Nov. 18, 2013

A good market technician will ignore all the fundamental arguments of why an investment should go up or down and focus solely on price. The basis for this is that all “fundamentals” should be built into the price of an investment.  In today’s world where information is available, almost instantaneously in fact, this reasoning has a sound foundation. I have been preaching fundamentals for years and have found out while they do matter in the long run, the short term on-the-other-hand can provide a completely different outcome. Starting with no bias or fundamental beliefs, thus weekend I took a long term look at two US stock indexes, SP500 and the Nasdaq and the results surprised me.

Below is the SP500 index sporting a very nice looking slanted inverse head and shoulders pattern which has a projected target of 2111, which is an increase of 19% from last Friday’s closing price

The NASDAQ has the exact same setup but a projected target of 4433 which is 11% higher from here.

While I am by no means predicting the future, I wanted to take an objective look at “possibilities” for the chance for further upside and if it existed, how much further.  What I discovered is the market has much more upside than I thought possible, so I need to adjust my views accordingly. By no means if we push higher and hit my targets or even go beyond do I believe it will be a straight moon shot there. I would expect to see the normal ebbs and flows of prices with the possibility of a short term correction (10% or less) between now and then.  In spite of the gamut of negative fundamental arguments (most of which I have addressed before), price says we have more upside.

Nov. 11, 2013

In Chile, a major study shows the nation's private retirement accounts provide worker’s pensions worth 87% of their salaries, 73% of that from profits on savings. The story was front-page news in Chile's largest newspapers, El Mercurio and La Tercera, on Sept. 3, a powerful affirmation of what former Republican presidential candidates Newt Gingrich and Herman Cain called "The Chilean Model" of private retirement accounts. The study of 28,000 households by Dictuc, a consultancy affiliated with the Catholic University of Chile, showed that male workers who contributed just 10% of their salaries to their retirements for 40 years or more on average earned retirement checks worth about 87% of their top salaries. No 401(k) account needed. This is because in 1981 Chile Labor Minister Jose Pinera replaced the country's bankrupt social security system with this famous system of private accounts. It redirected workers' existing social security taxes to a new market-based system of investing choices that let workers make their own decisions in a program run by private companies.

The Dictuc study shows Chile's private pensions over three decades have yielded returns six times higher than what workers got under Chile's old social security system — which, by the way, was similar to ours. The study shows that saving for retirement through the market is actually far less dangerous than relying on the government for pensions. Workers' returns on Social Security in the U.S. for those currently retiring is zero. For workers just starting their careers, the return is forecast to be negative as the trust fund goes bust.

More to the point, anyone who has to live on Social Security income alone is condemned to a life of poverty on those returns. The only alternative is for workers to double-down by opening 401(k) or IRA accounts.

Some 30 nations have adopted a version of Chile's private system. But in the U.S., detractors have warned that markets are far too dangerous to entrust workers' pensions to them. The details of the Dictuc study shatter this pernicious myth: Data show workers earn an extraordinary 8.7% compound rate of return above inflation over a period of 32 years from the 10% of their salaries put away. The compounding means that 73% of the pensions workers retire on comes from profit made on investments, with only 27% coming from their actual contributions. Profits accumulate even through market downturns, as was seen in 2008, because cost-averaging of investments cushions the impact.

Financial markets will never fall to zero, as scaremongers warn, except maybe if Armageddon hit. And if that's the case, Social Security would go bankrupt right along with it. There would be no economy to support it. With Social Security's trust fund slated to go bust in 2035 (or sooner depending upon which report you believe), maybe it's time to start thinking about how the lessons of Chile can benefit American workers, too.

Oct. 28, 2013

For the second straight year, millions of Social Security recipients, disabled veterans and federal retirees can expect historically small increases in their benefits come January.  Preliminary figures suggest a benefit increase of roughly 1.5 percent, which would be among the smallest since automatic increases were adopted in 1975, according to an analysis by The Associated Press.  Next year's raise will be small because consumer prices, as measured by the government, haven't gone up much in the past year. The exact size of the cost-of-living adjustment, or COLA, won't be known until the Labor Department releases the inflation report for September. That was supposed to happen earlier this month, but the report was delayed because of the government shutdown. The COLA is usually announced in October to give Social Security and other benefit programs time to adjust January payments. The Social Security Administration has given no indication that raises would be delayed because of the shutdown, but advocates for seniors said the uncertainty was unwelcome.

More than one-fifth of the country is waiting for the news.  Nearly 58 million retirees, disabled workers, spouses and children get Social Security benefits. The average monthly payment is $1,162. A 1.5 percent raise would increase the typical monthly payment by about $17.

The COLA also affects benefits for more than 3 million disabled veterans, about 2.5 million federal retirees and their survivors, and more than 8 million people who get Supplemental Security Income, the disability program for the poor. Automatic COLAs were adopted so that benefits for people on fixed incomes would keep up with rising prices. Many seniors, however, complain that the COLA sometimes falls short, leaving them little wiggle room.

Since 1975, annual Social Security raises have averaged 4.1 percent. Only six times have they been less than 2 percent, including this year, when the increase was 1.7 percent. There was no COLA in 2010 or 2011 because inflation was too low. The COLA is calculated by comparing consumer prices in July, August and September each year to prices in the same three months from the previous year. If prices go up over the course of the year, benefits go up, starting with payments delivered in January.

Advocates for seniors say the government's measure of inflation doesn't accurately reflect price increases older Americans face because they tend to spend more of their income on health care. Medical costs went up less than in previous years but still outpaced other consumer prices.

Oct. 21, 2013

As a part of our regular market analysis we continuously watch the internals to look for structural changes that may provide warning a change may be afoot.  Two of the “internals” we follow are the advance decline line and the number of stocks reaching all-time highs. The AD line measures the number of stocks that are advancing (going up) against those that are declining (going down).  It makes sense that over time the AD line must either rise or at least stay flat if the stock market (SP500) is going rise. A basket of stocks like the SP500 index can only continue to rise if the majority of the underlying stocks that make up the index are going higher.

In the chart below, the upper pane is the AD line while the lower pane shows the price movement of the SP500 (US Stocks) index over the past 15 years.  I have highlighted, in blue, areas where the AD line declined but the SP500 (US stocks) rose.  As you know by now, this is called divergence and when divergence raises its ugly head, it warns a change may be ahead. As you can see, we are in a period where divergence has formed --- prices are rising and the AD line declining. So why does this matter and why do I watch this so closely?  With further analysis you can see that every time this has occurred in the past, stocks declined.  Not immediately but they declined.  So this gets the hair on the back of my neck standing up and I need to look deeper for further confirmation.

Now let’s go to the second chart which shows the number of stocks that are reaching all-time highs in price (new highs) which are plotted in the upper pane. In the bottom pane I have, once again plotted the SP500 index price as my proxy for the US stock market.  This is not too different from the first chart because over time the “new highs” line must either rise or at least stay flat if the stock market is going rise. The stock market index can’t continue to rise over time if the number of “new highs” decline. Higher prices in the individual stocks are required for the index to make higher prices.  As with the first chart I have highlighted, in blue, areas where the “new highs” line declines but the SP500 (US stocks) rise.  As with the first chart, you can see it does a very good job at giving advance warning that a correction could be near.

While these “internals” are not perfect at predicting the future, they are very good at giving us an advance warning of potential struggles ahead. Unfortunately, while they do raise a warning flag they don’t give insight as to when it will occur or how big a correction to expect.  In as much as we already experienced a mild correction over the prior 2 weeks to the debt ceiling debate, the question that comes to mind is it whether that correction is the extent of it or do we have more to come?  While I have been burned before in being too bearish on my concerns of a top, I am cautiously optimistic we are near an end of this correction and the two cyclical, seasonal bullish trends will provide the support the market needs to move ahead through the balance of the year and pushing the potential for a much greater decline into the first half of next year.

Oct. 14, 2013

As the “negotiations” on the debt ceiling continue in Washington, this week’s post comes from the Pew Research Center where they put together a really nice piece called “5 Facts You Should Know About the National Debt”. With the Republican-led House engaged in a stare-down with Senate Democrats and President Obama over raising the federal debt limit, it seems an opportune time to dig into the actual numbers describing the national debt, the debt limit and interest payments on the nation’s credit line:

As of Sept. 30 the federal government’s total debt stood at $16.74 trillion, according to the Treasury Department’s monthly reckoning. Nearly all of it is subject to the statutory debt ceiling, which is currently set at a hair under $16.7 trillion; as a result, at the end of September there was just $25 million in unused debt capacity remaining.

The debt is about equal to gross domestic product (GDP), which was $16.661 trillion in the second quarter. (The government’s first read on GDP for the third quarter, which ended Sept. 30, isn’t due till the end of this month, but it likely will be delayed because of the federal shutdown.) Debt as a share of GDP has risen steeply since the 2008 financial crisis: Though U.S. government debt is perhaps the most widely held class of security in the world, as of the end of September 28.4% of the debt (about $4.76 trillion) was owed to another arm of the federal government itself. The single biggest creditor, in fact, are Social Security’s two trust funds, which together held $2.76 trillion in special non-traded Treasury securities (16.5% of the total debt). (Social Security revenues exceeded benefit payments for many years; the surplus was required by law to be invested in Treasuries.) The Federal Reserve banks collectively held nearly $2.1 trillion worth of Treasuries (12.4% of the total debt) as of last week.

In fiscal 2013, which ended Sept. 30, net interest payments on the debt totaled $222.75 billion, or 6.23% of all federal outlays. (The government paid out an estimated $420.6 billion in interest, but that included interest credited to Social Security and other government trust funds, as well as a relatively small amount of offsetting investment income.) By comparison, debt service was more than 15% of federal outlays in the mid-1990s; the share has fallen partly because lower rates have held down interest payments, but also because outlays have risen substantially: up 39.4% over the past decade. Largely due to the Federal Reserve’s aggressive efforts to keep interest rates low, the U.S. government is paying historically low rates on its debt. In fiscal 2013, according to the Treasury Department, the average interest rate on the public debt was 2.43%. Though you might think such low rates would dissuade investors from buying U.S. government debt, demand has until recently remained strong. But the ongoing debt crisis may be changing that, especially for short-term securities.

BONUS FACT: Though many people may believe that “China owns our debt,” as of July (the latest month available) China’s Treasury holdings amounted to about $1.28 trillion, or 7.6% of the total debt. China is, however, the United States’ largest overseas creditor, ahead of Japan, which holds more than $1.1 trillion in Treasuries