Asset Allocation and Re-Balancing

Updating Saturday and Wednesday.

A good friend and reader sent me an email and asked a most interesting question about “re-balancing” your portfolio.  I thank her for a great question, and encourage all of my readers to interact, send in questions or make comments like Abraham does.  I think that will keep us all thinking, and hopefully having fun!

Rebalancing is an activity that you would do periodically, IF you believe that an ASSET ALLOCATION strategy is important to your financial plan.  Conversely, if you don’t believe in “asset allocation”, then you don’t have to worry about rebalancing.

Asset allocation is a form of diversification, meaning “don’t put all of your eggs in one basket”.  Diversification means putting some of your assets in multiple asset classes (stocks, bonds, real estate, gold, international, etc.), but it does not specify how much of your assets to put in each category.  The theory is that usually not all asset classes go down together.  By diversifying across asset classes, if the stock market goes down, the Fed will lower rates and your bonds should go up (be careful, when the Fed is raising rates, your bonds will go down).

Asset allocation models are a form of diversification where specific percentages are targeted to be held in certain asset classes.

Example:

2016 08 31 Asset Allocation Example

We begin with a traditional 60% stock / 40% bond allocation.  In the next year, stocks gained 20% and bonds only gained 5%.  The total weight or percentage of the stock component of your portfolio is now 63% of your portfolio, and the bond component has shrunk to 37%.  In one year, this is not a big deal, but after 3 or 5 or 7 years, one could get substantially out of the 60 / 40 asset allocation, if one thought it was an important part of your investment strategy.  You would then sell some on your stock holdings and buy bond holdings with the proceeds, to rebalance your portfolio back to the model of 60% stocks and 40% bonds.  That’s it, asset allocation and rebalancing.

I have seen some models where the asset allocation varies with one’s age, for example:

Age                                      Stock     Bond

  • 20’s                                90%        10%
  • 30’s                                80%        20%
  • 40’s                                70%        30%
  • 50’s                                60%        40%
  • 60’s                                40%        60%
  • 70’s                                30%        70%

That’s a nice simple model that looks somewhat reasonable.  It assumes that the stock market will rise in the long run, and even if it takes a drastic tumble (and you hold your stocks like your brokerage house advises, which enriches them and not you, they take their 1% management fee out of your mutual fund whether it goes up or down!), you will have time to recover, and you will still come out ahead of holding all bonds.  The reason you reduce your stock holdings over time is that the recovery time can be very long (many times 10 years to get back even), and older folks don’t have that much time to wait on the recovery.

I AM NOT A FAN OF ASSET ALLOCTION STRATEGIES THAT IGNORE THE MUCH MORE IMPORTANT IMPERATIVE OF MANAGING YOUR ASSET ALLOCATION TO THE VALUATION LEVELS OF THE MARKETS YOU PARTICIPATE IN, usually the stock and bond markets, but sometimes the real estate and gold markets.

Valuation levels always trump asset allocation models.  Worry about the valuation level of the asset you are buying first and foremost, and pursue an asset allocation model as a secondary objective.

Right now, bonds offer little value.  A 10 year treasury bond is priced sky high and offers a historically low yield of 1.5% a year for the next 10 years.  That would be like buying a house at the peak of the housing bubble, which did not work out well over the next 10 years.

The bond market is so highly manipulated by the central banks around the world right now that I just don’t trust them.  I have been wrong about bonds for a good 5 years, but I’m ok with that, and I won’t be wrong forever.  I can make money in the stock market.  With Japan and Europe forcing interest rates negative, money from international is moving to the US for our low yields, which look good to them.

Why would anyone sell stocks and buy bonds right now, when bonds offer the lowest yield and highest price point in history?  This does not make sense to me.  If you were in the housing market, would you rent (time out) for a couple of years and wait for the bubble to pop, and buy a house when prices return to more traditional valuations?  Hopefully so.  In the financial markets, the equivalent would be to go to the money market (time out) for a couple of years (or 1 year CD’s, or 1 year treasury bill, definitely NOT short term bond funds).

What good would it possibly do you to buy into an asset class that is over-valued and on its way down, for the purpose of achieving diversification?  I was almost 100% in bonds from late 1999 to 2010 and did very well preserving assets and making some money.  Others did better if they were nimble enough, but for working full-time I picked a good asset class to ride out the carnage.

I have a few individual bonds, but they were bought in the 1990’s and early in the 2000’s back when bonds had value for the long term.  These are tax free municipal bonds that yield 4-5% and they have proven safe.  I don’t hold any out of California or Illinois because I have not trusted their deficit spending profile for decades and all of my bonds are bought to hold until maturity.  Looking back, maybe I should have bought more bonds when I did.  However, I could not foresee this economic collapse and the extent and duration of FED intervention in the bond market, which has now driven bonds to an extreme of over-valuation (unless you can hold the bond until maturity and be satisfied with the yield you are receiving).  I did not foresee that I would have to shape up my portfolio to retire 15 years ahead of time.  Thinking about it now, I don’t think it was a big mistake on my part necessarily, as I think the condition we find ourselves in was UNFORESEEABLE.  I thought I could always get a 5 year CD yielding at least 4%, and I was wrong.  At this point I do not want to compound the situation by making another mistake.

There are a number of mutual funds called “balanced funds” and they attempt to do some asset allocation for you.  By their charter they are required to hold some in bonds and some in stocks.  Their charter may require that they hold between 30-50% in bonds and 50-70% is stocks, so they have some latitude.  They may have flexibility to invest up to 30% of the funds internationally.  I am not a fan of those funds when they are required to hold at least 30% in bonds and bonds are not a good value (at least not US Treasury bonds).

I am a fan of diversification, but I advocate achieving that diversification over time, acquiring the assets in a class when that class represents a good value, then holding the asset.

I don’t think you should try to achieve diversification overnight if that means buying assets in different asset classes, some of which are clearly not a good value today.

Sometimes we may find ourselves where NO asset class represents a good value.  In that case we have to just wait until good value appears.

Technicals:

There is no change is the picture below.  The market had a nice run from the Brexit low in late June up into late July, and I called that well if you go back and read my comments in late June and late July.  The market became overbought so I sold out, and I did not miss much runup, but I protected myself from any loss.  Now I’m sharpening my buy list for the next pullback, whenever that is.

Oil has been weakening and with it the oil companies.  Oil is down from 53 to 45 over the last couple of months, as the summer driving season comes to an end.  This is from the latest EIA petroleum status report: “A rise in inventories is making for a drop in oil this morning. Oil inventories rose 2.5 million barrels in the August 19 week”.  It may take another month or two, but I’ll be watching.

The domestic banks have picked up recently, based on anticipation of the Fed raising interest rates, which would help banks with their “net interest margin”, the spread between their borrowing cost and lending rate.  When rates are a little higher, spreads can grow a bit, and banks make more money.

We see below that both the RSI and MACD are still declining, indicating market complacency or weakness, but not weak enough to entice me in yet.  I remain on hold.

2016 08 31 rebalancing sp

If you enjoy these updates, please tell your friends and family who are interested in the stock market about this blog.

Your comments and questions are always appreciated, so feel free to comment using the “Leave a Comment” feature just under the title of the post!

Remember the “Glossary” is at the top of the blog if you want to see what some terms mean.  If I need to add terms to the glossary, you can email me, email address is at the top of the “About” page, at the top of the blog.  I enjoy hearing from my readers!

If you would like to receive a “reminder” when I make a new update, if you send me your name and email address to sharplet@gmail.com .  I will send a notice on email when I make new posts.

Rich Comeau, Rich Investing

Yellen’s Speech

Updating Saturday and Wednesday.

Economy:

The Manufacturing PMI Flash, which is based on a nationwide sample of manufacturers, slowed by 8 tenths in the August flash to 52.1, a reading only modestly above breakeven 50 to indicate no more than limited expansion in composite activity.  Markit’s PMI service sector flash sample continues to report very flat rates of growth, at a composite index of 50.9 for the August flash which is 5 tenths lower than final July number.  Volatility is the name of game for the new home sales report where July’s headline surged, up a monthly 12.4 percent to a 654,000 annualized rate.  The surge in sales is getting a big boost from seller discounting as the median price fell 5.1 percent to $294,600.  Sales of existing homes slowed to a 5.39 million annualized rate which is under low-end expectations and down 3.2 percent on the month.  Durable goods orders jumped 4.4 percent in July in a headline gain exaggerated by a swing higher for commercial aircraft but including gains across most readings.  Historically low levels of layoffs continue to underscore the strength of the U.S. labor market. Initial jobless claims slipped 1,000 in the August 20 week to 261,000 with the 4-week average down 1,250 to 264,000.  Second-quarter GDP proved very soft, at only a plus 1.1 percent annualized rate for the second estimate.   Consumer sentiment is steady and respectable, at 89.8 for the final August reading and a 6 tenths dip from mid-month and a 2 tenths dip from final July.

The ragged slow-growth economy continues.  The manufacturing and services PMI are weak, both dropping a little this month.  The jump in durable goods orders bodes well for the future.  The job market is stable.  No big red flags.

Geo-Political:

The biggest news of the week was domestic, Janet Yellen’s speech at Jackson Hole to the Fed governors.  She was a little more hawkish, saying economic conditions were improving enough to support a future rate hike.  The bond market sold off a little as did stocks.

BEIJING – (08/27/2016) Profits of China’s major industrial firms rose 6.9 percent year on year in the first seven months of 2016, accelerating from the 6.2-percent rise registered in the first half, official data showed Saturday.

Europe – Regional slowdown expected in the wake of Brexit

“Outside of the UK, the economic damage from the United Kingdom’s vote to leave the EU is expected to be most profound in the Eurozone.  Prior to the vote, our panel had considered the region’s recovery to be firmly on track as steady domestic demand had fueled growth in the first quarter of the year and the bloc had showed resilience to external headwinds. Our panelists had projected that economic activity would pick up steam in 2017 and they saw GDP growth remaining broadly steady over the long-term horizon. Now, the Eurozone economy is expected to slow down in 2017 as contagion from Brexit hits the region, and the long-term growth outlook has soured. Our panel sees GDP expanding 1.5% in 2016, which is unchanged from our pre-Brexit forecast, due to a strong first quarter GDP reading and the long timeline for Brexit. Yet in 2017, as the economic consequences take effect, our panel sees growth edging down to 1.4%, which is 0.2 percentage points lower than the pre-Brexit Consensus Forecast.”

http://www.focus-economics.com/regions/euro-area

General News:

We have this report on Aug. 15: “Active U.S.-equity funds had outflows in July, with $32.9 billion exiting. All passive category groups saw inflows during the month, led by $33.8 billion in inflows to passive U.S. equity funds.”  Folks were moving from (active) managed funds to (passive) Index Exchange Traded Funds (ETF’s), because folks are watching their fees and the performance of their funds.

Technicals:

Technically, the chart is uninspiring.  The market had a nice run from the Brexit low in late June right up to mid-July, and I captured that.  I got out in late July because the market had quit going up, RSI had peaked and was sliding back down, as had MACD.  I did that because the previous 18 months have been range bound and I saw no significant catalyst to drive a significant breakout.  The market did jump up 2% in early August on the strong jobs report, but that has been it.  I gave up 2 or 3% on the upside, but I got protection from any pullback, and after the July run up in the market, the odds favored some sort of pullback, when the market gets around to it.  It can be maddening, just waiting.  I have about 20 low-ball buy orders in, including Exxon, but I am waiting on lower prices.

RSI (top section of the chart) has fallen to 50.  If the market does not go up or down, the RSI will fall over time.  The market can work off an overbought condition by going down in price, or by going nowhere over time.  But, we are not overbought anymore, in the short-term technical view.  MACD (bottom section of the chart) continues its long slow deterioration showing the market has no momentum to the upside.

Technically, it is still not a good entry point.  September has historically been the most volatile month of the year, so let’s see what happens.

2016 08 27 sp

If you enjoy these updates, please tell your friends and family who are interested in the stock market about this blog.

Your comments and questions are always appreciated, so feel free to comment using the “Leave a Comment” feature just under the title of the post!

Remember the “Glossary” is at the top of the blog if you want to see what some terms mean.  If I need to add terms to the glossary, you can email me, email address is at the top of the “About” page, at the top of the blog.  I enjoy hearing from my readers!

If you would like to receive a “reminder” when I make a new update, if you send me your name and email address to sharplet@gmail.com .  I will send a notice on email when I make new posts.

Rich Comeau, Rich Investing

Long Term August 2016

Updating Saturday and Wednesday.

The first fact I check is the PE on the S&P 500, which is sitting at 24 for Q2, with 96% of the stocks reported for Q2.  In general the stock market is overvalued on the basis of the 12 month trailing earnings GAAP PE.  We have seen this condition exist for years, so it is not a short term indicator at all, except to keep your guard up.

The candidates for president are making all sorts of promises that they won’t keep, because that is what presidential candidates do.  There is always a congress to prevent them from doing the most outlandish things, unless we keep electing outlandish congressmen.  But I don’t expect a major impact on the markets regardless of who is elected.

Oil has rallied from its lows earlier this year and is bouncing between 40 and 50.  That is pretty good, high enough for the oil companies to make money, and low enough for consumers to enjoy driving around.

The economic statistics are stable and show slow growth.  The initial read on Q2 GDP was light at 1.2%, following the Q1 reading of just .8%.  That will keep the Fed on the sideline for a Sept. rate hike.  The market seems to like it when the Fed is not tempted to raise rates, but it is kind of crazy that it also means the market likes a weak economy, which is not supposed to be true.  Just think about that for a while.

The Q2 earnings reporting season is mostly over, with most firms meeting or beating expectations, but the weakness here is how LOW the expectations were.  If you set the bar low enough, anyone can get over it.  We’ll beat last quarter’s earnings, but not last year’s earnings in the same quarter.  It is a primary reason that stocks are not going up, because earnings are weak.

We’re seven years into this recovery, so we’re late in the game, in an overvalued market on a PE basis, with weak GDP growth and poor earnings.  Wow, that doesn’t sound too good to me.

The CNBC analysts all say that TINA is at work.  In other words, regarding stocks, “There Is No Alternative”.  Bonds don’t offer a decent yield.  But, there is an alternative, and that is cash.  Another alternative being discussed these days is gold, which is usually held as a hedge against inflation.  I always say, buy what you know.  If you are familiar with the gold market and can write down a couple of paragraphs about what moves gold, where we are, and make a case to yourself, I don’t have a problem with owning a small position in gold.  If you don’t understand the market, you’re probably should stay out.

Let’s take a look at the long term chart, and I use the DJIA for that:

The RSI at the top is approaching overvalued at 63, while the MACD at the bottom looks close to an interim peak.  You can see the two aqua blue lines at 18,000 and it is clear I was wondering if the market was making a long term double top, but the market worked its way out of that trap by making new highs in July.  On a long term basis, the bull market is still in force, however it is looking tired to me.  The push to new highs has been without conviction.

2016 08 24 djia long term

If you wanted to be in the market and ride the bull until a bear market emerges, then you stay in this thing because there is no bear market yet.

One last comment about when to sell out.  Economists are bad at predicting when the next recession will begin.  Recessions seem to begin, and nobody knows that they have, until we have been in one for a little while.

If you enjoy these updates, please tell your friends and family who are interested in the stock market about this blog.

Your comments and questions are always appreciated, so feel free to comment using the “Leave a Comment” feature just under the title of the post!

Remember the “Glossary” is at the top of the blog if you want to see what some terms mean.  If I need to add terms to the glossary, you can email me, email address is at the top of the “About” page, at the top of the blog.  I enjoy hearing from my readers!

If you would like to receive a “reminder” when I make a new update, if you send me your name and email address to sharplet@gmail.com .  I will send a notice on email when I make new posts.

Rich

Why we need inflation

Updating Saturday and Wednesday.

Before we get started this week, I want to point out a distinguishing feature of this blog.  Unlike your “investment advisors”, I do not only want to give you my opinion on the markets, while hiding the data from you so you can’t think for yourself and you remain in the dark, as dependent as ever on your financial consultant.

In this blog, I try to ferret out the 10 important tried and true indicators, like PE ratios, and technical analysis trends.  I recently gave you 30 years of quarterly S&P 500 PE data, and I’ve discussed where you can go to find it yourself if you want to.  I don’t want you to be dependent on me, I want you to have some basic tools that you can learn to look at and interpret yourself.  That is ultimately what I want this blog to be about.

Hang in there with me.  Ask questions when you need to.  If you do, I won’t make you the next Warren Buffet, but I think I can make you a better, and a better informed, investor.  Remember, nobody cares about your money as much as you do.  Put in the effort to learn the basics, so you are not dependent on the opinion of others.  Think for yourselves, form your own opinions, and call your own shots, based on the data you see and your rules of operation!

Economy:

The CPI came in unchanged in July, pulled back by a 1.6 percent monthly decline in energy prices and other weakness including flat prices for food and contraction in transportation. And it doesn’t look much better when excluding food & energy where the gain for the core is only 0.1 percent.  Jobless claims are low and point unmistakably to strength in the labor market. Initial claims fell 4,000 in the August 13 week, to 262,000, which is 10K higher than July, but still historically low.  A bounce back in the factory workweek led a 0.4 percent gain for July’s index of leading economic indicators.

The Fed says they are focused on inflation and employment is deciding when to raise rates, and unemployment has come down enough, but the inflation target is 2% and we are not quite there.  This zero change in the CPI gives the Fed no ammo for a rate hike in Sept.

Why does the Fed want a little inflation?

  1. Deflation is terrifying.
    1. Inflation is desired because the Fed feels they can always deal with inflation. The Fed can raise rates until they MAKE enough people stop spending.  If you can make people stop spending, you can control inflation.  This is what Fed chairman Paul Volker did from 1979 – 1981 when the Fed Funds rate was 20%, a recession resulted, but inflation was halted.  We can do that. http://www.federalreservehistory.org/Events/DetailView/44
    2. The Fed cannot make people spend money. They can lower rates to the floor, like the near zero rates we have today, but when people are scared, when they have taken a beating in the stock market in their 401-K’s, and their job is not that secure, people will save money.  Sometimes low interest rates help people spend, but not always.  When products are not being sold, what is business’s response?  They put things on sale, they lower the price until it sells.  This is deflation.  It then becomes an incentive to not buy, because if we wait, the price will go down farther and we can buy things cheaper.  The economy stalls out deeper, and you get the “Great Depression”.  That is why deflation is so dangerous, it has a bad outcome, and the Fed has much less control over deflation than it has over inflation.
  2. If all the national debt outstanding is to be dealt with, it must be paid back in “cheaper dollars”, or inflated dollars. There is no other way to deal with it.
    1. Everyone wants to know how we will deal with the huge national debt which is up to 20 trillion dollars. First, much of that debt is held by the Federal Reserve which performed “Quantitative Easing” and bought bonds during the high deficit years just after the great recession of 2008.  The Fed bought mostly long term debt, so the interest rate is locked in at very low rates for a long time, 20 – 30 years.  If we double or triple the average income over the next 30 years, then income tax revenue will double or triple, and we can either retire the debt or afford to refinance and carry it (assuming we didn’t blow all the extra tax revenue on a new program).  If we get deflation in the system, this plan will not work, eventually the debt will be refinanced at higher rates, and interest on the debt will not fit with all of our other spending obligations, and we’ll be toast.

I’ll get to the stock market directly, but the economy is the eco-system in which the stock market lives, so we need to know how the economy operates to understand the forces operating on corporate America, and the stock prices of their companies.

Geo-Political:

Oil prices spiked the last couple of weeks, on rumors that at the upcoming OPEC meeting, members may be willing to talk about production cuts to bring up the price of crude.

Technicals:

The dull market continues.  MACD at the bottom of the chart is trending down, not a good sign.  RSI at the top of the chart is at 60 and slightly trending down.  It is uninspiring at best, and dangerous at worst.  The market can move up from here, but the odds are against it.  We should get at least a small correction, and I’m waiting and thinking about what to buy on a pullback.

2016 08 20 sp

If you enjoy these updates, please tell your friends and family who are interested in the stock market about this blog.

Your comments and questions are always appreciated, so feel free to comment using the “Leave a Comment” feature just under the title of the post!

Remember the “Glossary” is at the top of the blog if you want to see what some terms mean.  If I need to add terms to the glossary, you can email me, email address is at the top of the “About” page, at the top of the blog.  I enjoy hearing from my readers!

If you would like to receive a “reminder” when I make a new update, if you send me your name and email address to sharplet@gmail.com .  I will send a notice on email when I make new posts.

Rich

The Economy – Scalability

Updating Saturday and Wednesday.

Today I want to talk about how the new economy is so restructured that I don’t even recognize it from my youth some 60 years ago.  I believe this is the reason that we can’t get the GDP growth rate up to 4% or 5% these days, without massive govt. stimulus.

If you go back 50 years, auto manufacturing was a big part of the US economy.  You sent guys down into mines in W. Virginia and Pennsylvania and they dug up coal and iron, shipped it to Pittsburg and made steel, shipped that to Detroit.  Detroit bought machines to shape the steel into engines and chassis, put them on assembly lines and made a car.  It may have taken 1,000 people.  If you want to double your production and market, you either need to add shifts and employ more people, or even build a new assembly line and outfit it with people.  The industry does not “scale” without adding lots of people.  That is the economy we knew, back “when America was great”, the one I grew up in.

Go forward to today, from the industrial age to the information age.  At Microsoft, 100 great programmers can write Window, Word, Excel, and Access.  But, you don’t send guys in associated industries down in the ground, don’t order expensive tools to build your product, and you don’t have to add another shift of programmers to double your production or expand your market, let’s say by going into China.  To go into China, you need one translator to lay out the new screens, one programmer to switch the screens, and 1 guy in the CD duplicator room to run off another million copies.  That’s a simplification, but probably not too much of one.  The point is how well systems “scale”.  In this sense, “scale” means to accommodate growth easily, where you can substantially increase production without having to add resources at nearly the same rate.  How do you think Bill Gates became the richest man in America and essentially retired at the age of 50?  So, what happens with wealth?  If fewer people are required to generate it, and they generate even bigger sums of wealth than before because their marketplace easily spans the whole world, you get larger piles of money, held by few people.  Is that a taxation problem, or a result of scalability?  A bit of both, buy more due to scalability.

Who were the old titans?  John D Rockefeller, oil, Cornelius Vanderbilt, railroads, Henry Ford, automobiles.  Those were all industrial giants and they needed people across the nation to make their companies grow.  Who is “winning” in America today?  High Tech.  Microsoft, Intel, Oracle, Apple, Cisco, Amazon (more of a tech company than you think, a new type of retailer that is revolutionizing the space), Facebook, and some in bio-tech.  This is the new leadership in America, where we are better than anyone else on the planet (yes, America is still great).  Why?  Every one of these companies “scales” very well.  Scalability is the key.

We don’t need as many workers to operate our robotic, computerized society.  When you go to the mall, you need a salesperson.  When you order from Amazon, you don’t.

Do you see how that would limit new hiring?  Sure.  Would that slow down all of our recoveries.  Yep.  George H. W. Bush lost the 1992 election because following the shallow 1990 recession we were having a jobless slow recovery.  The companies recovered and returned to profitability, but they didn’t go out and hire lots of new people.  When people don’t have jobs, they don’t buy new cars or boats or houses.

George W. Bush inherited a mild recession in 2001, cut taxes and cut interest rates to 1%, the lowest since Kennedy, and as late at 3 years later, in 2004, they were still talking about the “jobless recovery”.  Google “jobless recovery 2004”, you’ll see.  Then we did reckless things in housing to try and get the economy to grow faster, and when the artificial stimulus played out, we crashed.  Bad plan.

Now under Obama, we have had a long slow recovery from the crash.  Its frustrating.  To Obama’s credit, we have not engaged in reckless spending to spur growth.  You can say his $900 Stimulus back in 2009, spent over 3 years, was supposed to spur growth, but it was not.  The $900 billion was spent to stop the economy from going down, and it did.  That was very important.  You can’t grow, until you can stop going down, that was job 1 at the time.

There are several major economic changes over the last 30 years that have fundamentally restructured the US and world economies.  The US economy today works fundamentally different from the economy of 50 years ago, or even 30 years ago.

Unfortunately, these changes have more power than the president, especially when viewed over the longer run.  That is why people are so frustrated with the politicians.  They say they have a solution for slow GDP growth and slow wage growth (they are lying, just to win an election), we elect them, they do a tax change, and things don’t improve in the long run.  Solutions that worked 50 years ago in the industrial economy don’t work so well in the information age.

The major changes in the structure of the economy are more powerful than any president’s tax policy.

Doing a tax cut will change spending habits while it is new, for a year or two, then it reverts to a way of life and the GDP will stop growing due to the tax change.  Even an infrastructure building program can be a stimulus, maybe for 10 years, but you can’t just build forever.  What happens then?

I really hope some of you will comment on this using the comment feature, or send me an email and I’ll put it up for you.

I would put up the chart of the S&P, but it is just doing nothing, going sideways like it has for a month.  No change.

If you enjoy these updates, please tell your friends and family who are interested in the stock market about this blog.

Your comments and questions are always appreciated, so feel free to comment using the “Leave a Comment” feature just under the title of the post!

Remember the “Glossary” is at the top of the blog if you want to see what some terms mean.  If I need to add terms to the glossary, you can email me, email address is at the top of the “About” page, at the top of the blog.  I enjoy hearing from my readers!

If you would like to receive a “reminder” when I make a new update, if you send me your name and email address to sharplet@gmail.com .  I will send a notice on email when I make new posts.

Rich

Summer Doldrum

Updating Saturday and Wednesday.

If you would like to see the chart bigger, go to the View-Options link at the top of the blog and read about how to zoom in with your browser.

Economy:

Jobless claims are steady at historically low levels pointing to a low rate of layoffs and strength for the economy. Initial claims edged 1,000 lower in the August 6 week to 266,000.  Crude oil inventories rose 1.1 million barrels in the August 5 week to 523.6 million, lifting the year-on-year gain to 15.4 percent.  Consumers spent their money on vehicles in July but not on much else as retail sales came in unchanged. When excluding autos, retail sales slipped 0.3 percent for the first decline in this reading since March.  Consumer sentiment is flat, at 90.4 for the August flash for only a 4 tenths gain.

Last week the big news was the strong jobs report, this week it is the weak-ish retail sales report.

Geo-Political:

This is low level, but tensions are rising in the Ukraine again, with Russia charging that a small Ukraine force had a skirmish with Russian forces in Crimea (which Ukraine denies).  Putin would probably like to make more trouble in Ukraine, but economic sanctions from the west and low oil prices do hurt the Russian economy.  His adventurism is not free.

There are charges in Syria that the govt. there has used chemical weapons again, perhaps counting on the Russian presence in Syria to deter US action.  This situation is going from bad to worse.

For all the concern early in the year about slowing growth in China, the consensus seems to be that the Asian economies are stabilizing.

All of the major central banks outside the US are pursuing low interest rate policy (negative rates in Europe and Japan), and QE in Europe.  There is a sense that in this environment, economies will recover and there is little danger of a global recession.  The US recovery is farther along than everyone else, and if the Fed tightens rates while everyone else is easing, the dollar will rise, which hurts US competitiveness and profitability.

Nothing is hurting the US market this week, but that does not mean that nothing could  erupt.

Technicals:

The market is dull with no big moves in either direction.  It is working off the overbought condition by moving sideways.  The RSI is slightly elevated at 63, and MACD is slowly trending downward.  After a nice pop up last Friday (8/3) on the good jobs report, there was no follow thru this week.  The market remains overvalued and slightly overbought, not a good entry point.  Oil has come down and I am looking at some of the oil stocks and I made one purchase on the pullback, with oil around $40.  If we get a market pullback, they will probably fall, although when the oil stocks have already fallen and then the market goes down, the oils have not continued down.

2016 08 13 sp

The tech sector has been leading the market, with Facebook and Google leading.  Their PE’s are high, and I keep looking at Microsoft and Cisco, with much lower PE’s and they pay a little dividend.  It is time to put together a buy list for the next pullback.  We’re in a bull market, and while it is late, I don’t see the end in sight.  The slowness of the recovery has been frustrating, but it has also prevented excesses from building up, which is extending the duration of the recovery.

If you enjoy these updates, please tell your friends and family who are interested in the stock market about this blog.

Your comments and questions are always appreciated, so feel free to comment using the “Leave a Comment” feature just under the title of the post!

Remember the “Glossary” is at the top of the blog if you want to see what some terms mean.  If I need to add terms to the glossary, you can email me, email address is at the top of the “About” page, at the top of the blog.  I enjoy hearing from my readers!

If you would like to receive a “reminder” when I make a new update, if you send me your name and email address to sharplet@gmail.com .  I will send a notice on email when I make new posts.

Rich

Percent Gain and Loss

Updating Saturday and Wednesday.

I’m going to do something simple and important today, discuss the simple reality of percent gain and loss in security trading.

The simple but obvious truth is that an “X” percent loss hurts you much more than the same “X” percent gain helps you, regardless of the value of X.

This is middle school arithmetic from back in my day, so if you know this already, you can just skip down to the S&P chart in the Technicals section below.

To calculate Percent Gain:

  1. Subtract the original amount from the new (larger, since we had a gain) amount, giving the “difference”.
  2. Divide the difference by the original amount, giving a quotient.
  3. Express the quotient as a percent by multiplying by 100 and using the % sign after it.

Example:

I start with 100, and I end with 110.  What was the percent gain?

110 – 100 = 10 (difference)

10 / 100 = .10 (quotient)

.10 X 100 = 10, so the percent gain is 10%. (quotient is expressed as a percent)

To calculate Percent Loss:

  1. Subtract the new amount (which is the smaller number, since we had a loss) from the original amount, giving the difference.
  2. Divide the difference by the original amount, giving a quotient.
  3. Express the quotient as a percent by multiplying by 100 and using the % sign after it.

Example:

I start with 100 and end with 90.  What was the percent loss?

100 – 90 = 10 (difference)

10 / 100 = .10 (quotient)

.10 X 100 = 10, so the percent loss is 10%. (quotient is expressed as a percent)

 

Now, let’s take a 50% gain FOLLOWED by a 50% loss, starting with 100:

From 100, a 50% gain gives us 150.  Now take a 50% loss.  50% of 150 is 75, and 150 – 75 = 75!

If I have a 50% gain, followed by a 50% loss, I am not back to break even.  The 50% loss has hurt me more than the 50% gain helped me.

Let’s run the process in the other order, let’s take the 50% loss, followed by a 50% gain.

50% of 100 is 50, so the 50% loss leaves us with 50.  50% of 50 is 25, so a 50% gain on top of 50 is 75.  Again, a 50% loss followed by a 50% gain has left me with less money than I started with.  The “X” percent loss has hurt me more than the “X” percent gain helped me.  I have less than I started with.

This is true regardless of the number of percent you select.  The smaller the percent, the less bad you come out, and the larger the percent, the farther you come out behind your starting position.

If you take a 50% loss, it actually requires a 100% gain to get back even.  I think most people don’t think about this, and the casual way they think about it is to say, well if I took a 50% beating, I need to make 50% to get back even, but it is not true.

In investing, this is why it is so important to “never take a big loss”.  Recovering from a big loss is even more difficult than most folks think.

Technicals:

A quick look at the chart this morning (11 AM):

There has been zero follow-thru on Friday’s rally on the good jobs number.   It’s a dull summer market, many Wall Streeter’s take their vacation in August.  The RSI is slightly elevated, but MACD (momentum) is eroding.  I’m still waiting for a better entry point.  We haven’t talked about patience in the market, but sometimes you just need patience.

2016 08 10 Wed sp

If you enjoy these updates, please tell your friends and family who are interested in the stock market about this blog.

Your comments and questions are always appreciated, so feel free to comment using the “Leave a Comment” feature just under the title of the post!

Remember the “Glossary” is at the top of the blog if you want to see what some terms mean.  If I need to add terms to the glossary, you can email me, email address is at the top of the “About” page, at the top of the blog, or just leave a comment.  I enjoy hearing from my readers!

Rich