1/10 that of Germany and the U.K. Its emission of nitrogen oxide and sulfur dioxide have been reduced by 70 percent over 20 years. Unlike its neighboring countries of Germany, Italy and the United Kingdom, France does not rely very much on fossil fuels and biomass for electricity or home heating thanks to an abundance of cheap nuclear power. Taken as a whole, the country therefore has superior air quality and lower pollution related deaths.
  • Electric cars for everyone. Provide $2.09 trillion in grants to low- and moderate-income families and small businesses to trade in their fossil fuel-dependent vehicles for new electric vehicles.” I'm planning a trip to Michigan this fall, which is about 1,200 miles one-way. The longest range electric car today is the Tesla S model, at 250 miles. I don't want an electric car. 
Other points in the plan include no more diesel trucks, fully decarbonize (there's that word again) the airline industry, return of the Civilian Conservation Corps, suing the fossil fuel industry, making the fossil fuel industry illegal, and expansion of food stamps,  

How to do we pay for this? Other than higher taxes for just about everything and everyone, make the fossil fuel industry pay. But if they are illegal, how does that work? 

This doesn't include his plans for government takeover of the health care industry and education. 

Sounds like Fascism to me. 

Investing in Energy: Time to Dip Your Toe?

Warren Buffett: "We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful."

Like it or not, oil and gas will be major energy sources for decades to come. Therefore, oil and gas can be good investment from time to time. But we won't ignore alternative energy companies, because these will be an important source of growth as time goes on. So I'll list what I think are the best ways to invest -- and whether it's time to invest or not. I'll focus on ETFs rather than individual companies for diversification and relatively low expense ratios. 

On the surface, the case for energy stocks has worsened in recent months as the escalating U.S.-China trade war and other geopolitical disruptions have heightened concerns about global growth and energy demand.

As my friend Jared Dillon at Mauldin Economics said in this month's ETF 20/20 newsletter:

I will tell you that energy is really, really beat-up here. This thesis that we won’t use oil in 20 years is stupid—but pervasive. And people believe it.

Check out a chart of XOP, the SPDR S&P Oil & Gas Exploration & Production ETF.

It’s bad out there.

In a previous issue of ETF 20/20, I talked about constraints. The idea that when there are implicit constraints on a stock—people find it embarrassing or detestable and refuse to own it—someone must own it, and that person must be compensated with higher returns.

We are getting close to that point with energy stocks.

I don’t have any particular view on oil fundamentals, supply or demand, or whatever. In my experience, trading oil is mostly a function of the economy. Secondarily, it’s about supply. The Great Oil Short of 2014 was predicated on the oil gushing out of the Bakken.

The Great Oil Short of 2008 was predicated on the financial crisis.

The Great Oil Short of 2019 is about this hippy-dippy theory that we’re all going to drive electric cars or ride around on burros.

I tend not to believe the thesis. We’re not going to dive headlong into energy just yet, but if you feel like dipping a toe, I’m not going to stop you.

U.S. oil prices have fallen to around $54 a barrel from an April high of $66. Natural gas has also been hit hard, down more than 25% this year, to the lowest level since 2016.

On the alternative front, declining costs are fostering adoption of renewable energy and that trend could be a long-term catalyst for clean energy ETFs.

So while energy ETF prices are depressed, and alternative ETFs are growing, it is a good time to put together a watch list for the future (which may not be too far off; the charts will tell).

These are a sampling of ETFs to consider (prices as of 8/23/19):

SPDR S&P Oil & Gas Exploration & Production ETF (XOP)
Latest Price: $21.52
Dividend Yield: 1.17%
Expense Ratio: 0.35%
Top Five Holdings: Phillips 66, Hess Corp, HollyFrontier, Noble Energy, Valero
Number of Holdings: 63
Three-Year Return: -9.14%

Fidelity MSCI Energy Index ETF (FENY)
Latest Price: $15.35
Dividend Yield: 3.29%
Expense Ratio: 0.084%
Top Five Holdings: Exxon Mobil, Chvron, ConocoPhillips, Schlumberger, Phillips66
Number of Holdings: 132
Three-Year Return: -1.21%

SPDR S&P Oil & Gas Equipment &B Services ETF (XES)
Latest Price: $7.18
Dividend Yield: 1.02%
Expense Ratio: .35%
Top Five Holdings: US Silica Holdings, TechnipFMC, Nabors Industries, Baker Hughes, National Oilwell Varco
Number of Holdings: 38
Three-Year Return: -18.62%

ALPS Clean Energy ETF (ACES)
Latest Price; $30.69
Dividend Yield: 1.25%
Expense Ratio: .65%
Top Five Holdings: Enphase Energy, Universal Display Corp, Ormat Technologies, Itron Inc., Pattern Energy Croup
Number of Holdings: 31
Three-Year Return: N/A (1-year is +23.36%)

Invesco Solar ETF (TAN)
Recent Price: $31.02
Dividend Yield: 0.44% 
Expense Ratio: .75%
Top Five Holdings: Enphase Energy, SolarEdge Technologies, First Solar, Xinyl Solar Holdings, SunPower Corp
Number of Holdings: 22
Three-Year Return: +14.03%

These are just suggestions. There are many other energy=related ETFs and Funds. I think it's time to start watching. 

Thursday, August 22, 2019

How Credit Card Balances Affect Credit Scores

Is it better to pay off the entire balance on a credit card each month, or to always leave a small balance to carry over?

There is a common myth that carrying a balance on your credit card from month to month can benefit your credit scores, but that is not true. Ideally, you should pay off your credit card in full every month.

Leaving a balance will not help your credit scores. All it will do is cost you money in the form of interest.

The most important factor in credit scoring is always your payment history — whether or not you make all your payments on time. The second most important factor is your utilization rate, or balance-to-limit ratio. The lower your utilization rate, the better for your credit scores.

It's Best to Pay Your Credit Card Balance in Full Each Month

If you are trying to establish a strong payment history, you can do so by making small purchases on your credit card each month, paying the balance in full, and making sure all payments are made on time.

If you cannot pay the balance in full, keep the balance as low as possible. You should never carry a balance of more than 30 percent of your credit limit on any one card or in total. The lower your balances, the better it will be for your credit scores.

Making small purchases and then paying them off right away will keep the card active and keep your balance well below your credit limit. This demonstrates that you consistently manage debt well and can help increase your credit scores.

Should Your Risk Tolerance Change with Your Level of Wealth?

Basically, accumulated wealth should have nothing to do with your risk tolerance, or risk management. There are two ways to look at this:
  • Your risk tolerance should decrease as you get older, because you have fewer years until retirement to ride out any bad markets or bad decisions. If you’re in your 20s, you probably should be investing in mostly stocks, which over the long-term have better returns, though from time-to-time bonds can offer very good returns. If you’re in your 60s, you should be in “safer” asset classes, such as bonds and money markets. I’m 67 and I have 25 percent in stocks, 10 percent in bonds (I believe bonds are in a bubble and the face value will go down in the next few years), and the rest in money markets. I’m kind of waiting to see what the market does, as it seems to not have much direction right now. (The S&P 500 is essentially unchanged over the last 12 months. Below is a chart of the SPY ETF, which tracks the index. Each candle is 1 week.)
  • Your risk management plan should never change. One thing a lot of novice investors do not do is have a risk management plan before they make a purchase. My rules are that I never risk more than 1% of my portfolio on any one investment. This doesn’t mean I spread my investments out over 100 investments. For example, if I’m thinking of buying XYZ stock (or an ETF) at $50 a share, and 1% percent of my portfolio is $1,000, I will calculate my position size based on this, as well as a stop-loss to automate the process. If I believe I need to have a stop-loss at $45 to allow the stock room to wiggle (as I call it), then my initial position size will be 1000 / 5 = 200 shares. In other words, if the stock goes down by $5, my maximum loss will be $1,000. I never hold onto a stock with a dream and hope. I can always re-evaluate and re-invest. If the stock starts to go up in price I could add to my position as appropriate, as well as raising the stop. Successful investors always do the math before making an investment. So, always do the math,

Note: I do this technical analysis after I’ve examined fundamentals. The health of the economy and the health of the company.x

Wednesday, August 21, 2019

What's a "Self-Directed" IRA? Not What it Sounds Like

From time to time, I participate on Quora, providing answers to personal finance questions. This one came across my desk last night: "Is self-directed IRA a good idea?" I'm not sure the person asking this question really understood the question, so I provided this answer:

First, let’s define the difference between self-directed and custodial account. The previous answer would leave you to believe that in a custodial (or custodian) IRA is directed by someone else and this is not necessarily true. It’s a matter of terminology.

Custodial IRA is an Individual Retirement Account that a custodian (typically a parent) holds for a minor with an earned income. Once the Custodial IRA is open, all assets are managed by the custodian until the child reaches age 18 or 21 (varies by state). All funds in the account belong to the child, allowing them to get started early on saving money and reap the benefits of compounded growth. You can open either a Custodial Roth IRA or Custodial Traditional IRA, and the respective account benefits and rules apply.
The confusion in terminology might be that that all IRAs require a “custodian”, or trustee, to hold the account, such as a bank, mutual fund company, or a stock brokerage.
Now, a self-directed IRA is different. This doesn’t mean you, as the owner, are the director, so to speak. A self-directed IRA is a type of traditional or Roth IRA, which means it allows you to save for retirement on a tax-advantaged basis and has the same IRA contribution limits. The difference between self-directed and other IRAs is solely the types of assets you own in the account. Just because you hire a financial advisor to manage your IRA, this would not necessarily be considered something other than a traditional IRA. It’s the type of account that matters.
Regular IRAs typically contain only stocks, bonds, mutual funds and other relatively common investments. Self-directed IRAs offer many more possibilities. For example, you could invest in a horse-breeding operation, a rental property, or a privately held company. If you can find a custodian to agree to the deal, you’re good to go.
Brokerage firms act as custodians for many types of IRAs, but most household-name brokers don’t offer self-directed IRAs.
Custodians of self-directed IRAs are often companies that specialize in them, including some banks and trust companies. They can differ from each other in the types of investments they’ll agree to handle, so you’ll have to shop around.
Given the complexity of self-directed IRAs you might want a financial advisor with experience managing investment deals for self-directed IRAs to help you with due diligence on the investments. A custodian generally won’t offer this.
Also, keep in mind that the IRS still forbids some types of investments in self-directed IRAs, including collectibles and life insurance.
Once you find a custodian, you’ll open an account and contribute money to it, just as you would with any other IRA.
I would suggest for the average investor, a regular Roth-IRA or Traditional IRA. These accounts will allow you to own stocks, bonds, gold, or most liquid assets. Even if you have a financial advisor, you still have total control over your investments, while a self-directed IRA may be more restrictive and less liquid.
Seems the terminology is a bit backwards and confusing, but that’s kind of the way many professions are: they like to keep the average person confused. Or you can blame congress and the IRS for making it more complicated than it needs to be. Don’t get me started on that :)
34 views · View Upvoters · Answer requested by Krunal Darji

Tuesday, August 20, 2019

Are We on Recession Watch?

While the yield inversion was only short lived last week and while yields are ridiculously low, where are we now? There just isn't anything that might bring on a panic-attack. 

Kelly Evans at CNBC, in her noon newsletter today, provided a very astute explanation of what to watch for. Hint: The easy-to-forget credit markets are important! 

You can sign up for her newsletter, called The Exchange, here. I recommend you do. 

Here's a copy of today's newsletter.

With everyone now on recession watch, let's talk about a couple of things to be watching for. A kind of "field guide" to the yield-curve-pocalypse.

There are two main avenues to watch: the real economy, and the financial markets. And you have to watch them both if you want to avoid "false positives." As the old Paul Samuelson line goes, the stock market has predicted nine of the past five recessions. And the economists always just say "there's a 40% chance" of a downturn.

The best leading indicators of the real economy are probably jobless claims and the ISM manufacturing survey. But you have to make sure they're both deteriorating in an obvious and sustained way. Jobless claims are in great shape these days. The ISM survey is not, but you've heard my arguments for why it might need to be taken with a grain of salt right now.

Now, as for financial markets. We all watch the obvious stuff: the stock market, bond yields, the yield curve, etc. But credit markets do not get the attention they deserve because they are the key tell as to whether credit provided by the financial markets to the real economy is crunching up a la 2007 or not.

What do I mean by credit markets? Watch what companies are doing. This is the kind of seemingly boring two-paragraph stuff buried in the back of the Wall Street Journal. In fact I can't even find this Bloomberg write-up of 3M's debt deal online to link to.
But it's a great example: 3M yesterday sold $3.25 billion of debt at a spread of 1.3 percentage-points over comparable Treasuries, "down from initial price talk of around 1.45 percentage-points," per the article. This was to fund "their biggest acquisition ever," of a medical products maker called Acelity. I know, zzzzzzz.
It's not boring, though! Remember how 3M just had an awful earnings report back in April and the stock had its worst day since 1987? But now, with markets "panicking" about the yield curve inversion and a recession, demand for 3M's debt is so strong that the company barely has to pay more than the rock-bottom yields on "risk-free" U.S. Treasuries!
This is the kind of stuff to watch. It tells you there is no credit crunch--the harbinger of recession--in sight. In fact, credit markets are supposed to be basically closed right now for the last sleepy days of August. Instead, there was a higher-than-normal amount of corporate debt priced yesterday alone (aside from 3M, there was also Juniper, Puget Sound, Boston Properties, to name a few).

It's a little trickier to follow, but well worth it for the next few months...and years. Other bull market signs: debt-financed corporate takeovers, debt-funded mergers, and so forth. (Where is demand for all this debt coming from? Pension funds, for one, but more on that later.) Of course that doesn't mean it will all end well, but it means "the music is still playing"--yield curve inversion or no.

Schwab has a more in-depth outlook in their recent analysis:
Schwab Market Perspective: Mixed Picture Getting More Concerning

Key points on the above article: 

  • With cracks forming in equity markets and economic uncertainty mounting, we believe it could remain a bumpy ride over the next few months. 
  • U.S. economic data is mixed but there are signs that manufacturing weakness is bleeding into the service side of the economy; although the consumer remains a support. Pressure is building on the Fed to be more aggressive in cutting rates, but we have doubts additional cuts will be the elixir for what ails the U.S. or global economy. 
  • A global manufacturing recession appears to be underway; if not yet an overall global economic recession.

Friends Don't Let Friends Buy and Hold

That's the subtitle to this entire blog, and a basic principle of mine.

Many brokers and some financial advisors are going to tell you to stay fully invested all the time. This is a buy and hold strategy. “Just re-balance your portfolio will do the trick!” This assumes that you have a properly balanced portfolio, which could be something like 70/30, which is 70 percent stocks (equities) and 30 percent bonds. The ratio could be something different, but the principle is the same.

This is bad advice. In fact, this buy and hold advice is so bad it should be criminal. To take a lesson from 2008, if you had done this buy and hold and re-balance crap, both your stocks and bonds would have tanked. You would have suffered losses approaching 60 percent. This is unacceptable. It would have taken the average portfolio nearly 6 years to return to break-even.

Granted, sometimes bonds will provide a safe haven, but not always. And other asset classes, like commodities, can also provide some protection, but these are for professionals.

Before you invest, have a risk management plan. In other words, decide how much loss (which actually might be just a downturn from a profitable portfolio) you are willing to take. Don’t ever lose more than 7 percent on a particular position and don't risk more than 2 percent of your entire portfolio on a single position. I use a dollar method, rather than percentages, while keeping in mind the 7 percent and 2 percent rules. 

For example, if I’m thinking of buying XYZ company (or maybe it’s an ETF), I decide first that I’ll get out if it goes down by $500. I use this as a guide for my position size. I set a stop loss order at the same time I add the position to my portfolio. If the investment moves higher (and if I’ve done the proper research and bought it wholesale rather than retail, which is a whole separate book), I raise my stop appropriately.

While money markets may only pay about 2% right now, I’d rather earn 2% during a bear market, than lose 50 or 60 percent.

Try to ride out a bear market during a recession — or any other time, is bad advice and can be devastating to your portfolio.

Thursday, August 15, 2019

Correlation is not Causation

When the 10 and 2 year bond yields inverted yesterday, the markets freaked out. Every recession since 1950 or some ancient time as been preceded by a yield inversion. But on the flip side, not every yield inversion has been followed by a recession. And the recessions, if they do come, come much later, like up to 2 years later. 

So yield inversions do not cause recessions. They are just a measure of imbalance in the bond markets. 

What does cause recessions? A contraction of activity in the economy. Business slowdowns, housing market weakness, a reduction in liquidity, cost of money (credit cycle and Federal Reserve policy), asset bubbles, and a host of other events can cause recessions. It normally takes more than one thing to cause a recession. 

But the U.S. economy -- in most regards -- is still doing just fine. 

Kelly Evans at CNBC (my favorite mid-day newsletter) said this: 

The U.S. data came in strong again this morning. Jobless claims have barely budged; the regional Philadelphia and New York manufacturing surveys continue to shake off their earlier slumps; retail sales were super strong, helped by--no joke--Amazon Prime Day. But that wasn't just a quirk; the retail gains were broad-based, putting consumption on track for another 3% quarter.

And there's more! Productivity is up 1.8% on the year now. Hourly compensation is running a nice 4.3% over the past four quarters, per economist Stephen Stanley. That's great news for workers (although not so much for profit margins) and should help dispel some of the deflation fears out there. 
All of this was enough to push the 30-year Treasury yield back above 2%, which itself feels like a ridiculous thing to write. Back above 2%?! It had never in U.S. history slipped below that level until last night. And we couldn't even hold it. We're back below 2% as of this writing.
So I'm not freaking out. And I'm still mostly in cash, except for a few stocks and inverse ETFs. The market is still overvalued by two measure I follow: The Shiller PE ratio and the Buffett indicator

Phil Town, on what causes recessions.

Markets Throw a Tantrum Over Bonds

Time to panic? With the DJIA dropping 800 points in one day, what do we do? Basically, nothing. In fact, you will probably see a small uptick in markets today, Aug 15. 

I've been calling for market weakness since June. I've pointed out that the markets are overvalued, and others like Warren Buffett have large cash reserves right now. 

Even with the 800 drop in the Dow and a 250 point drop in the NASDAQ, the markets are not yet in correction territory. 

But have a plan. 

Here's the chart of the QQQ, the ETF that follows the NASDAQ. And below, I've added a video to Phil Town's take on market crashes. While he says he doesn't really care about correction or crashes, he does in the sense that when markets are down, it's time to actually start buying. 

Monday, August 12, 2019

Three Common Psychological Trading Mistakes

1. The Fear of Missing Out (FOMO)

This one can cause you to 1) Take every single trade you see, even if it's not the strongest set up; and 2) You will oversize your positions. 

2. Revenge Trading

After a trading loss, this trader will throw out the rules and take on crazy trades to make back the loss. Remember, every trader has losses. Keep them small and follow your trade rules and be consistent. 

Helpful hint: Trade smaller position sizes for a while. Focus on the long-term.

3. Gambler's Fallacy

The Gambler's Fallacy is the belief that the chances of something happening with a fixed probability become higher or lower as the process is repeated. People who commit the Gambler's Fallacy believe that past events affect the probability of something happening in the future.

For example, if you flip a coin 10 times and heads comes up the first five flips, if you think that the odds for the sixth flip favors tails, you have succumbed to Gambler's Fallacy. The odds for the sixth flip actually is 50/50 heads/tails. It does not change based on the first five flips. 

Watch the video here.

Sunday, August 11, 2019

The YoYo on the Escalator

Price action on stock and other markets tend to act like a yoyo on an escalator. Imagine that you're on the up (or down) escalator playing with a yoyo. The up and down motion of the yoyo is the daily action of prices. The escalator is the trend. 
Monday began with the largest year-to-date drop (-767 on the DJIA) in the stock market after the Chinese pushed the yuan to its lowest value compared to the U.S. dollar in more than a decade and equities kept falling from there. At one point in the first trading day of the week, the Nasdaq was down 4.2%. 
Things calmed down Tuesday (DJIA +312) after the Chinese central bank signaled it would keep the yuan from falling much further, only for the Trump administration to declare that it considered China to be a currency manipulator. Dovish moves by central banks in Thailand, New Zealand, and India roiled markets.
But a rise in U.S. Treasury yields seemed to indicate that recession fears were less than deeply-seated. And indeed, by Friday's open the S&P 500 and the Nasdaq were, improbably, in slightly positive territory for the week.
The context that began the week – a dovish Fed, an unresolved and widening U.S.-China trade war, and indications of slowing global growth – is effectively unchanged. And it seems that context is likely to to produce modest declines punctuated by fleeting moments of panic like Monday. 
So are we on an up or down escalator right now? Looking at a chart of the SPY, which tracks the S&P 500, short-term we're going down, longer-term we've stepped off the up escalator and are deciding whether to go down or up. If you've already gone to cash, I'd stay there. If you're still invested, you might consider selling some weaker investments, taking some profits, and just waiting. The dark blue line in the chart below is the 50-day moving average. You can use it as an indicator of the trend. 
Also, another indicator i use the the Investors Business Daily's Market Pulse, which is "market in correction." Like Warren Buffet, who currently has record-level cash reserves, it might be prudent to also be in cash for now. 

Saturday, August 10, 2019

Baby Boomer Myths

Baby boomers were born between 1946 and 1964. Here's some common facts about these guys. 

Baby boomers have lots of money
  • At least 30 percent don't have any retirement savings.
  • Fifty-four percent failed to meet the savings benchmark for a successful retirement.
  • The average savings for this generation is $152,000, according to Money Magazine.
Baby boomers are less in debt than other generations
  • The baby boomers are second only to Gen X in total debt load.
  • The average Baby Boomer has $95,000 in debt, according to Experian.
Baby boomers have pensions and social security to get them through retirement
  • Social security alone is not enough to live on, comfortably
  • Pensions, if someone is lucky enough to have on, added with social security, are only meant to supplement retirement savings
  • The average social security check is $1,413, monthly. 
Baby boomers are heavily invested in the stock market
  • The 2008 financial crisis scared Baby Boomers out of the market after they lost a lot of money.
  • While Baby Boomers have allocated too much of their portfolios to stocks, they don't own enough to affect the market.
Watch the video here. For more information on the Baby Boomer crisis, see Investopedia.

Friday, August 9, 2019

Wealth Is a Result -- Not a Purpose

On Quora, I came across the following answer to the question "How easy is it to become wealthy and successful?" The answer was written by Axel Schultze, and is worth considering -- actually, put some thought into what he has to say.
  • Success and wealth have absolutely nothing to do with education, experience, circumstances you are born into… About half of the super rich had nothing to start with.
  • Our mindset determines the outcome of our action. If your goal in life is to get rich, the likelihood of getting rich is extremely small. And why should you? And if that would help, everybody on the planet would be rich. BUT - if your goal in life is to solve a problem that very many people have and all you can think of is to find a solution for THEM, you will find that solution and that makes you rich.
  • 90%+ will never believe that those who made it all the way to the top, never cared about money. But the wealthy in this world know that wealth is coming with success almost automatically and success is the fulfillment of your very personal dream. In 500 BC, Confucius wrote: Seek an engagement you wholeheartedly love and you will never work a day in your life.
  • After living by that mantra I made a little twist to make it more easy to understand: Do something that you really love and find people who love what you do. The resolution of this inherits actually the reason why: If you can help 100 people you have an opportunity to get a reward from 100 people. If you help 100,000 people you have an opportunity to get a reward from 100,000 people and most likely a reference from them to reach maybe even another 100,000 people.
  • Wealth is a result - not a purpose. Look for your purpose and enjoy the result. This has been written in thousands of books. It did not made a lot of people wealthy but it fed their minds and they felt happy. The only ones who got rich were those who understood and maybe if he or she reached millions of people (making them feel good).
  • Why is it so easy? Because you can simply start with nothing. Why are so little number of people successful and wealthy? Because they continuously hope to find a shortcut to wealth, which obviously not exist, and they they are busy doing so all their life.
  • Any day you look for a way to get wealthy is a lost day. Any day you work on an idea to help other people solve their problems you get a day closer to fulfillment and wealth.
Hope it helps. I started with nothing, never worked a day in my life.

Wednesday, August 7, 2019

Habits of Highly Successful Traders, Part 2

Continued from Part 1. Trading is different than investing. Simply put, trading is short-term, investing long-term. 

The goal of investing is to gradually build wealth over an extended period of time through the buying and holding (and selling at a appropriate time) of a portfolio of stocks, ETFs, bonds, and other investment instruments.

Trading involves more frequent transactions, such as the buying and selling of stocks, commodities, currency pairs, or other instruments. The goal is to generate returns that outperform buy-and-hold investing. While investors may be content with annual returns of 10 percent to 15 percent, traders might seek a 10 percent return each month. 

Trading is hard work. Don't let anyone fool you. But if you're interested in this, it can be rewarding. However, you must have discipline and be able to follow rules. Most traders blow up their accounts. But the good ones follow certain habits. These habits can work well for investors also.

7. They are willing to change sides if the market tells them to do so. Take the last several days for example. My broker says hang on. But I've been mostly in cash the last 30 days anyway. If Warren Buffett has record cash holdings, he must know something. The market was telling me that I should be careful. So I did what it told me. I put aggressive stops on my stock holdings and watch them go to cash. I'm happy. Don't say: "I think the market will do this today." Instead, wait to see what the market does.

8. They trade aggressively when trading well and modestly when they are not. Sometimes when I have a couple of bad trades, I step back to evaluate. I don't push it further. The best traders know when not to trade.

9. They realize the market will be open again tomorrow. I miss trade opportunities all the time, but never look back.

10. They never add to a losing trade. EVER. Never trade down. Better to cut losses than add to them. Trends a very strong. If a stock starts to trend lower, sell it. Don't add to the position. Never lose more than 5 to 7 percent on a stock, or 1 percent on a futures position.

11. They never force trades based on a daily goal. Say you have a daily goal of $1,000. Trying to meet this goal can force you to trade badly. Instead, your daily goal should be "did I follow my plan, did I follow my rules?" If you do this, the cash will follow.

12. They read a lot. And they read books about market psychology, not just how to invest or trade. For example, The Wisdom of Crowds, by James Surowiecki; The Art of Strategy, by Avinash Dixie; and Markets, Mobs & Mayhem, but Robert Menschel.

13. Their position size is calculated exactly on risk tolerance. Decide beforehand what your maximum risk will be on a trade. Say it's $300 (never risk more than 2% of your account on any one trade; this can be higher for long-term investing, say 5% to 7%). If you buy a stock at $50, then if you place your stop at $48, your position size should be: maximum loss / stop position, or 300 / 2 = 150 shares. You could buy more shares with a $49 stop loss, but the risk of shake out increases. Conversely, you could by few shares with a wider stop loss. Decide this before you buy.

14. They write down or record every trade: price, entry and exit points, thoughts, etc. Keep a journal.

15. A winning trade does not results in taking on extra risk on the next trade. Remember, follow your plan, stock to your rules, be consistent.

Some more ideas on trading, from a professional trader, here.

And have some fun.

Sunday, August 4, 2019

Habits of Highly Successful Traders, Part 1

(Part 2 is here.) Trading is different than investing. Simply put, trading is short-term, investing long-term. 

The goal of investing is to gradually build wealth over an extended period of time through the buying and holding (and selling at a appropriate time) of a portfolio of stocks, ETFs, bonds, and other investment instruments.

Trading involves more frequent transactions, such as the buying and selling of stocks, commodities, currency pairs, or other instruments. The goal is to generate returns that outperform buy-and-hold investing. While investors may be content with annual returns of 10 percent to 15 percent, traders might seek a 10 percent return each month. 

Trading is hard work. Don't let anyone fool you. But if you're interested in this, it can be rewarding. However, you must have discipline and be able to follow rules. Most traders blow up their accounts. But the good ones follow certain habits. These habits can work well for investors also.

1. Successful traders are patient with winning trades and extremely impatient with losing trades. Let profits run, and cut your losses. When I first started trading futures, I would set my stop for a $500 or $750 loss, which is well within guidelines of not losing more than 2% of my trading portfolio (not my retirement account) per trade. Since then, I'm very aggressive with stops, and won't accept any more than $200 loss, even less. My returns are much improved, because I can be wrong more than right, and still make profits. As Warren Buffet says the two rules of investing (which applies to trading) is 1) don't lose money and 2) see rule #1.

2. Successful traders realize that making money is more important than being right. Do what the market tells you. Don't let it slap you in the face, because it will. The market doesn't care about you. Face it. If you think the market is going to go up, and it doesn't, it's OK to be wrong and switch sides (going short instead of long). 

3. Successful traders learn how to read charts. Technical analysis can provide clues to whether traders are buying or selling, on average. I pay attention to fundamentals, but don't buy or sell without looking at the charts or market technicals

4. Before entering any trade, they know exactly where they will exit for either a gain or loss. This probably should be #1. A successful trader (or investor) calculates both risk and gain before entering a trade. They use stop and limit orders to set both losses and gains. For example, I decide my entry point on a stock is $30. I also decide, before I enter the trade, that I am not willing to lost more than $1 per share, so I place a stop at $29. I also calculate that I want to exit the trade at $35, so I place a limit order there. These stops and limits can change while I manage the trade, but I've decided BEFORE I place the orders. And never lower the stop. You can move the stop up, and move the limit up. If you get stopped out for the $1 loss, you can re-evaluate and re-enter at a later time.

5. They have a trade plan and stick to it. Consistency and discipline are important. They also keep a journal of trades. This allows them to learn from their mistakes, or trades that go wrong. 

6. They don't try to pick tops and bottoms. It's extremely difficult to see tops and bottoms. Prices at all-time highs can go higher and prices at all-time lows can go lower.  As an example of this, at the time I'm writing this paragraph, the prices of a September contract of Natural Gas hit $2.08 on Aug. 2, a 20-year low. Certainly it couldn't go any lower. Right? Wrong! It opened on Aug 4 and hit $2.067 before recovering slightly to 2.078. So record lows can certainly go lower. The bottom can only be confirmed when the trend changes. Trade with the trend; you'll make more money. The old saying, "The Trend is Your Friend" has a basis in fact.  

Continue with part 2.

Some more ideas on trading, from a professional trader, here

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