Harry S. Dent Jr.'s Blog, page 95

Searching for Value in the REIT Rubble

Leave it to the stock market to do the exact opposite of what you expect it to do. Following Donald Trump’s surprise win, stocks have spent the past three weeks pushing higher.

Ironically, given that the President-Elect is a world-renown real estate developer, real estate investment trusts (REITS) have gotten clobbered. REITs as a sector peaked in July, but the selling has continued well past the presidential election.

As I’m writing this, the sector is down nearly 20%… ouch!

Whenever I see a sector flirting with bear-market territory at a time when the rest of the market is hitting new all-time highs, I sit up and take notice. Sometimes it can be the sign of a sector facing deep, long-term problems with no easy solutions. But just as often, it’s a classic market overreaction.

So, as we look at the carnage in REITland, which is it?

Is the market correctly forecasting real estate doom… or is Mr. Market working himself into a stomach ulcer over nothing?

Let’s take a look.

The narrative right now is that the Fed’s pending rate hike is bad news for REITs, as it potentially raises their cost of capital. Adding to this anxiety is the spike in longer-term bond yields. See, higher bond yields hurt REITs in two ways.

To start, it raises their borrowing costs. REITs, as with most real estate investors, tend to borrow a lot of money, and every additional dollar paid in interest is a dollar not kept as profit. But perhaps worse, REITs tend to be priced relative to bonds. So rising bond yields (and falling bond prices) mean rising REIT yields (and falling REIT prices).

This latter point has been a particular worry since investors have come to view REITs as bond substitutes over the past few years. With bond yields too low to be worth considering, investors have been chasing the higher yields of other income sectors, particularly REITs.

Again, that’s the narrative. But is it actually true?

Well, let’s see. The following chart shows the performance of REIT stocks during periods of rising bond yields. The shaded areas represent periods in which 10-year bond yields were rising.

If the narrative you read in the financial press were true, you’d expect REIT stocks to tank every time bond yields had a significant bounce. But that is clearly not the case here. Of the six times since 1981 that we saw bond yields rise by a meaningful amount, REIT prices actually rose in three of them.

With President-Elect Trump pushing for large tax cuts and major new infrastructure spending, there’s a lot of worry in the market right now that outsized budget deficits will cause long-dead inflation to come back with a vengeance.

Don’t bet on it.

Let’s get serious. If large budget deficits were all it took to stoke inflation, then Japan – with the largest budget deficits in the world – would also have the highest inflation in the world. Suffice it to say, it doesn’t. Japan has been fighting deflation, not inflation, for three decades now.

And while I would love to get a tax cut, I don’t see it giving a major jolt to consumer spending. The cohorts most likely to have incomes high enough to benefit – baby boomers and early gen xers – have already crossed their peak spending years, so any extra cash due to tax cuts is likely to get saved or invested rather than spent.

The generation most likely to actually spend the money – millennials – is already paying close to zero in taxes at its current income levels, so it’s hard to see Trump’s tax plan having a major impact.

So, what’s next for REITs?

I’m betting that we see another repeat of the scenario we had a year ago. Then, as now, bond yields ended the year relatively high, and REITs were under pressure. But when yields started to ease, REITs enjoyed a spectacular rally.

It’s this exact outcome that we’re positioned for in Boom & Bust right now, and in my new retirement income service Peak Income.

In fact, I just gave Boom & Bust readers an attractive new recommendation that that will add a nice stream of income to their portfolios. And the best part? Due to the recent rise in yields, this investment has been sold off to very attractive levels. To see exactly what I’m talking about, check out the December issue now.

 

 

 

Charles Sizemore

Portfolio Manager, Boom & Bust

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The Next Best Thing to Mr. George’s Magic Ticket

There’s a man in France who owns what the Financial Times is calling a “magic ticket.” In their words: “It lets him turn back the clock, to invest with perfect hindsight week after week, steadily accumulating a fortune.”

Sounds like a sweet deal, no?

In 1987, Max-Hervé George’s father bought a life insurance contract from Aviva France. But this was no ordinary life insurance contract.

For some reason – which is still lost on me – the insurance company offered a contract that allows the purchaser to buy into any investment fund of his choosing, on Friday, but at the previous Friday’s prices.

Did you catch that?

He gets to pocket the investment returns… of last week’s top-performing fund… after the performance of all available funds is known.

“So you say Chinese stocks did the best last week? OK… I’ll buy those… at last week’s prices, please and thank you very much.”

Mr. George has reportedly exercised his contractual right with fervor, profiting from last week’s winners, week after week, earning an unimaginable 68% per year!

The story is truly remarkable. And if you think Mr. George’s deal is “too good to be true,” you’re more or less correct.

The insurance company offered these “magic ticket” contracts to a very small group of wealthy clients (who, back then, had to visit the broker in person). They have since bought out most of the contract holders. And they’re fighting Mr. George’s contract in court, since he (wisely) refused to sell it back to them.

Suffice it to say, YOU will NEVER be able to buy a “magic ticket” quite as nice as Mr. George’s.

But I think I’m on to the next best thing with the latest trading strategy I’ve developed…

For all the complexity in financial markets, your ultimate goal as an investor is actually quite simple:

Invest in high-returning assets (typically called “risk assets”), but only when it’s worthwhile and safe to do so.
Avoid risk assets when it’s NOT safe to own them.

To me, a market-timing model that tells you when to be IN risk assets… and when to be OUT of them… well, that’s the next best thing to Mr. George’s “magic ticket.”

And I believe I’ve developed a strategy that does just that.

Take a look at this chart…

It shows the annualized returns of a variety of risk assets – stocks markets, in general, but also highly volatile sectors, like biotech, along with junk bonds.

But these are not buy-and-hold returns.

Since my market-timing model very simply tells me when to be IN risk assets and when to be OUT… I can segment the performance of any market, according to the signal provided by my model.

In blue, you’ll see the annualized returns of each asset while my system says it’s SAFE to be in them.

In red, I’ve plotted the annualized returns generated while my system said it’s DANGEROUS to be in them.

Now, most investors intuitively understand that it’s no easy feat to “time” the market. And unless you have a magic ticket like Mr. George’s… no market-timing model will get it right all the time.

But getting it right most of the time, combined with good risk management, is more than enough to beat buy-and-hold returns and accumulate a considerable sum of money.

I’m sure you’ll agree that if you could capture, say, 80% of the returns during the “good” times… and avoid, say, 80% of the losses during the “bad” times… you’d stand to do quite well!

That’s essentially the aim of my latest research project, which I’ve been working on for the better part of the past two years. I’ve developed a market-timing model that very simply tells us when to “buy” and when to “sell.”

The project has been so successful that we’ve just closed the doors to our first round of founding-member invitations. If you missed the chance to join in, don’t worry – we’ll be offering access to this strategy in the Spring of 2017. And I plan to share with you more details about this strategy in the weeks and months ahead.

In the meantime, you can read more about my views on the “Active vs. Passive Investing” debate here.

And you can read the full story of Mr. George’s “magic ticket” here.

 

 

 

 

Adam O’Dell

Chief Investment Strategist, Dent Research

P.S. Have you heard about the Network? It’s our highest level of membership here at Dent Research, and with it, you never need to sign up to receive any of our latest projects. You’re simply sent the first issue of each new service (such as my new market-timing strategy), along with any related materials, right from Day 1.

Access to the Network isn’t granted very often, but I’ve just been told that a limited number of spots will be available for purchase later this month. If you’ve been thinking about joining the Dent team, you won’t find a better opportunity than this to receive all of our latest research. Stay tuned for more details.

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Who’s On Deck at the Fed?

You may remember that in early September I wrote about the Federal Open Market Committee (FOMC) – basically, the Fed officials who vote on monetary and interest rate policies, which govern a massive part of our economy. They try to guide our economy through the booms and busts of business cycles (how well you think they do that probably depends on how your portfolio looks).

These all-but unknown folks have their hands on the levers of the economy, so I took a look at the FOMC voting member backgrounds and asked: what qualifies these people to decide if savers get punished with lower interest rate payments or borrowers get access to loans with reasonable repayment terms? What qualifies these Fed officials to tinker with the value of the U.S. dollar by experimenting with unproven academic theory?

After eight years of tinkering and experimenting with tools that created asset bubble after asset bubble, these policies haven’t magically created jobs or corporate revenues. They have made it far too easy for companies to buy back their own stock, which in turn makes it look like those companies are more profitable – and all while fueling a stock market bubble for good measure.

So with a new U.S. President-elect, what will the Fed look like in the near future? Will Trump try to fire Fed Chair Yellen? Will the new appointees really make any difference at the Fed? Let’s take a look at who’s on deck…

The voting members are split into two groups: the Board of Governors (BOG) who are political appointees, and regional Federal Reserve Bank presidents. In my last article, I highlighted the backgrounds of the 2016 voting members. Since the BOGs are appointed to 14-year terms, nothing is due to change until 2018.

Sure, the new president-elect could ask for Janet Yellen’s resignation but her term as Fed Chair is up in early 2018 anyway. He might want to focus on getting his picks on the BOG first since there are two vacant spots that need to be filled and confirmed by Congress. My guess is that she serves out her term as Chair and resigns from the BOG in 2018 (her term on the BOG is up in 2024).

Stanley Fischer’s term as Vice Chair is also up in 2018, which only adds to Trump’s potential influence on the Federal Reserve and monetary policy. He will appoint a new Fed Chair and Vice Chair in 2018 and then will most likely need to appoint two new members of the BOG. Fischer and Yellen will most likely leave the Fed (if they stay until 2018) so, Trump will need to appoint four voting members of the FOMC within a year (including a new Chair and Vice Chair).

William Dudley, President of the Federal Reserve Bank (FRB) of New York is a permanent voting member of the FOMC as long as he is president. While he holds a Ph.D. in economics, he has actual banking experience with Goldman Sachs and Morgan Guarantee.

The other three BOG appointees have terms that expire in 2022-2028 so unless Trump get re-elected, he’s stuck with them.

The incoming voters (January 2017) from the regional Reserve Banks mostly come from academic backgrounds – Charles Evans (President FRB Chicago) and Patrick Harper (President FRB Philadelphia – but there’s some real-world experience sprinkled in there). Robert Caplan (President FRB Dallas) got his MBA from Harvard but was also a big-wig at Goldman Sachs and served on several corporate boards. Neel Kashkari (President FRB Minneapolis) got his Ivy-league MBA from the University of Pennsylvania and cut his teeth at PIMCO and Goldman Sachs – he also established and led the Office of Financial Stability and oversaw the Troubled Asset Relief Program (TARP) under Presidents Bush and Obama.

So, of the known ten voters on the FOMC in 2017, not much has changed. Five voters are politically connected, not including Chair Yellen or Vice Chair Fischer who are as well. Four have actual business experience and the rest have academic or legal backgrounds.

But why does it even matter? The Fed isn’t influenced by politicians! Except when they are.

Congress overseas the Federal Reserve System and its entities, which include the BOG (who are appointed by the President and confirmed by Congress), the FOMC and the Federal Reserve Banks. The Board of Governors is an independent agency of the federal government but isn’t influenced by political considerations, or so they say…

The 12 Regional Federal Reserve Banks are organized like private corporations because they’re separately incorporated and have their own board of directors. But ultimately, the Reserve Banks don’t operate for profit and member commercial banks are required to own a certain amount of stock in their district’s Reserve Bank. Also, by law, the Reserve Banks are required to transfer net earnings (after expenses, dividend payments, and required surplus fund) to the U.S. Treasury.

In fact, over the last two years the Fed has transferred over $200 billion to the U.S. Treasury! Maybe the Fed considers itself “politically independent” but I doubt if our political leaders do.

If the Fed hikes rates too rapidly, interest on the U.S. debt will explode and cut into government fiscal budgets. If the Fed tapers their $4 trillion U.S. Treasury bond holdings, the transfer payments to the U.S. Treasury will decline as well.

We’ll soon find out who Trump will appoint to the Board of Governors and who he will replace the Chair and Vice Chair of the FOMC with. I hope his appointees will include persons with practical business experience and an understanding of how the economy functions. It might be telling that his frontrunner for the Treasury Secretary gig is a former Goldman Sachs banker, movie producer, and hedge fund manager with no governmental experience. This approach could translate into a Fed that knows its limitations and actually operates in the publics’ best interest!

In the meanwhile, the political pressure will continue to stay on the Fed until the federal government gets its fiscal house in order. Unfortunately, the Fed has proven its policies are a failure and fiscal reform by our government is pure fantasy.

Whoever Trump appoints and whatever the Fed may or may not do, ultimately doesn’t really matter. Overreaction to what happens in long-term Treasury bonds is one way Treasury Profits Accelerator subscribers continue to profit.

 

 

 

 

Lance

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Closed-End Bond Funds are Ripe for the Picking

You really can’t beat getting a dollar for 90 cents. Unless, of course, you manage to find one for 85 cents.

While deals like that really shouldn’t exist in the real world, they’re actually pretty common in the closed-end fund (CEF) space. And today, some of the best bargains can be found among the safest and most conservative CEFs – those investing in tax-free municipal bonds.

Right now, you can put together a portfolio of funds offering an immediate 6% tax-free yield, plus the opportunity for respectable capital appreciation.

Before I get into that, let’s do a quick review of what exactly CEFs are… and how they work.

Closed-end funds are a type of mutual fund that trades on the New York Stock Exchange (NYSE), so they look and feel a little like their cousins, exchange-traded funds (ETFs). With a traditional open-ended mutual fund, you invest by sending money directly to the management company, who in turn invests your cash in a portfolio of stocks or bonds. When you want your cash back, the manager sells off a small piece of the portfolio and sends you the money.

But with CEFs and ETFs, you have no direct transaction with the managers. They raise capital like a stock, via an initial public offering, and after that point they trade freely on the NYSE. So you buy from or sell to other investors rather than to the manager.

And here’s where that gets fun.

ETFs can never deviate too far from their net asset values (NAV) because large institutional investors have the ability to arbitrage those profits away.

For example, if an ETF’s share price were $20 per share but its underlying portfolio of stocks or bonds were worth $25 per share, the large institutional investor could buy a ton of ETF shares for $20, break the ETF apart, and sell the underlying investments for $25, making a risk-free profit of $5 per share.

With CEFs, that creation/redemption mechanism doesn’t exist, so share prices can – and often do – deviate wildly from their underling NAV.

And on top of that, CEFs generally have the ability to borrow, and it’s pretty normal for them to be leveraged 20%-40%. Funds with more conservative portfolios, such as those that hold muni bonds, tend to be leveraged a little heavier than those that hold more volatile securities like stocks.

So, let’s get back to those 90-cent dollars.

The election of Donald Trump has been great for the stock market so far. But it’s been an absolute death sentence for bonds… and particularly tax-free muni bonds. Bond yields were rising before the election, and they’ve shifted into overdrive in the weeks that have followed in the belief that Trump’s policies will stoke inflation and that his proposed tax cuts make the tax savings of muni bonds less attractive.

Well, rising bond yields mean falling bond prices. So, we’ve seen the NAVs of bond CEFs get absolutely clobbered, with many down by around 10%.

But remember, CEF prices often deviate from NAV… and that’s certainly been the case of late. Many bond CEFs have seen their share prices drop by as much as 15%-20%. CEF investors have done what they usually do… massively overreact to market moves. And as a result, they’ve set us up for a fantastic opportunity.

If you believe, as I do, that bond yields have gone too far, too fast and that yields are likely to ease in the coming weeks, then we could be looking at an ideal trading setup.

Let’s play with the numbers…

Today, you can put together a portfolio of muni bond CEFs yielding about 6% – that’s tax free. If you’re in the 35% tax bracket, that amounts to a tax-equivalent yield of over 9%.

Now, let’s say that bond prices recover half of their losses in the coming months. I think it’s likely they’ll recover more than that, but we’ll be conservative. In that case, we’d be looking at something in the ballpark of 5% in underlying portfolio appreciation and probably a good deal more.

And here’s where the 90-cent dollar comes into play. When investors see that bond prices have stabilized, I expect them to pile into CEFs again. After all, where else are they going to find a safe 9% tax-equivalent yield in this market?

When they do, you should see that discount to NAV shrink, or even disappear completely. That would add another 5%-10%.

So between the dividends, appreciation of the portfolios, and a shrinking of the discount to NAV, I believe total returns in the ballpark of 20% over the next year are likely.

And if I’m wrong?

Well, I console myself by collecting that tax-free dividend check every month.

 

 

Charles Sizemore

Editor, Peak Income

P.S. I’ve developed a new, income-driven service specifically designed to take advantage of these discount opportunities, putting money collected from dividend checks into your pocket each and every month. I consider it the ultimate “set it and forget it” investment opportunity… and I’m excited to finally share it with you. I’ll have more details for you in the weeks to follow, so make sure to keep an eye on your inbox

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Our Shopping Habits Say Something About Us

Thanksgiving is officially in our rearview mirror, and all I have to show for it is about five more pounds on the scale and a new belt loop going in the wrong direction.

I always tell myself before the fourth Thursday of November that I’m going easy on loading up the plate. But the sight of turkey, stuffing, and sweet potato casserole quickly drains out all the discipline the Marines has beaten into me over the years, as much as any enemy could.

Retailers are smart. They waste no time. The very next day, on Black Friday, and then Cyber Monday, they cash in on your post-Thanksgiving lack of self-control (and the dinner-table reminder from the day before that you need to buy holiday gifts for your family), with once-in-a-year door-buster deals.

Adobe’s digital marketing research group estimated that consumers spent $3.34 billion this Black Friday, which is a year-over-year 21.6% growth.

What’s startling, though, is online mobile sales accounted for $1.2 billion. That’s a 33% increase from the year before!

About 40% of all Black Friday sales were done via a smartphone or tablet. In fact, this Black Friday was the first day in U.S. retail history to earn more than $1 billion in mobile sales. How far we’ve come in just 10 years…

And this trend isn’t slowing down at all.

So much for burning off that turkey gut by fighting off fellow shoppers in the electronics section of your local retailer. Seems our thumbs get most of the workout now – scrolling through websites furiously to punch in credit card information.

I can’t help but think: Are we shopping smarter or just getting lazy?

It’s a combination of both. Technology has made us more efficient, but make no mistake, we’re downright lazy, too. Retailers, including companies like Amazon (Nasdaq: AMZN), are betting on it.

The company known mostly as a giant online marketplace – where you can get anything – is hoping to take advantage of our inner laziness, and get some more traffic to its site, by encouraging you to buy an Amazon Dash.

This little gem of modern engineering has one job only… to let you order more of your favorite products with a touch of a button, no matter where you are.

That’s right, the Dash is a one-button device that sticks to just about any surface and connects to Wi-Fi. Whenever you’re out of, or are getting close to running out of, a specific household item such as coffee or laundry detergent, press the button and Dash automatically places a refill order through Amazon.

You then get an order form on your phone to confirm the order. Good thing too, otherwise your small children could order up several hundred boxes of coffee in the mail. Imagine your surprise when you open that box!

It gets better. If you want to add some artificial intelligence to your car, look no further than the Dashbot, only this one isn’t an Amazon product.

This electronic wonder is reminiscent of the red light display and interactive voice control for Kit, the talking car from the 80’s television show Knight Rider, starring David Hasselhoff. (I loved that show! My ring tone, for probably a year, was the Knight Rider theme song. Turns out the show was way ahead of its time with the technology, too.)

The Dashbot plugs into the cigarette lighter in your car and connects to your phone via Bluetooth. For just $49 you can suddenly interact with your phone hands-free, so you can stay focused on the road and the maniacs all around you.

The coolest part of the Dashbot is that it leverages open-source code so the geeks out there can constantly customize its functions. That means it’s always evolving.

And, if you or your kid learn just enough of the Linux programming language, you too can hack this device for fun custom functions. Hopefully ones that don’t make you too lazy! After all, there’s that turkey-gut that needs some attending to and the best way to do that is to actually get off the sofa.

These devices are just the start of a tech revolution that’s changing our world, right before our eyes.

Until next time, stay frosty, and keep your kids away from the Dash!

 

 

 

 

 

Ben

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China’s Economic Imperialism Could Spell Trouble

In 2007, a Chinese company bought Mount Toromocho in Peru. That’s right. A mountain, in another country.

It’s more than half the height of Mount Everest, but aesthetic beauty wasn’t a factor. Beneath the mountain’s surface sits two billion tons of copper, one of the largest reserves in the world. Through a state-owned company, the Chinese government secured access to yet another natural resource overseas.

Over the last 20 years, the country has employed a kind of economic imperialism, buying minerals, farms, and water rights in far-flung places around the globe.

Now the country is developing the technical know-how of high-end production, which will allow the Chinese to complete another part of the manufacturing process domestically. With the resources and knowledge required for advanced production, China can slowly reduce its interdependence with the rest of the world.

China is big. The country represents 20% of the world’s population and 13% of its economy. When it comes to consuming commodities, the country is even bigger. China accounts for 60% of the world’s concrete, 48% of copper and coal, 30% of rice, and 54% of aluminum. Some of that is used for domestic consumption and building, while part of it goes into creating goods for export.

Given such a huge appetite, it makes sense that Chinese imports shot through the roof since 2000, increasing from less than $500 billion to almost $2 trillion in 2014.

But then something happened.

Chinese imports fell off a cliff, diving to $1.68 trillion in 2015, and have fallen further since then. Part of the trend reflects lower energy prices, while falling demand for Chinese exports is part of it, too.

But there’s no doubt that Chinese companies now buy more resources from other Chinese firms, even when the raw inputs themselves sit halfway around the world. By taking control of mines, farms, and deposits in South America and Africa, the Chinese have ensured willing sellers to meet their increasing demand.

What once appeared as trade when a Chinese company would buy natural resources on the open market, now shows up as investment when the same company buys the entire deposit.

At the same time, Chinese companies are quickly building expertise in high-end manufacturing. Companies historically would buy Japanese or South Korean steel and ship it to China to be used in production, because locally produced steel held too many imperfections. That’s no longer the case.

With each passing year domestic Chinese companies are capable of producing higher-quality chemicals, like silicone-based coatings, and are undercutting international competitors. The annual value of China’s high-tech and new-tech imports peaked in 2013 and have fallen in successive years.

None of this means that China will be economically independent from the rest of the world in the months or years ahead.

The country remains the largest exporter on the planet by far, shipping $2.3 trillion worth of goods and services overseas, easily outpacing the next closest exporter, the United States, at $1.6 trillion. China’s business model requires the rest of us to buy the stuff they make, and they need the foreign currency to buy food, energy, and other necessities. But the trend is obvious, and can lead to problems as the global economy slows down.

If economic cooperation drops – and a globalization retreat is something Harry has talked about in recent weeks – then economic sanctions and other trade-related repercussions have less influence. The Chinese could become more aggressive in their quest to control the South China Sea. Or worse, they react badly when they have an issue with one of their foreign holdings.

Eventually, somewhere on the planet, a government will decide that the sale of a natural resource to the Chinese by a previous administration was a bad idea. This will lead to nationalization or appropriation of the resource, like Peru taking back Mount Toromocho (which I do not expect; it’s just an example).

With greater independence from the rest of the world, the Chinese might be more inclined to use force when compelling the foreign government to uphold its end of the bargain. Depending on the country involved and the treaties signed, this could very well lead to a conflict that we all want to avoid.

The point is not to hold up Chinese development or the country’s pursuit of resources, but simply to acknowledge that, just as there is a cost to deep integration, there is also a potential cost to disengagement… particularly when the other party has the world’s second-largest economy, and is the most populous country on the planet.

 

 

 

 

Rodney

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Why Gold Isn’t Rallying After Trump’s Win

Even though the markets haven’t behaved logically of late, it would have seemed a slam dunk for gold to rise if Donald Trump won. After all, we faced uncertainty around his policies, rising inflation from infrastructure spending, and higher expected growth rates.

But instead, gold has headed back down more sharply. It had its initial rise in the futures market when Trump looked like he was going to win. But since then, it’s reversed course – the opposite of the stock markets.

While I’ve been saying for a long time now that gold still has a lot to lose, a new and interesting dynamic has arisen to add more pressure to the downside.

Before I explain, let’s first look at the chart pattern here…

This pattern suggests that the rally from late 2015 had seen a clear a-b-c bear market or corrective rally – I’m talking in Elliott Wave language here – just as I’d forecast to around $1,400.

The next stop, coming from strong support in the 2008 mini-crash, is around $700 and it looks like this move is already well into motion!

A slowing economy, with deflation, would be the biggest reason for gold melting to that level. The fall since the election would suggest such deflation is not very far away.

But, as I hinted earlier, there’s another reason for the sharp decline in recent weeks…

And that reason is: India.

India and China are the biggest buyers of gold, together consuming about 50% of the total. That dwarfs developed countries like the U.S., central banks and everyone else. China’s still the biggest player in the gold market, but Indians are second at 700-800 tons a year. They’re much poorer than Chinese, but they spend a higher percent of their income on gold! They wear the stuff in places we can’t even imagine.

Now a new reason for Indians to buy gold like it’s life-sustaining water has come to light: to launder money from illegal and underground businesses that make up 20-25% of their economy. And of course, they do that with larger bills as all money launderers do.

Well, the Modi government just forced the exchange of all 500 and 1,000 rupee bills ($7.50 and $15.00, respectively) to clamp down on these illegal businesses. And gold has declined steadily since. There’s far less money that’s easy to lauder. Gold imports are down 59% year-to-date from the same period last year.

The India Bullion and Jewelers Association is now warning its 2,500 members that Modi may even ban gold imports for a time to squeeze out these illegal activities even more. Just imagine what that would do to the price of gold!

Gold $700, here we come.

The Commitment of Traders Report shows that gold likely peaked back in early July of this year and has a long way down to go.

The dumb money or large speculators were net long 310,000 contracts right near the top and are still long 180,000. They’ll have to go all the way to the other side of the trade and get net short something like 300,000 before this next major move down is over. Hence, gold could easily drop to $700 over the next year or so.

Likewise, the smart money or commercials were net short at the recent top and are still 200,000 net short. That’s also a long way to go before they become 300,000 or so net long at the next major bottom as they are always right at extremes.

In short, I reiterate my warning to sell gold. I said to do so just before the top in 2011 and on the exact day of the silver top, and again recently when we got near that $1,400 target.

I’m saying it again now for those that did not heed – and I understand the natural emotional attachment to gold – but that just won’t hold in this deflationary environment as gold is primarily an inflation hedge, and yes, a commodity driven by consumption from consumers like the Chinese and Indians.

Modi’s potential impact on gold is the most urgent reason to sell yet. Don’t wait until his policy announcement in case it occurs. Gold could shed $200 in a day or two. Cut your losses now!

 

 

 

 

Harry

 

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Life’s Too Short to Lose Your Head in a Walmart Parking Lot at 3 A.M.

I like saving money. A lot.

In fact, I’m a cheapskate and actually take pride in my stinginess.

But you won’t see me fighting the crowds on Black Friday. Not going to happen. Life is far too short to explore the depths of human misery that I see on display the Friday after Thanksgiving every year.

Lines forming the night before…

Elbows flying…

Fighting over boxes with fellow shoppers…

The vulgarity of it all.

No, whatever money I would save isn’t worth the lifetime of bad karma I’d provoke fighting for a space in the mall parking lot.

Still, if you’re in the retail business, Black Friday matters because it gives you an indication of what to expect for the remainder of the holiday shopping season.

Nearly a third of all retail sales happen in the month between Thanksgiving and Christmas. So if sales bomb on Black Friday, it can be a bad sign of things to come.

Interestingly, “Black Friday” is something of a changing concept these days. Stores desperate for a finite number of customer dollars have been opening earlier and earlier, and now Thanksgiving Thursday itself is a major shopping day.

And of course, Internet shopping has also taken some of the sense of urgency out of the whole endeavor.

Nevertheless, you’re going to be blasted with Black Friday news stories over the next several days.

Black Friday sales growth has been somewhat sluggish since 2008, but if 2016 to date has been any indication, then I’d expect some surprises this year. With a new president promising to “make America great again,” consumers might – just might – open their wallets a little wider this year.

But I’d be very careful about drawing meaningful conclusions from any reports you read between now and Christmas. Because while Black Friday spending is a big deal for mall retailers, its overall effects on the economy are a lot smaller than you might think.

Much of what gets purchased during the holiday shopping season is fairly cheap and disposable. We’re talking about clothes, toys, and consumer gadgets that tend to get used for a year or two and then get tossed. But what really supercharges the economy are big-ticket items typically purchased on credit.

Think about it. When you buy something on credit, you’re essentially spending tomorrow’s money today. So big-ticket items are like throwing gasoline on the fire.

Well, growth in this segment of the market has been tepid for a long time.

Consider the following chart, which tracks orders of consumer durable goods. These are items expected to last three years or more, such as appliances, furniture, large electronics, etc.

As you can see, growth was robust and steady throughout the 1990s, eased during the 2000-2002 slowdown, and then rocketed even higher until 2008.

Of course, orders absolutely collapsed during the Great Recession that started that year. But the most interesting part is what happened after that.

Durable goods orders enjoyed a nice recovery once the economy came out of deep-freeze. But then in 2012, they flatlined. And they’ve been grinding sideways ever since.

What’s the story here?

Part of it is housing. The housing boom of the 2000s created massive demand for appliances. You have to have something to fill up that massive McMansion, after all. And as home-buying has been sluggish since 2008, so has been the buying of consumer durables.

But there’s a much bigger factor at work here, and that’s demographics.

The baby boomers are done buying durables. Sure, they might replace a broken refrigerator now and then. But few of them are furnishing a new house. In fact, many are actually downsizing and even giving away furniture they no longer need.

Meanwhile, the millennials have been slow out of the gate to start families and buy homes of their own. And millennials that are starting families tend to be more fiscally conservative than prior generations. For all the flack that millennials take – and hey, a lot of it is deserved – their fiscal conservatism is actually pretty admirable.

The problem, as I wrote a few weeks ago in “The Paradox of Thrift,” is that what’s good for the individual family – discipline and thrift – is bad for the economy as a whole, at least in the short-term.

So, millennial reluctance to spend like older adults is still a major headwind for the economy… and a reason that growth has been so lackluster for several years running. And according to Harry’s research, we’re probably a good four or five years away from that materially changing.

So, regardless of what Black Friday looks like this year, try to keep a level head. We’re not likely to enjoy pre-2008 levels of growth any time soon.

And as for Black Friday itself… don’t debase yourself by fighting with the unwashed masses for that last bargain-basement blender on the shelf. That’s no way to live your life.

Stay at home, eat some pumpkin pie and spend some time with your kids. Or at least relax and watch some football.

 

 

 

Charles

 

The post Life’s Too Short to Lose Your Head in a Walmart Parking Lot at 3 A.M. appeared first on Economy and Markets.

This Thanksgiving, Don’t Regret Missing Personal Time

This month I received a jolt to my system, and I’m not talking about the election. The day before voters elected Donald Trump the next president, my brother died of brain cancer. He was diagnosed in February of 2015, and exhausted all treatment two months ago.

He was 53.

We weren’t especially close for much of our adult life, but we weren’t distant, either. From the late 1990s through the 2000s, his work and family commitments carried him just outside of our normal circle.

There was no recrimination, no ill will or falling out to reconcile. Just the normal ebb and flow of life on which he drifted further away. We’d catch up every few months, and see each other once a year… or maybe once every two years.

During the same timeframe, other members of the family grew a bit closer, making my brother’s absence more noticeable. We talked about it, and I even discussed it with him from time to time. And yet, things remained the same.

Then came 2013.

That was the year that my sister, brother and I were responsible for hosting a family reunion. This side of the family includes a lot of aunts, uncles and cousins that we rarely see. But we are always glad they come.

We have a reunion every three years, and the burden of hosting passes down through the family tree. They tend to be raucous affairs with a lot of laughter and late-night parties. They also take a lot of coordination.

As the three of us worked on preparation, we talked often. In the days before the reunion and during the event, we spent a lot of time together, reconnecting and generally enjoying each other’s company. Maybe we should have done that sooner, but at least we took the opportunity when it presented itself.

This led to more conversations and connections in the following months, including visits. We were back together. Still, there were no hatchets to bury, no issues to resolve, just a distance that we bridged.

His diagnosis in February 2015 hit like an avalanche. We dealt with the usual questions…Why him? Why so young? Why couldn’t modern medicine cure it?

But luckily we avoided one common emotion – regret.

The two years of closer contact that we enjoyed before his diagnosis put us in a good place. We were able to jump in and help with his care without it being awkward. We flowed in and out of his home, where his gracious wife dealt with a constant parade of characters.

Both in the early stages and the last stage of his life, many of us had the chance to be with him.

For those moments with him, I am truly thankful.

All of us have the most precious commodity – time. We can take the opportunity today, or any time during the holiday season, to reconnect with those who might have drifted out of view for no particular reason. By rekindling that relationship, we’ll pick up one of the more rewarding things in life – a personal bond.

May your season of Thanksgiving be blessed with personal relationships, new and old, that make you rich in ways that money never can.

 

 

 

 

Rodney Johnson

Follow me on Twitter @RJHSDent

The post This Thanksgiving, Don’t Regret Missing Personal Time appeared first on Economy and Markets.

Role Reversals Are the New Trend

Back on November 1, one week before the presidential election – what now feels like an eternity ago, in political-regime-change time – I wrote to Cycle 9 Alert subscribers about the market’s most dominant trends.

In short…

 

U.S. stocks lagged foreign stocks, with all markets showing lack of conviction;
The healthcare sector had been whacked down, but showed signs of strength;
And an inflationary and/or higher rates trend was taking hold; sending…

The U.S. dollar higher;
S. Treasury bonds lower;
And financial stocks higher.

I explained that with the Election Day result being so pivotal, many of the pre-election market trends I observed were at risk of reversing… with some markets reversing for the better and others for the worse.

Well, with what some might call the surprise of the century (Trump’s election), a careful analysis of pre- and post-election trends is a must-do exercise.

For a number of reasons, it’s wise to let the dust settle just a bit longer before ponying up fresh capital on trends that are just beginning to digest the coming Trump presidency.

Still, a hard look at the winners and losers of Election Day 2016 – (after Week 1, at least) – will point us toward market outperformers in the months ahead.

What follows, below, is a sampling of the type of broad market and sector analysis my Cycle 9 Alert readers receive on a weekly basis.

Let’s dig in…

U.S. Stocks Attract Wave of Risk Capital

I had said a week before the election that… “If this ‘hesitant’ trend reverses after the election, we could see a rather sudden wave of risk-seeking investment – essentially, money pouring into stocks.”

This indeed happened.

Reported inflows into U.S. stocks reached a multi-year record of $31 billion in the week following Trump’s victory.

U.S. small-cap stocks (IWM) surged 11% in the two weeks following Election Day – the strongest performance of any world stock index.

Meanwhile, Chinese (FXI) and emerging-market (EEM) stocks fell 2% and 6%, respectively. The brunt of emerging-market damage hit Brazil (EWZ) and Mexico (EWW), which sank 9% and 17% lower, thanks to Trump’s talk of disrupting trade agreements and norms.

These are complete reversals of pre-election trends. They show that whatever force was keeping investors out of the U.S. stock market has been alleviated. Money is pouring into risk assets… into U.S. stocks… and into small-cap U.S. stocks.

That’s a “risk-on” signal, for sure (for now).

Sector Analysis

The financial sector (XLF) has been the biggest beneficiary of the election result, up 12%. Industrial (XLI) stocks come in #2, up 6%. And the healthcare sector’s initial performance came in at a close third.

Within the healthcare sector, though, biotech stocks absolutely BOOMED after the election!

The SPDR S&P Biotech ETF (NYSE: XBI) jumped a whopping 18% in a week. That’s the absolute best post-election performance of all industry groups (or sub-sectors) that I track in Cycle 9 Alert.

And not so coincidentally, I already had my Cycle 9 Alert subscribers positioned in a bullish (and quite lucrative) biotech play ahead of the election. We locked in a fat, double-digit profit just a week after.

Elsewhere, you can’t ignore the ripping performance of financial stocks. Bank stocks (KBE and KRE) are up 16% to 18%… capital market (KCE) stocks are up more than 13%… and insurance (KIE) stocks have gained 8%.

Financial stocks were outperforming before the election result. So their strong post-election performance is a continuation, not a reversal, of the current trend.

The outperformance of financial stocks may be forecasting high expectations of a December Fed rate hike (higher rates mean fatter margins for banks). Or, it might be reflecting an expectation that Trump will deregulate and let the banks do as they wish (the SEC Commission Chair has just stepped down and some speculate Trump won’t bother replacing the post).

Either way, bank stocks have been and continue to be on fire!

Rates and Dollars

The U.S. dollar was strong heading into the election… it continues to climb post-election.

U.S. Treasury yields were climbing heading into the election… and they’ve continued to climb post-election. [Note: yields are climbing, therefore bond prices are falling.]

This continued strength in the “higher inflation/rates” trend is a must-watch.

For one, it’s a departure from the dominant trend of the last two years. Throughout 2015 and 2016, the U.S. dollar has languished sideways. And since 2014, following the “taper-tantrum” of 2013, 10-year Treasury yields steadily drifted lower, falling from 3% to 1.3%.

Now that the U.S. dollar and Treasury yields are surging higher, nearly all current market trends can be called into question, since the future returns of nearly all financial assets, in one way or another, are dependent on the level and direction of the U.S. dollar and U.S. interest rates.

In this brave new world, I think having a time-tested investment strategy like Cycle 9 Alert is an absolute must,

It’s a brave new world, and only time will tell how these trends will shake out. In the meantime, make sure to tune into your Cycle 9 email each week to see how I’m playing the markets to my advantage.

 

 

 

 

Adam O’Dell

P.S. Watch out for an email from me on Friday. I’ll be giving you the details to my brand new research service that allows me to turn $100,000 into $1 million. For a very limited time, I’ll be offering you a year’s subscription to Project V absolutely free. More details to follow.

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