July Market Outlook

Bullish Case

Earnings are expected to be better in 2016, and the market should start reflecting better earnings later this year.

  •  The U.S. has low inflation and that could help keep interest rates low. Low inflation gives the Fed more time and flexibility in raising interest rates. This is good for the economy and asset valuations. Every time there is confirmation that interest rates may stay low, the market has a strong rally.
  • Low oil prices should be a net positive for the U.S. economy, especially for the consumer.
  •  Job growth is expected to continue in 2015.
  •  Shareholder perks like share buyback programs, spinoffs and dividend increases are expected to continue in 2015. There are signs that this trend is slowing, especially buybacks.
  •  From 1997 to 2012 the number of corporations publicly traded on American stock exchanges has dropped about 44%. Less supply could mean higher prices.
  • Mergers and acquisitions and private equity companies buying companies are expected to be active and should help stock valuations.
  • Central banks around the world have been pursuing stimulative efforts to help their economies.
  • The market has been rising since 2009, longer than most bull markets. The slow growth from this economic cycle could cause this market cycle to last longer than the average, and could last at least another year.

Bearish Case

The bearish case includes:

  •  Most of the risks to U.S. markets are external: Europe and Greece, China’s markets and their slowing economy, an unstable and uncertain energy rich Middle East.
  • Earnings forecasts are coming down, especially for energy companies, and for companies that have significant sales internationally. The strong dollar makes U.S. goods more expensive.

Earnings are expected to improve by the end of the year, and into 2016. See forecasts below.

  • The Fed may raise interest rates. Raising interest rates have been disruptive to the markets in the past, but less to the economy.
  • Cyber-attacks could disrupt our economy and markets.
  • The oil price collapse could cause some oil producing nations (Russia, Iran, Venezuela…) to take drastic measures. What measures they take is anyone’s guess, but desperate people do desperate things.
  • Our Federal Reserve has very few effective bullets to use if we have a major financial crisis.
  • Black and grey swan events. Events that have a low probability, but if they happen would have a big impact

Investors and analysts have low expectations for 2nd quarter 2015 earnings season.

As the list below shows, S & P earnings are expected to fall 4.5% for the 2nd quarter 2015.

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Financials, Healthcare and consumer discretionary have the highest growth rates for the quarter and for 2015.

The dollar’s strength is hurting earnings for U.S. multinationals.

The collapse in oil prices is hurting energy companies.

Below is a list that shows the price increase/decrease year-to-date of the list of industries above.


Source: Barron’s

Prices do reflect the expectations for earnings growth. The industries that are down only reflect 2015 price performance and not 2014’s. For example, oil and gas/energy is down about 10% for 2015, but most are down about 50% since their peaks last year. Energy’s price performance matches their earnings decline.

Utilities are down more than earnings, and that may be because the P/Es for utilities were above their historical averages earlier this year, in other words they were overvalued.

It’s good to look at the trend for earnings forecasts. Below are the weekly forecasts that come out in Barron’s each week.

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Source: Barron’s and Dan Hassey database

By studying the spreadsheet, are earnings forecasts increasing, falling or flat? Prices are impacted by these changing forecasts.

2015 earnings forecasts were rising for about 1 ½ months, but then started to fall. Earnings forecasts have ticked up the last few weeks.

Earnings forecasts for 2016 have been essentially weak, and volatile, but higher than 2015.

Below are this month’s market forecasts:

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Source: Consensus Earnings Estimates Thomson Reuters, Barron’s

As has been true for most of this year, the markets are fairly valued for 2015. If earnings forecasts are met in 2016, then the total return potential is about 10% (appreciation potential and dividend).

I have been warning that the market’s chart looks like it might be topping:


Source: www.erlangerchartroom.com

Most major markets have been going sideways since last December, about eight months.

Again, if earnings meet expectations, the Dow Jones could appreciate about 8% from current levels.

If earnings aren’t met, prices could roll over like they do at the end of a bull market.

Below is a chart of the end of the bull market of the 1990s:


Source: www.erlangerchartroom.com

The bull market of the 1990s topped at around 11,759 in late 1999 and finally broke down in 2002. The topping phase of the market lasted more than two years.

Once prices broke down in 2002, the market entered a bear market. From peak to trough, the market lost close to 40%.

We are seeing the transport index rollover:


Source: www.erlangerchartroom.com

Some of the transportation companies were overbought and overvalued.

The index has rolled over and is down about 13%, not bear market territory. The index may stay within in its trading range with support at about 8,000 and resistance is about 9,250.

We encourage caution, as the markets look toppy, valuations are fairly to overvalued, and there are external risks.





July Economic Outlook

July Economic Outlook

Since we’re half way through 2015, it’s a good time to review the first half of 2015. We will also look at where we are in this economic and interest rate cycle.


  • The U.S. economy continues to grow with low inflation and interest rates, and with an improving outlook for the consumer and spending.
  • Most economists see a low probability of a recession for this year.
  • Risks remain, but most risks are external.
  • The strong dollar has been a drag on the economy.


This economic cycle started in mid-2009, so we are in the sixth year of this economic cycle. Most economic cycles last about 4 to 5 years.

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Source: WSJ Economic Forecasting Survey

The WSJ economic forecasting survey is from more than 60 global economists, from different industries and academia.

Economic growth is low. The forecast for economic growth continues to be below 3%. I explained last month why our economy has slow growth and why slow U.S. economic growth will probably continue. Click here to read why U.S. economic growth is slow, the “new normal”. The “new normal” section starts on page 5.

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Source: WSJ Economic Forecasting Survey

The probability of a recession for this year is very low, 10.33%, according to the economists’ survey from the WSJ.

Unfortunately, the risks to our economy are growing and most are external:


Let’s review some of these risks

Again, most of the risks are external. The stronger dollar is hurting our exports (I explain the impact of the dollar’s impact in the Dollar section below).

The risk of a Greek exit from the Eurozone has increased. This is creating great uncertainty in terms of what it means for Europe and the rest of the global economy. Theoretically, the financial impact should be small because Greek loans are held by governmental entities and not private. Also, the loans are small compared to the size of the Eurozone. There is a fear of contagion that other Eurozone nations may follow Greece and the economic depression in Greece could impact the rest of Europe.

Geopolitical/Security Issues – The Ukraine/Russian crisis continues. The oil rich Middle East and especially ISIS Syria and Iraq are serious geopolitical concerns, and a resolution is nowhere in sight. If Iranian nuclear negotiations turn bad, military confrontations between Iran, U.S. and Israel are on the table.

The U.S. strong dollar is impacting U.S. international trade and profits. The section below is from my May Market Outlook. The dollar outlook is worth repeating.


One of the concerns that our Federal Reserves and the International Monetary Fund have is the strong ascent of the U.S. dollar index (a basket of the major currencies in the world), as it is up about 25% since last summer.

The concerns revolve around the amount of dollar denominated debt that has been issued since 2009, about $9 trillion. With a dollar that is worth about 25% more, those loans and interest rates have increased about 25%. A 10%, $1 million dollar loan has increased to about $1.25 million and the interest rate has essentially increased to about 12.5%. If we have a global recession, the increased burden of these loans could slow down the economy more, and there could be a significant rise in defaults.

The dollar has not increased 25% against all currencies.


It’s important to note that the dollar has appreciated against certain currencies more than others, the markets are discounting the differences in growth, interest rates, inflation… for each currency.


According to the map, the dollar has not appreciated against the Chinese yuan. The dollar has increased about 31% against the euro. Again, any dollar denominated loans made in Europe or overseas will probably have a difficult time servicing the debt, especially if there is a global economic slowdown, or recession.


The dollar’s rise and its impact on dollar denominated loans is another reason why the Fed will have to be very careful in raising rates.


In the Fed’s last news conference, the Fed stated they were aware of the global risks of rising rates and the dollar, and the Fed would take caution due to the disruptions the strong dollar could have on the global economy including dollar denominated loans.


How Do We Value the Dollar?


The questions is, is the U.S. dollar undervalued, overvalued, or fairly valued? Can the dollar go higher from current levels?


There are many ways to value an asset, whether its real estate gold, stocks, bonds, oil…

Valuing the dollar against other currencies is nebulous and difficult.


There are many variables that determine the value of a currency: inflation; interest rates; economic growth; the assets, resources that back the currency; the size of the countries’ economy; GDP; rule of law; debt; political system; accounting systems and reporting; transparency; the diversity of its industries; the educational attainment of its citizens…

One of the simplest and oldest ways to value a currency is PPP (purchasing power parity). The theory of PPP is the price of a good in one country should equal the price of the same good in another country.

For example, if a foreign currency is overvalued, the PP of the domestic currency is lower in the foreign economy. As the flow of the lower currency moves, domestic prices rise and foreign prices fall as the domestic demand falls, or the foreign currency falls until the two currencies reach parity. Unfortunately, the global economy is much more complex than this currency valuation theory.

Another way to determine if a currency is undervalued or overvalued is to determine the total value of a currency that currently exits and compare that to the value of the GDP of the country.

There is a total of about 23.18 trillion dollars in the global economy (about $12.68 trillion are in foreign reserves, and about $10.50 trillion are in M1, M2 and M3 here in the U.S.). Our economy is about $17 trillion, so there are more dollars than the size of our economy. Because the U.S. dollar is the largest world reserve currency. There should be more dollars in the world compared to the size of our GDP.

Even though the dollar is the main global reserve currency, the euro has increased its share as a global reserve currency when it began in 1999.

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If we back out our exports from the foreign reserves, then the dollar should be close to being fairly valued, but it’s hard to determine what the dollar value should be using this method.

One could make the argument that if we factor in total government debt and future obligations (Social Security and Medicare) then the dollar is overvalued.

We can also take a look at the dollar historically to have a clue especially by looking at the highs of the dollar, and determine if the dollar could reach those historical levels.

Here is a long-term chart for the dollar:


Before we analyze what caused the dollar to rise and fall during this time period, I would like to point out two trends of the chart above:

  1. Stocks tend to move quarterly because of earnings reports. Commodities and currencies don’t have quarterly reports, so they can be stuck in trading ranges for long periods of time. We can see that in the 1990s, and from 2008 to 2014.
  2. The latest rally is almost parabolic, normally a sign of speculation. These type of moves are normally not sustainable. See current chart for dollar below.

Can the dollar reach the highs that it made in the mid-1980s, and the late 1990s?

Before the fall of communism, the U.S. dominated the global economy. This is no longer the case, the U.S. now shares the global economy with China, India, Latin America…. I doubt the dollar could be as strong as it was in the mid-1980s because the global economic pie is shared by more economies. Also in the 1980s, baby boomers were having families helping boost the economy in the 1980s. Millennials are large in numbers, but they are not starting families and buying homes like baby boomers did.

The dollar bottomed in 1992 at about 80 and rallied about 50% due to the U.S. technology and internet revolution by 2000. The U.S. does not have a major economic trend like the technology, internet boom to boost growth and wealth in the U.S.

The dollar was probably overvalued by the late 2000s. The dollar crashed about 41% after 911 and the Great Recession that started in 2007.

The dollar has rallied over 40% off its low of 70 made in 2008 and tested in 2011, close to the rise during the technology revolution.

The causes of the dollar rally include: QE ending, the Fed may start raising rates, the economic growth in the U.S. is stronger that most of our trading partners, except China. We are attracting foreign capital because of higher rates, better growth, and the safety and liquidity of the dollar.

The reasons for the current rise are not as strong as the reasons in the 1980s and 1990s, but the dollar is up about the same. If the dollar did rise 50% that would put the dollar at about 105 (50% of 70 would be 35, a 50% move would be about to about 105).

A rise of the dollar index to 105 would be about a 5% above this year’s peak. Again, a 50% move would not be justified on a fundamental basis, but if the rally matched the move in the 90s, 105 would be the target.

The Dollar and the Futures Market

In the short-run the futures market is determining the direction of the dollar. Below is a table from Barron’s that shows the activity of the Eurodollar futures market:


The Eurodollar has the most contracts of the three assets listed above. There are also significant contracts and activity in other currencies: pound, yen, Canadian dollar, Swiss franc….

The main function of the futures market is to shift the risk from producers to risk takers. The other function of the futures market is price discovery.

If you look at the above table, most of the contracts belong to commercial hedgers, as they try to reduce their price, currency risk.

The rest of the futures market is dominated by speculators and traders (not investors, click here for an explanation of the differences between investors, speculators and gamblers.) because of the significant leverage in these futures markets.

The U.S. dollar index is $1,000 times the index value. If the U.S. dollar index is 100, then the futures contract is worth about $100,000. The margin requirement is only $1,950, so the there is tremendous leverage, and this attracts speculators.

Large speculators, deemed as the smart money, have more long contracts. Also long contracts increased, and the shorts decreased.

Small traders have more shot contracts than longs.

Here is a current chart for the dollar:


The dollar’s rally accelerated last December, then the dollar consolidated its move in February.

The dollar accelerated again after the consolidation. The move was parabolic and was not sustainable.

There is resistance at 100. If the dollar can break above resistance 100, then the dollar could rally to 105, matching the rise in the 1990s.

It’s possible that speculators drive the dollar above 105, but the dollar would be overvalued if this happens.

The dollar has established a trading range with support around 94, and resistance around 100. Currently prices are around the middle of the trading range.

The Dollar’s Impact on the U.S. Economy, the Consumer, Corporate Profits, Gold and Oil

A strong dollar is a good thing for consumers as it makes foreign goods and services cheaper. A vacation to Europe would be about 30% cheaper than in 2013.

Domestic producers and service providers will have to keep prices lower to compete against cheaper foreign goods and services. This should keep a lid on U.S. inflation, and therefore interest rates.

A strong dollar is bad for U.S. international companies, because foreign buyers will need more of their home currency to buy stronger dollar priced U.S. goods and services. The stronger dollar and higher priced U.S. goods and services are expected to lead to weaker sales.

Also hurting U.S international companies is the currency conversion loss that happens when a weaker foreign currency sale needs to be converted into a stronger dollar. Currency losses are expected to lead to lower earnings for U.S. international companies.

In the short run a strong dollar could hurt a gold and oil recovery.

I have made the case in past Outlooks and Updates that the dollar oil relationship is overstated. Briefly, even though the dollar is stronger than the euro by about 30%, oil prices are down about 50%, so oil is still cheaper and the dollar should not impact demand. Most countries’ currencies aren’t down as much as the euro so their demand should not be impacted by a strong dollar because the drop in oil prices is greater than the appreciation of the dollar. Also, our 2015 global outlook for oil based on the EIA and IEA’s outlook see global oil demand rising in 2015. Also, the U.S. uses all of its oil its oil its produces and then imports. The dollar does not impact domestic oil prices for U.S. consumers.

If the dollar moves above 105, gold could make new lows. Remember the all in cost for gold is about $1,100. Below that price producers will probably cut output and supply and demand can eventually achieve equilibrium and price stability.

Inflation, the Fed and Interest Rates

Below is the trend and forecast for inflation:


Source: WSJ Economic Forecasting Survey

Inflation has been very tame during this economic cycle, especially lately as the bottom row of the graph above shows. Inflation is expected to stay low this year, and may get to the Fed’s target of 2% in 2016.

Below is the latest dot plot from the Fed:


Source: FRB website

Each dot reflects the forecast of each Fed member and where they expect the fed funds rate to be.

In past economic and interest rate cycles, when the Fed raised rates it was because the economy was showing signs of inflation, and the Fed raised rates to slow down an overheating economy that was causing inflation or inflation expectations.

In this cycle, the Fed kept rates lower than normal during the Great Recession and the economic recovery. The Fed needs to raise rates to get back to normal levels. Normally rates reflect inflation and inflation expectations. Currently rates do not reflect inflation and interest rates.

Currently the fed funds rate is at .25% and they’re expected to rise to about .5% by the end of 2015 and rise to about 1.5% in 2016. Most members see rates rising to normal levels by 2017.

Long-term bonds are starting to anticipate the Fed’s raising of rates. Below is a current chart for the 10-Year Treasury:


Source: WSJ

The 10-Year Treasury yield was 1.65% in February and rose to about 2.5% last month, about a 50% rise in yield.

Yields have fallen due to rising risks from Greece and China and the flight to quality to U.S. Treasuries that are backed by the full faith and credit of the U.S. Government.

The Consumer, Housing and Autos

Consumer sentiment continues to improve due to a better job, real estate and stock markets.

Below is chart showing the trend in consumer sentiment and expectations:


The consumer is 70% of our economy. An upbeat consumer is good for retail sales, autos, and real estate.

Here is a chart that shows the trend for retail sales:

RETAIL 1990 2015

Retail sales took a hit during the Great Recession, but they have been increasing each year. Again, the consumer, retail sales are very important to our economy.

Home sales are doing better this year:


Notice that last year home sales leveled off, but this year sales are doing better. Some analysts believe home sales are doing better because many home buyers believe that mortgage rates will be moving higher, so they want to take advantage of low mortgage rates.

During this economic cycle, when home sales are strong we see weakness in auto sales and vice versa. Here is trend for auto sales:


We can see auto sales have declined the last few months.

The current economic conditions are good for the markets. My July Market Outlook should be out late next week.

June Market Outlook

June Market Outlook

Many stocks and major indexes have been stuck in trading ranges for much of the year. The reasons for the lackluster performance include: the dollar and its impact on revenue and profits, low oil prices and weak energy industry earnings, valuations, anticipated rate increases by Fed, Grexit.

Will prices break out up or down from these trading ranges?

Bullish Case

  • Low oil prices should be a net positive for the U.S. economy, especially for the consumer. We are seeing oil prices rise off their March lows.

Oil prices are expected to be higher this summer, but prices normally fall after summer vacation and hurricane season.

  • The U.S. has low inflation and that could help keep interest rates low. Low inflation gives the Fed more time and flexibility in raising interest rates. This is good for the economy and asset valuations. Every time there is confirmation that interest rates may stay low, the market has a strong rally.
  • Job growth is expected to continue in 2015.
  •  Central banks around the world have been pursuing stimulative efforts to help their economies.
  •  From 1997 to 2012 the number of corporations publicly traded on American stock exchanges has dropped about 44%. Less supply could mean higher prices.
  • Shareholder perks like share buyback programs, spinoffs and dividend increases are expected to continue in 2015. There are signs that this trend is slowing, especially buybacks.
  •  Mergers and acquisitions and private equity companies buying companies are expected to be active and should help stock valuations.
  •  The economies in Europe and Japan are showing signs of improvement.
  •  The market has been rising since 2009, longer than most bull markets. The slow growth from this economic cycle could cause this market cycle to last longer than the average, and could last at least another year.

Bearish Case

 The bearish case includes:

  •  Earnings forecasts are coming down, especially for energy companies, and for companies that have significant sales internationally. The strong dollar makes U.S. goods more expensive. Earnings are expected to improve by the end of the year, and into 2016. See forecasts below.
  • The Fed may raise interest rates. Raising interest rates have been disruptive to the markets in the past, but less to the economy.
  •  Cyber-attacks could disrupt our economy and markets.
  • The oil price collapse could cause some oil producing nations (Russia, Iran, Venezuela…) to take drastic measures. What measures they take is anyone’s guess, but desperate people do desperate things.
  • The conflicts between Russia and the Ukraine, Syria’s civil war, Iran’s nuclear weapons ambitions and negotiations, ISIS in the Middle East, Sunnis versus the Shiites remain and are unresolved.
  • Our Federal Reserve has very few effective bullets to use if we have a major financial crisis.
  • Black and grey swan events. Events that have a low probability, but if they happen would have a big impact.

Market Forecast

Below is a consensus earnings forecast for 2015:

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I circled S & P 500 2015 earnings growth, and the market reflects the earnings expectations for 2015.

Energy’s 2015 earnings’ outlook is dismal.

However, 2016 earnings forecast looks much better:


Fortunately 2016 earnings estimates for the S & P and energy look much better.

The market does have a chance to break out of its current trading range.

Below is my current forecast for the S & P and Dow 30:

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Source: Consensus Earnings Estimates Thomson Reuters, Barron’s

Markets appear fairly valued for now.

2016 looks better with close to a 10% total return (including dividends).

Valuations and Price Action

In 2009, stocks were inexpensive, prices were low, and dividend yields were much higher.

Below is a chart of the S & P dividend ETF, symbol SDY:


Source: www.erlangerchartroom.com

SDY is the type of recommendations our Baby Boomer service normally recommends.

In 2009, the price was around $22 the P/E was moderate, and the dividend was around 5%. Also, when buying at the start of an economic cycle, and bull market investors should be more aggressive and invest long-term

Today the stock is up about 250% from its 2009 lows, the dividend has shrunk to 2.2% and the P/E is an expensive 20. I have recommended SDY in the past. Would I recommend SDY today? NO!!!

Notice that the stock has been going sideways for about 10 months. The pattern is called a symmetrical triangle, a neutral pattern. Participants are buying the pullbacks but selling the rallies. It could also be considered a bearish topping pattern as it seems as it is running out of energy after a great bull run.

SDY will probably move sideways as it grows into its expensive valuation.

Pay attention to valuations and its price action, stock chart.

I do prefer stocks that have dropped, are inexpensive, pay a good dividend, and have good upside.

Occidental Petroleum (OXY) is the type of stock I would recommend today. I did recommend OXY in our Gold and Energy Advisor service earlier this year.

Below is a chart for OXY:

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Source: www.erlangerchartroom.com

From peak to trough, OXY was down around 30%, bear market territory.

OXY last year had a topping pattern that lasted about seven months.

Prices are currently basing, normally the last phase of a bear market. Bases are like diving boards, the shorter the base, the shorter the bounce, next move. The longer the base the bigger the bounce, next major move. OXY is building a strong, long base.

OXY’s dividend is about 3.9%. Its enterprise value (market capitalization plus debt) of its proved reserves is about $20 per barrel, this is relatively a good value. When oil prices are close to $100, proved reserves average acquisition price go for about $35 a barrel.

I look for companies to recommend like OXY and avoid investments like SDY in today’s market.



June Economic Outlook

June Economic Outlook

This economy slow growth has frustrated job seekers, businesses, consumers, investors, economists, politicians….In this issue I update the “New Normal” – the U.S. slower economic growth.

As I normally provide each month, I will provide a few data points that should give our subscribers an understanding of where the economy is and may be going. The first quarter of this year was weak, but as expected the economy is looking better.

Most of the economic data that is coming out in the second quarter: jobs, housing and auto sales, inflation have been improving.

Most of the risks to our economy are external: Greece and its potential exit from the euro, Middle East instability, China’s opaque and slowing economy, and black swans.

Many analysts and investors are nervous about the Fed raising rates, probably toward the end of the year. A normalization of rates will probably be more disruptive to the markets and less on the economy.


Below is a chart the GDP growth trend since 2008:

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Source: U.S. Dept. of Commerce

This economic cycle is different for many reasons including recovering from a deep recession, with political dysfunction, and slow growth. Notice since 2008, the economy has dipped into negative growth territory in 2011, 2014, and this year. This is rare that our economy goes into negative growth several times in an economic cycle.

The negative growth in the 1st quarter is being attributed to very cold weather toward the end of weather, a strong dollar, a contracting energy industry, and worker strikes on West Coast ports.

Many economists expected our economy to do better because of lower oil prices and the belief that consumer would spend their savings from the gas pump. This hasn’t happened – so far.

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The chart shows that disposable personal income has grown, but consumer spending has not. Consumers have been saving more and spending less.

I have asked many people I know what they would do with the savings at the pump, and most replies were that they didn’t believe oil prices would not stay low for long. Here in California they have been right.

 Autos and Housing

The auto and housing markets are very important to the U.S. economy. Fortunately, both markets are doing well.

Below is the trend for vehicle sales:

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Vehicle sales are above pre-recession levels. Consumers are spending money to buy or lease cars and trucks.

Home sales trends are improving:



When housing started to recover in 2012, most of the buying was done by institutional and professional investors.

The graph below shows the trend is changing:

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First-time buyers are now an important part of the housing market.

The financial media has been pointing out that this trend may not last as the current buyers are buying because of the prospect of higher mortgage interest rates.

Update on the “New Normal”

I posted the research below in a Special Report. I did revise it and added a bit more research and comments in the Law of Large Numbers section and Baby Boomer section. I believe this is important research for investor to understand as it should lead to better investment decisions.

This economic cycle has seen subpar growth with little wage growth, and fewer high paying jobs. Is this the “new normal”?

Before the global financial crisis of 2008, Dr. Mohamed El-Eraian (former CEO, and co-CIO of Pimco, one of the world’s largest bond money managers), wrote a book, When Markets Collide. The book received quite a bit of buzz when it came out. One of the main tenets of the book is that the U.S. will face a “new normal” of slower economic growth.

So far Dr. El Eraian has been correct, in terms of a slower growth U.S. economy. Some of the reasons describing the new normal have been wrong. But many economists and analysts agree, and that the book explains, that the biggest reason for the slowdown is – too much debt from households, businesses, sovereign entities including national, state and local governments.

Ray Dalio, one of the most successful hedge fund managers in the world, produced a YouTube video on how the economy works. The video is more about how leverage, debt has played an important role in the growth of the U.S. economy. The video also explains that there are economic super cycles where the debt piles up that eventually lead to a major economic debt crisis. The debt crisis takes about seven to ten years to recover from. The Great Recession started in 2008, so we are into our 6th year, so according to Dalio and other economist we have a few more years to recover from our debt crisis. Click here to view the video.

Also as we get late in this economic cycle we can’t expect the economy to get stronger.

I’ve been following this story since the book came out, and I’ve identified other reasons for the slowdown in the U.S. economy, the “new normal”:

• Too much debt – consumers, government, businesses are going through balance sheet repair, reducing debts (see Dalio YouTube video).

• Law of large numbers

• Globalization and a more competitive global economy

• Baby Boomers getting ready to retire and spending less

• Younger Americans are changing economic and social trends: sharing services (starting with Napster, Uber, Airbnb…), getting married, starting families or buying homes less than previous generations

• Slow wage growth

• Overly cautious corporations, financial engineering versus capital spending and hiring

• Consolidation of most industries

• Technology and the loss of jobs

Of course there are other reasons for the “new normal”: high corporate taxes (effective tax rates are much lower), regulations (especially in financial services – getting a mortgage, small business loans are more difficult to get due to Dodd Frank), cost of living keeps rising leaving the poor and middle class behind, high college education costs, dysfunction in Washington D.C., decaying U.S. infrastructure (roads, bridges, airports….).

I was going to analyze the slow growth in bank and mortgage lending, but loan demand is down (many sectors of economy are focused on reducing debt). Also alternative sources of capital are available and growing (peer to peer lending, crowd funding, capital markets, private equity, venture capital….).

Bottom line, we face a very different economy than previous generations.

Law of Large Numbers

We can see the law of large numbers working in our largest public companies. Many of our larger companies are no longer growth companies but slower growing, mature companies.

Below is a 10-year history of the revenue for Walmart, symbol WMT:

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Source: S & P Stock Report

In the 1970s and 1980s WMT was a high growth company, but now it’s a mature, dividend paying slow growth company.

The average growth rate over the 10-year period is about 5%, but last year revenue grew only 2%. As WMT grows larger, growth slows.

Below is the 10-year revenue history for Exxon Mobil:

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Source: S & P Stock Report

XOM and many energy companies’ fortunes depends on oil prices. We can see that XOM’s revenues peaked in 2011.

XOM’s 2014 revenue are essentially the same as ten years ago, when adjusted to inflation.

Below is the 10-year revenue history for General Motors:


Source: S & P Stock Report

General Motors emerged from reorganization in 2009. Revenue has barely grown since 2011, adjusted to inflation.

Below is the 10-year revenue history for General Electric:


Source: S & P Stock Report

GE’s revenue is last year was less than ten years ago, especially when adjusted to inflation.

If you look at most companies that are over $100 billion in revenue, you see growth slows or is stagnant. Apple is an exception.

Below is a long-term chart for GDP growth:

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The grey highlighted area are periods of recession; fortunately they are few. The average U.S. recession lasts about 10 months.

Notice that as time goes on, the growth rate slows.

Below is a table that shows U.S. GDP at the start of each decade, and 2014:

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Click to enlarge

Source: Bureau of Economic Analysis, Dan Hassey database

From 1970 to 1980 the economy grew about 170%.

From 2000 to 2010 the economy slowed to about 48% for the decade.

We can’t expect the economy to grow above 3% on a sustainable basis when we have an $18 trillion economy.

We are starting to see China slow from 10% to 7% now that its economy is around $10 trillion. We can also expect China’s growth to slow going forward because of the law of large numbers.

The Financial Crisis of 2008 and Impact on Baby Boomers and Millennials

The financial crisis of 2008 that led to the Great Recession created many hardships and destroyed the confidence of many Americans especially among baby boomers and millennials.

The consumer is about 70% of the U.S. economy. The lack of confidence and high debt levels has caused weak demand from these important groups and is another reason for the subpar growth of the U.S. economy.

Baby Boomers

Baby Boomers are individuals who were born from around 1946 to 1964. There were around 76 million births during this period.

Baby Boomers were responsible for many social, economic and investment trends, and they will probably continue to do so.

Baby boomers have been hit especially hard. Their homes and 401ks and retirement accounts have declined and they’re insecure about their jobs and the job market. They have changed their spending habits. There are approximately 77 million baby boomers, and they are a significant part of the economy.

Baby Boomers are also starting to retire and will start applying for Social Security and Medicare. Politicians often complain about entitlements, they will only increase as baby boomers retire in mass. Americans, especially women, are living longer, so the growth in “entitlement” spending could increase and last for many years.

A problem for retired baby boomers (and many retirees) is historically low interest rates.

Below is a long-term chart for the 10-Year Treasury:

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Click to enlarge

I started my investment career as a stock broker for Merrill Lynch in 1980. I mostly sold income producing investments because interest rates were so high. I tried to get my clients to buy long-term bonds, to lock in high rates. My pitch then was “I hope when I retire that rates are double digits.” I had no idea rates would go as low as they are now.

Investors locking in double digit rates did well.

Below is a chart that shows the net worth of the median family over the last few decades:

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Click to enlarge

If an investor invested $200,000 in a 10-Year Treasury at the prevailing rate of about 12% during the early 1980s, the income generated about $24,000 in income. Back then $24,000 could go a lot further than today.

Today if a retiree invested the majority of their nest egg, about $200,000 (average net worth of a retiree) into a 10-Year Treasury at 2.5%, they would only generate about $5,000 in income.

Today’s retirees have less to spend from their portfolios, leading to less aggregate demand in the U.S. economy.


Millennials, also known as Generation Y. They number approximately 80 million ( slightly more than baby boomer numbers), and were born from the early 1980s to the early 2000s.

Millennials are also creating many social, economic and investment trends.

They faced many economic headwinds during this difficult economic cycle: high post high school education and training costs and debts, poor job markets where many are underemployed, working part-time or remain unemployed.

This generation started and made many technologies popular that are free or where goods and services are shared or rented. The first such popular service was Napster, a free file sharing service that was mostly used by users to download free music. Millennials have also invented and made popular services like bitcoin, Uber, Airbnb, Netflix, Hulu, and crowdfunding.

Car buying, marriage, family formations, and home buying trends have changed and are less from previous generations.

Could these economic, demand trends change? Maybe for Millennials. Baby Boomers leaving the work force and retiring, probably not unless they have substantial portfolios, and if interest rates rise substantially from current levels.

If interest rates rose substantially, it would probably be a wash because it would also mean much higher inflation, a higher cost of living.

The Global Economy Is More Competitive and Has More Participants

Post WWII the U.S. was the economic engine of the world, but this is changing.

The dominant, developed economies (Europe, U.S., Japan) are all slowing due to the size of their economies, large debt levels, aging populations, high costs, bureaucratic economies with more regulations and complacency.

Emerging economies in Latin America, South East Asia including China are the opposite: they have younger populations, they’re hungrier, they have less regulations, lower costs, and less net debt.

The U.S. now operates in a more competitive global economy and this leads to outsourcing and the consolidation of industries, fewer high paying jobs, and stagnant wages.


Unions and politicians complain how U.S. companies outsource jobs overseas. U.S. companies have been very good at expanding internationally to grow their businesses. It does not make sense for Coca Cola, or General Motors to make a can of coke or cars in the U.S. and ship to their customers overseas. Those jobs need to be close to their markets.

Some jobs do go overseas because of lower costs and regulations. Below is a chart that shows the labor costs per hour for shoe manufacturing:

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Source: BusinessWeek, Bloomberg

The average hourly wage of an American worker is about $21. If you were to locate a shoe factory, where would you locate it? Would it be the U.S.?

New Technology, Innovation

Technology has improved the lives of many in the world, and has made the workplace and workers much more productive. The downside of technology is that it has eliminated millions of jobs.

In the 1990s, I read an article that the vision of many technology companies was to help companies and governments across the globe automate tasks and jobs to make them more productive. Technology companies have been very successful in their goals. Again, the downside is many jobs were eliminated.

There are many jobs that have been reduced because of technology: bank tellers, gas station attendants, checkout clerks at grocery stores, telephone land line workers, travel agents, newspaper employees….

Consolidation of Many Industries, and Downsizing among Many Companies

The consolidation of many industries, and the downsizing of companies have laid off millions of workers.

As a shareholder of some of these companies, gaining scale, entering new markets and offerings through mergers and acquisitions had lowered costs and increased revenue and is good for the bottom line and stock prices, but is has been bad for the millions of workers that have been laid off.

When I graduated from business school I interviewed with Goldman Sachs, Merrill Lynch, Kidder Peabody, Smith Barney, and Chemical Bank. I had three job offers early on, so I quit looking. Notice the list, only one company is independent, Goldman Sachs. The rest were swallowed up by bigger companies and basically don’t exist anymore. I know that if I graduated today, I would not have the same opportunities that graduates had 30 years ago.

Our generation has been impacted by these consolidations, mergers and acquisitions. I’ve lost several jobs due to mergers and downsizing.

I’m sure if you think about it, how many companies have you’ve worked for still exist, and how many times have you’ve been laid off because of downsizing and mergers?

No matter what industry graduates are looking to start a career in, the options they have are much fewer than our generation. Below is a list of a few industries and the consolidation they have gone through:

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Click to enlarge

This list is a sample of the many companies that existed 35 years ago, and a sample of the few large companies that remain today.

The lists of companies above are important because most of these companies were where graduates go to start their careers, receive valuable expensive training, and experience.

Visually one can see that in 1980 there were many more companies that existed compared to today, and our economy is much bigger, and has a much larger work force.

When companies consolidate, or in the case of sectors like record and book stores, many high paying jobs were lost in accounting, marketing, management, finance that will not come back.

Not all companies were acquired or merged; some went bankrupt or are out of business: E.F. Hutton, Burnham Lambert, Lehman Brothers, Woolworth, Continental Illinois.

Also, many of these industries have many companies in them, but many of these industries are dominated by a handful of huge international companies. For example banks, there are thousands of banks, but the major banks listed above hold most of the deposits and make most of the loans.

Notice that technology is an area in the economy that has expanded and provides high paying jobs, but not all graduates studied information technology.

Graduates with degrees in information technology, engineering, business or healthcare will probably do better than other graduates.

The questions is – where do young graduates go for their first career job, training and experience?

Cautious Employers and Financial Engineering

As shareholders we’ve benefitted from financial engineering and a prudent corporate America, but it has been hard on the economy and job seekers.
At the start of the Great Recession corporations cut capital spending by about 20% and laid off millions of workers. The economy contracted about 8% at the start of the Great Recession, so corporations overreacted.

If we look at the energy industry, it spent about $1 trillion on capital spending during this economic cycle and created a shale energy boom that created lots of wealth and high paying jobs and has made us less dependent on foreign oil.

Most other industries cut capital spending, downsized and increased share buybacks and dividends otherwise known as financial engineering. Again, this is good for shareholders but bad for the economy and workers.

Stagnant and Volatile Pay

The financial media, the Fed and politicians all talk about stagnant wages, and the need to put more income into the pockets of lower income and middle class consumers.

Below is a chart that shows the trend in household income:

We can see that wages increased about 25% from the 1970s to the later part of the 1980s. Wages are essentially the same today as they were in the late 1980s.

As the chart states, these numbers are in constant 2010 dollars. I read a study that if you have a family and or are divorced you are being left behind economically. Families are being left behind economically because the cost of education, childcare and healthcare costs are growing much faster than wages. If you’re single, you should be in better shape financially.

Some politicians and economists blame cautious employers for the lack of wage growth. In the above section about cautious corporations and financial engineering we can see the chart below does show that wages have dropped as a percentage of national income:

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Click to enlarge

Below is a chart that shows that corporate profits as a percentage of GDP is at historic highs:


Some economists argue that employers have increased spending on employee health care costs and other benefits. Some of these benefits don’t show up in wage costs.

I found another reason why there is less spending, demand. Entrepreneurs, the self-employed, part-time workers, workers dependent on tips, employees who work on commissions, temporary employees, and workers that have multiple jobs have volatile incomes. Making the situation worse is they don’t have the savings to get them through times when their incomes fall.

JP Morgan did a study on household savings and household income volatility. Below is a chart that shows the problem:

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Click to enlarge

The chart shows that poor to middle income households that have volatile incomes don’t have the savings to get them through periods when their income drops. For example, a middle class household typically has expenses of $4,800 a month, but they only have $3,000 worth of savings. The situation is better for more affluent households.

According to a Federal Reserve study, income volatility impacts about 40% of the workforce.

Unemployment, the Underemployed and Part-Timers

Again, a more competitive global economy, outsourcing, technology, globalization, consolidation of many industries, more cautious companies have all lead to stagnant wages, fewer high paying jobs, more part-time and underemployed workers.

With such a large economy and population and the many economic headwinds the U.S. economy faces, it is hard to move the needle on the economy.


Investors need to realize our economy is very different than previous cycles and generations and we must adjust to these new realities. These new economic conditions could persist. They could improve under different monetary and fiscal policies, once balance sheets are repaired, and if new technologies, industries emerge. This will take more time.

It is very rare in the late stages of an economic cycle (we are in the 6th year of this economic cycle, and most economic cycles last 4 to 5 years) that the economy picks up steam. Most economic and market cycles are like a 10K race: in the beginning a runner has more energy, but toward the end the pace slows and most runners don’t have the same energy they had at the beginning of the race, so we can’t expect the economy to grow faster this late in the economic cycle.

Most economic cycles are disrupted by a strong economy that creates demand pull inflation, and the Fed responds by raising rates too much and the economy goes into a recession. Because the economy is not heating up, inflation and interest rates can stay lower, and lower inflation and interest rates are good for the economy and markets.

This means that the “New Normal” could cause economic and market cycles to last longer, a good thing.

One of the trends that investors need to keep an eye on are game changing technologies, services, or products. In a book, It Was a Very Good Year, by Martin S. Fridson, the author describes the conditions that create great market years, cycles. One of the conditions is the introduction of new technologies/industries. In the past they’ve included: autos, aviation, electronics, and recently the internet and digital revolution including social media. I’m always looking for these new trends. Admittedly it is difficult, especially entering these emerging trends at the right time and valuations, and who will be the winners in these emerging technologies and industries.

The way to think about the markets going forward could be similar to a freeway: there is a slow lane (large capitalization stocks, mature slower growing companies) and the fast lane (technology, biotech, some small capitalization stocks, emerging markets, read It Was a Very Good Year). To improve returns, investors will have to include investments from the fast lane of the market.

One of the strategies that I use frequently is to follow and invest in companies that have short-term problems that causes the stock price to plummet. In the past I’ve recommended companies like Toyota (car acceleration problem), British Petroleum (Gulf of Mexico oil spill tragedy), Target (data breach), and energy stocks (last year’s collapse in oil and energy stocks). The strategy is called – buy low, sell high.

Older and conservative investors should also consider investing in companies that pay dividends and have a history of raising them. I recently wrote an article about investing for income in a low interest rate environment. Click here to read the article.

Investors should also consider writing options against some of their holdings. The fundamentals of the company you own, technical analysis (especially support and resistance levels and medium and long-term moving averages), and the Black-Sholes options pricing model should be mastered before pursuing this strategy. Option writing could increase the total return of your portfolio, and also lower the volatility of your portfolio.

Major Markets Marching Towards 2013 Price Targets

One Last Energy Recommendation for 2013


  •  GDP and employment continue to recover, but the payroll tax and the sequester could be a drag on the economy and revenue growth for companies
  • Earnings were good this earnings season, but investors and analysts are concerned about revenue growth
  • The bullish case includes: low inflation, accommodative fed, low rates, the housing recovery, an energy boom
  • Bearish case includes: Europe financial crisis; instability, uncertainty in the Middle East; political dysfunction in the U.S. and Europe; a black swan event
  • Dividend paying stocks is the place to be long-term
  • This month’s recommendation, the last energy stock for the year

 Economic Outlook

Below are some of the key economic indicators that are relevant this month. [Read more…]

Gold Prices Plunge! What Does This Mean For Its Future?

“The yellow metal is down 24 percent from its highs. Is this the end of the gold bull? Or is it a temporary correction?

“I believe it’s temporary! In fact, I expect to see huge amounts of capital flowing back into gold, taking the prices far above their previous highs. Here’s why!”

We’re only 4 months into 2013, and we’ve already had a series of historic financial crises.

Investors have been bloodied in multiple markets. And the battering hasn’t yet run its course.

For maximum success in our investing, we need to anticipate the strongest trends, and get in front of them. Right now, one of the largest global trends is…


Investors are scared, and rightly so. Even the assets that used to be safe are risky now.

Nevertheless, wherever there is danger, there is also opportunity. When oceans of capital move from market to market, there are big winners and big losers. If we want to flourish as investors, we need to follow the money. We must anticipate where it’s going, and get there first. That’s when tremendous profits can be made.

Right now, the world is awash in liquidity that’s flowing from one asset to another. The markets are scared and confused. That’s why we’re seeing such truly bizarre events, like a crash in the price of gold even as global central banks have printed almost $17 trillion (!) in new money. [Read more…]

A Small Island in the Mediterranean Sea Reminds Us of Risks of the Global Financial System

Another Energy Company Recommendation


  • The Cyprus banking crisis was a major recent event, and it reminds us of the global risks investors face.
  • The markets reflect the many positives of the economy: an accommodative Fed; low inflation and interest rates; earnings and cash flow growth; improving real estate markets; energy is a bright spot in the economy; alternative investments potential are limited making stocks attractive.
  • The markets are up about 11% year-to-date, how much further can they go?
  • Last month we looked at the U.S. outlook for oil, this month we look at the global oil outlook
  • Global demand is expected to increase in 2013.
  • Global surpluses have improved, and is helping stabilize prices but not bring them down significantly
  • I try to answer the questions, how much oil does the world have, and how long will these global reserves last?
  • This month’s recommendation is another high yielding Canadian energy company. [Read more…]

“Don’t Be Deceived: The Shortage of Cheap Oil is Real, and Long-Lasting!”

“Recent media reports claim that new reserves like the Bakken formation will provide abundant oil, make America self-sufficient, and bring oil prices back down. Rubbish!

“Oil prices will remain high for years to come. Here are seven reasons why!”

As the name of this publication indicates, we focus our investing efforts on gold and energy—especially on crude oil, the most important form of energy in the modern economy.

There’s been a gusher of news reports lately, telling Americans that we’ll have abundant crude oil for the next decade or more.

For example, the current World Energy Outlook report from the IEA (International Energy Agency) predicts that just five years from now, the United States will pass Saudi Arabia to become the world’s largest oil producer. The New York Times went even further, reporting that the US is on track to be “all but self-sufficient” in oil.

Even Harvard University has joined the fun. It published a report called “Oil, The Next Revolution: The unprecedented upsurge of oil production capacity and what it means for the world.” That report included cheery graphics like this one: [Read more…]

Collectors, Investors and even Rare Coin Dealers, Falling Victim!

Some new suggestions on how to buy and sell safely!

By James DiGeorgia

Over the years I have preached to collectors and investors just like you, to be careful not to give their rare coins and or precious metals to ANY dealer or broker for storage.

Having literally grown up and in the rare coin and precious metals market, I have seen virtually every scam and convenient bankruptcy possible. Among the most expensive have been the collapses of so called “independently audited” storage facilities as well as brokers and dealers that issue “certificates of precious metals deposits”.

In my opinion, if you don’t take physical possession, you’re setting yourself to be robbed. Always take physical possession, rent a safety deposit box and store your precious metals and rare coins on your own. The cost of insurance for even a great deal of value is very inexpensive.

Besides storage risk, there’s a growing risk of being scammed in the rare coin and precious metals business that you must not ignore. This rising threat is not only putting investor/collectors like you at risk, but this scam has also put professional dealers with decades of experience at risk. [Read more…]

Can the US Become Energy Independent?

Here’s an Energy Name

You Can Be Independent With


The bearish and bullish case has not changed that much. I have written about the bullish and bearish case in past monthly issues. Below is a summary:

Bearish Case

  • The main headwind for the economy is lawmakers
  • Tax increases, specifically payroll taxes, and taxes on rich may be a drag on the economy
  • $85 billion spending cuts will cause slower growth
  • High gas prices at pump
  • Although Europe has improved, risks remain
  • Since the Arab Spring, the Middle East continues to be unstable and uncertain

Bullish case

  • Low rates, don’t fight the Fed
  • Housing is improving
  • Improving global economy, Iran
  • Valuations
  • Energy boom is causing an increase in high paying jobs, increased U.S. oil reserves and production, stabilizing energy prices. This issue will focus on U.S. oil and the energy boom.  [Read more…]