THE DEATH OF THE STOCK BROKER  

When I grew up, small brokerage firms where as common as Starbucks franchises are today. What ever happened to E F Hutton, Paine Webber, Bache, AG Edwards, Shearson Hammel and  the hundred of other names that were well known to us? Registered Broker Dealers have gone from 10,000 to some 4606. Within this group are a very small group of small broker-dealers and regional firms. (http://www.businessinsider.com/demise-of-the-stockbroker-2012-3)  Small broker-dealer are considered ones that have less than 150 brokers. These small firms are quickly closing again this year because they are unable to cope with the massive regulations and keeping up with the expense of compliance. Being a compliance officer or supervisor at a small firm, is analogous to committing financial suicide.  The industry has been taken over by the banks and FINRA and SEC regulations have  encourage this.  A recent Barron’s Magazine released its list of 1200 state-by-state rankings of the top Investment Advisers show that of the 1200 investment advisers listed, most are serviced by large firms such as Merrill Lynch owned by J.P. Morgan, Morgan Stanley, Wells Fargo and UBS (all banks). Only 39 are local independent firms. In the past, small regional brokerage firms were helping small businesses that wanted to go public. This option is no longer available for small businesses and they no longer have access to the capital markets. Now, the only option for small businesses is to go to the banks for a loan, that are servicing mostly a large global conglomerates.  For individuals, rather than investing in a portfolio of stocks through your stock broker, investors use investment advisers, that  suggest that you diversify your money in a series of no load mutual funds, also owned by the banks. Without the old fashioned stockbrokers individual investors are either investing in no load mutual funds (84% of which under perform the market), through their investment advisers or trying to trade stocks on the internet, which I believe is like feeding anchovies to the sharks. Without stockbrokers I believe small businesses and investors are being undeserved.

In 1963, and 23 years old,I was following my dream and became a stockbroker with a local Chicago firm, called McCormick and Company. We made markets in local stocks that normally traded below three dollars a share, in what was called the pink sheets. These stocks are now banned from ‘solicited trading’ under the guise that the SEC and FINRA are protecting the public from ‘speculative securities’ rather than helping small local bushiness get access to the capital markets. McCormick and Co. also helped regional Midwest firms  go pubic. One of those firms was Kentucky Fried Chicken and my first IPO. Yes the Col. in 1963 was there, all dressed in white. There wasn’t a big demand for the stock, as people were unsure as to whether franchising would work.That was considered a  new concept then. My Dad bought 1000 shares and doubled his money. My Uncle bought 1000 shares and kept it until his death. It was his largest asset. Those times and stock brokers are gone and probably forever. I don’t believe the regulators FINRA and the SEC understand what the ruined. In my opinion, they certainly are not serving the best interests of the public. They knowingly or unknowing represent only the Big Bucks. ( It make good business sense as the banks can afford to pay the billions of dollars in fines the SEC and FINRA has leveled against them) Hot deals now go to the professionals and hedge funds. A local small business is pretty much cut off from bank loans, unless they don’t need the money.  Brokerage firms don’t help local firms go public anymore because the local firms are all gone and the current brokerage firms are now global and owned by the banks, as are the mutual funds. Also, most people don’t invest in stocks anymore through their stockbrokers, because their aren’t any stockbrokers around anymore. Most invest in no-load mutual funds controlled by the banks, through their domesticated well-trained investment planners.

Mutual funds don’t offer many alternatives to protecting  your portfolio in a Bear Market. Professional investors can easily go short or long with ease. For instance, while Goldman Sachs was selling worthless mortgage-backed securities to Iceland and Ireland, they were shorting the same securities in their own portfolios. It is human nature for most investors to be positive and patriotic and therefore to be bullish. We want the market to go up because it is in our general best interests that the economy prospers, so that our careers and our families can prosper. However, markets don’t always go up.

The financial industry approves of the Efficient Market Hypothesis Theory(EMHT), which proposes that it is impossible to beat the market by trading in it out and that investors should at all times be fully invested in the market in the aggregate, by owning an allocation of mutual funds, because in the long run the market will go up. The dangerous beauty of this theory is that accordingly, your goals will always be achieved sometime in the future. If you just ‘hang in there’ long enough you will make your money back. This gives investors a false theory of contentment. However, during a very long period between 1997 and 2012, the market was up 50% of the time and down 50% of the time. Also during that period there were two stock market collapses of 50%, one between 2000 and 2003 and the other between 2008 and 2009. The financial industry would have you believe that trying a methodology that uses’market timing’ is an ‘heretical tactic’. Lately, the EMHT methodology, has investors drinking euphorically from the common Kool-Aid trough and believing that the market will just continue to go up and that Bear Markets are a thing of the past.  Besides, for those who have a fiduciary responsibility, ‘market timing’, is frowned upon by regulators. For any small brokerage firms that doesn’t drink from the common Kool-Aid trough, the SEC and FINRA  encourages investor arbitration claims for ‘trading’.

In America, capitalism spiritual home, a survey conducted in 2013 found that just 54% had a positive view of the term. This seems to be the case because the benefits of capitalism have recently only gone to the top 1%. There seems to be a crisis in confidence as the Supreme Court has a ranking of only 30%, public schools 26%, the criminal justice system 23%, and Congress 7%. The recent election showed just how unsatisfied people are. They voted for change, but change is unlikely to come. Since Citizens United, that declared corporations are people (If they are people, they are sociopaths), most changes in government is dictated by donors and election contributions. A recent Princeton study has shown that public opinion has no effect on the outcome of an issue in Congress, whether there is 0% approval or 100% approval, the line of accomplishment is flat-lined. Donor power has taken over the rights of ‘we the people’. The current illusion that voters are being heard and are connected, will soon diminish in my opinion. The risk now is that since government agencies are not responding to the public “we the people”, they have pursued policies which I believe, are damaging the common good.

It was George Orwell book of  1984 fame who said: “anyone who challenges the prevailing authority, can find himself suddenly silenced”.  I believe political stagecraft, through skilled manipulation of facts, has given the public the perception and the illusion of power, rather than participation in real power. Public opinion has been manipulated and nullified.  We have only ourselves to blame. Like Pogo said “We have seen the enemy and it is us”. My fear is that this process has corporations and the top 1% dominating  the financial industry and has left small businesses and the investing public very vulnerable and the general public has become to weakened and powerless to stop it from progressing.

Carl M. Birkelbach 11/28/1
4

HAPPY THANKSGIVING

Some good new from a friend

Turner Investments

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Navigating the forest A common metaphor for explaining human shortsightedness is a person can’t see the forest for the trees. Growth-stock investors can be as susceptible to not seeing the forest as anyone. It’s easy for growth investors, for better or worse, to get fixated on the trees. For instance, they may be keen on assessing fundamental criteria such as how Apple Pay, the new iPhone app that enables consumers to make purchases in stores, will affect Apple’s revenue and earnings. Or they may try to gauge the attractiveness of the price/earnings ratios of fast-growing companies benefiting from two key business phenomena of our times, the rise of social networking and cloud computing. Cases in point: Facebook, whose shares trade at 39 times next year’s earnings, and Workday, trading at 15 times projected sales for the next 12 months. Others may attempt to pull back from the trees somewhat and examine broader quantitative measures such as the S&P 500 Index companies’ earnings growth, which is still impressive at 9% year over year, or valuations, which we believe remain reasonable if not exactly table-pounding cheap at 15 times projected earnings for 2015. Or they may scrutinize the duration of the current bull market, which as of November 2014 is approaching 69 months, versus the historical average of 60 months. Or they might seek to look at the magnitude of gains generated by this bull market: the S&P 500 Index has returned more than 190% cumulatively from when the upswing began on March 9, 2009 to November 17, 2014, compared with the historical average of 185%, according to the CFA Institute. Bull alive and well? Such perspectives might provide some comfort that this bull market could have a ways to go yet. But then growth investors, being the tree huggers they are, might be tempted to shorten their sights and contemplate such microeconomic issues as whether 3-D printing will revolutionize manufacturing and thus be a bonanza for a major player like Stratasys. We hasten to emphasize that in growth-stock investing, not all tree hugging (or gazing) is bad. Far from it. It’s just that focusing only on the trees won’t furnish a bigger picture as to where the stock market may be headed. Since we didn’t foresee the extent of the 2008-2009 bear market, we thought at one point it might be a good analytical exercise to imagine our acquiring the investment equivalent of a sophisticated military tool – the drone – so that we could zoom over the stock-market forest to see what we could possibly be missing. We reasoned that an investment drone might give us the ideal vantage point to determine which way the market is moving – in a bullish or bearish trend. But then our research indicated that a drone would only further muddle things; it would introduce additional criteria of marginal usefulness to our efforts to deduce the market’s direction. Criteria such as stocks that are trading above their 200-day moving average, the global demand for stocks, the supply of U.S. stocks, merger-and-acquisition activity as a percentage of the gross domestic product, and so on. Alas, we realized the list of potential criteria could simply go on and on, like modern-day presidential campaigns. Who’s that on CNBC? Then there are subjective criteria – most prominently, market forecasts. For every one opinion by market strategists who make a handsome living divining the course of the stock market, there are scores of indicators to support (or not support) their predictions. Being right once can make a strategist’s career. Being wrong often merely results in a strategist being invited less often to appear on CNBC. But here’s the good news: we have come to realize that there’s a better way to discern the prospects of the stock-market forest. In our judgment, it’s more simple and reliable than any other fundamental, quantitative, or subjective criteria: credit-market analysis. Brian Reynolds, the chief market strategist at Rosenblatt Securities, has been in the forefront of analyzing credit data perceptively. He has concluded that the credit market’s direction parallels that of the stock market. Typically the credit market enjoys a boom for an extended period (to the benefit of stocks) but ultimately goes bust (to the detriment of stocks). Investors apply leverage As Brian Reynolds has documented, in today’s world of paltry and declining interest rates, institutional investors covet certain desired rates of investment returns for their portfolios. For instance, pension plans typically want investment returns of 7.5% annually, and endowments typically seek returns of 4-5% annually. To achieve those kinds of returns, some money managers for institutional investors are compelled to use leverage – lots of it. The outsized use of leverage has been particularly pronounced in the past five years, when 10-year Treasury yields have struggled to stay above 2.50% and the return potential of bonds has been subpar. Also, the bear market of 2008-2009 burned many investors so badly that they subsequently avoided stocks, thereby impairing the results of those investors’ portfolios. All that has helped to fuel an investment boom in credit (see Display 1). Display 1: Corporate Bond Issuance ($bil) Source: Bloomberg. 2014 annualized through 6.30 A credit boom has an array of consequences – at first, favorable consequences, then not-so-favorable consequences. Of course, low rates make it financially advantageous for companies to issue debt. For instance, in April 2013 Apple floated a then-record $17 billion worth of bonds, with its 10-year issue yielding a meager 2.38%. The upshot: higher stock prices Also, the issuing companies often use the new cash to buy back their shares (see Display 2). Or they often raise their dividend payouts. Or they acquire other firms. Most often, they invest in research and development and production plants and equipment. All of this, happily, can lead to the ultimate favorable consequence: companies’ stock prices move higher – potentially much higher (see Display 3). Display 2: S&P 500 Quarterly Stock Buybacks Actual and Announced, Cumulative in $ Billions Source: S&P, Bloomberg Display 3: S&P Composite Index Source: Robert Shiller, FactSet, JP Morgan Asset Management Even though stocks have risen sharply over the past five and a half years, we think this bull market can still rage quite a while longer. For one thing, stocks remain much less richly valued than bonds are (see Display 4). For another thing, as long as interest rates remain low and institutional investors’ desire for substantial total returns remains high, the credit boom is likely to persist, thereby aiding the stock market. (Incidentally, contrary to the conventional wisdom, stocks can continue to perform well when interest rates rise – as long as that rise isn’t too dramatic.) Display 4: Stock vs. Corporate Bond Valuation S&P 500 Earn Yield as % of Junk Yields Source: Bloomberg, Rosenblatt Inevitably the time will come when credit investors are hurt by the use of leverage and receive the dreaded margin call from their brokers. When that happens, as in the past, the credit boom is likely to end badly – and is likely to take stocks down as well. But we believe that’s unlikely to happen for a few years at least. In the meantime, we believe it’s an opportune time to wade into the forest and take a hard look at the trees to identify growth stocks capable of soaring at this advanced stage of the bull market. At the same time, we will keep our ears alert for the alarm sounded by the discerning forest ranger in the lookout station who’s commonly known as the credit market. As we see it, when that forest ranger finally does sound his alarm, savvy stock investors should take note and adopt a more conservative positioning in their portfolios, in anticipation of a market downturn. But until then, looking at the trees may continue to prove rewarding. Robert E. Turner, CFA Chairman and Chief Investment Officer The views, opinions, and content presented are for informational purposes only. They are not intended to reflect a current or past recommendation; investment, legal, tax, or accounting advice of any kind; or a solicitation of an offer to buy or sell any securities or investment services. Except as otherwise specified, any companies, sectors, securities, and/or markets discussed are solely for illustrative purposes regarding economic trends and conditions or investment process and may or may not be held by Turner, the Turner Funds, or other investment vehicles or accounts managed by Turner or its affiliates. Past performance is no guarantee of future results. As of October 31, 2014, Turner held in client accounts 7,465,608 shares of Apple Inc., 5,718,737 shares of Facebook Inc., 7,976,590 shares of Workday Inc., and 2,800,777 shares of Stratasys Ltd. Turner Investments refers to Turner Investments, L. P., its subsidiaries, and affiliates. Nothing presented should be considered to be an offer to provide any Turner product or service in any jurisdiction that would be unlawful under the securities laws of that jurisdiction. Turner Investments, founded in 1990 and based in Berwyn, Pennsylvania, manages growth, global/international, and alternative separately-managed accounts and mutual funds for institutions and individuals.

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THE INVESTMENT STRATEGY LETTER

ANOTHER DAY OF DULL NEW HIGHS Just another normal day of all time new highs. The DAX and Nikkei markets are quiet. In in the last 24 days the market has made new highs. That is among the longest such upward streaks since 1960. The current uptrend is being driven both by seasonal factors, (the last two months of the year tends to be among the strongest for stocks) and the need for under-invested participants to play catch-up, such as hedge funds.

THE DEATH OF THE STOCK BROKER  I have just written a new page listed above

When I grew up, small brokerage firms where as common as Starbucks franchises are today. What ever happened to E F Hutton, Paine Webber, Bache, AG Edwards, Shearson Hammel and  the hundred of other names that were well known to us? Registered Broker Dealers have gone from 10,000 to some 4606. Within this group are a very small group of small broker-dealers and regional firms. (http://www.businessinsider.com/demise-of-the-stockbroker-2012-3)  Small broker-dealer are considered ones that have less than 150 brokers. These small firms are quickly closing again this year because they are unable to cope with the massive regulations and keeping up with the expense of compliance. Being a compliance officer or supervisor at a small firm, is analogous to committing financial suicide.  The industry has been taken over by the banks and FINRA and SEC regulations have  encourage this.  A recent Barron’s Magazine released its list of 1200 state-by-state rankings of the top Investment Advisers show that of the 1200 investment advisers listed, most are serviced by large firms such as Merrill Lynch owned by J.P. Morgan, Morgan Stanley, Wells Fargo and UBS (all banks). Only 39 are local independent firms. In the past, small regional brokerage firms were helping small businesses that wanted to go public. This option is no longer available for small businesses and they no longer have access to the capital markets. Now, the only option for small businesses is to go to the banks for a loan, that are servicing mostly a large global conglomerates.  For individuals, rather than investing in a portfolio of stocks through your stock broker, investors use investment advisers, that  suggest that you diversify your money in a series of no load mutual funds, also owned by the banks. Without the old fashioned stockbrokers individual investors are either investing in no load mutual funds (84% of which under perform the market), through their investment advisers or trying to trade stocks on the internet, which I believe is like feeding anchovies to the sharks. Without stockbrokers I believe small businesses and investors are being undeserved.

In 1963, and 23 years old,I was following my dream and became a stockbroker with a local Chicago firm, called McCormick and Company. We made markets in local stocks that normally traded below three dollars a share, in what was called the pink sheets. These stocks are now banned from ‘solicited trading’ under the guise that the SEC and FINRA are protecting the public from ‘speculative securities’ rather than helping small local bushiness get access to the capital markets. McCormick and Co. also helped regional Midwest firms  go pubic. One of those firms was Kentucky Fried Chicken and my first IPO. Yes the Col. in 1963 was there, all dressed in white. There wasn’t a big demand for the stock, as people were unsure as to whether franchising would work.That was considered a  new concept then. My Dad bought 1000 shares and doubled his money. My Uncle bought 1000 shares and kept it until his death. It was his largest asset. Those times and stock brokers are gone and probably forever. I don’t believe the regulators FINRA and the SEC understand what the ruined. In my opinion, they certainly are not serving the best interests of the public. They knowingly or unknowing represent only the Big Bucks. ( It make good business sense as the banks can afford to pay the billions of dollars in fines the SEC and FINRA has leveled against them) Hot deals now go to the professionals and hedge funds. A local small business is pretty much cut off from bank loans, unless they don’t need the money.  Brokerage firms don’t help local firms go public anymore because the local firms are all gone and the current brokerage firms are now global and owned by the banks, as are the mutual funds. Also, most people don’t invest in stocks anymore through their stockbrokers, because their aren’t any stockbrokers around anymore. Most invest in no-load mutual funds controlled by the banks, through their domesticated well-trained investment planners.

Mutual funds don’t offer many alternatives to protecting  your portfolio in a Bear Market. Professional investors can easily go short or long with ease. For instance, while Goldman Sachs was selling worthless mortgage-backed securities to Iceland and Ireland, they were shorting the same securities in their own portfolios. It is human nature for most investors to be positive and patriotic and therefore to be bullish. We want the market to go up because it is in our general best interests that the economy prospers, so that our careers and our families can prosper. However, markets don’t always go up.

The financial industry approves of the Efficient Market Hypothesis Theory (EMHT), which proposes that it is impossible to beat the market by trading in it out and that investors should at all times be fully invested in the market in the aggregate, by owning an allocation of mutual funds, because in the long run the market will go up. The dangerous beauty of this theory is that accordingly, your goals will always be achieved sometime in the future. If you just ‘hang in there’ long enough you will make your money back. This gives investors a false theory of contentment. However, during a very long period between 1997 and 2012, the market was up 50% of the time and down 50% of the time. Also during that period there were two stock market collapses of 50%, one between 2000 and 2003 and the other between 2008 and 2009. The financial industry would have you believe that trying a methodology that uses’market timing’ is an ‘heretical tactic’. Lately, the EMHT methodology, has investors drinking euphorically from the common Kool-Aid trough and believing that the market will just continue to go up and that Bear Markets are a thing of the past.  Besides, for those who have a fiduciary responsibility, ‘market timing’, is frowned upon by regulators. For any small brokerage firms that doesn’t drink from the common Kool-Aid trough, the SEC and FINRA  encourages investor arbitration claims for ‘trading’.

In America, capitalism spiritual home, a survey conducted in 2013 found that just 54% had a positive view of the term. This seems to be the case because the benefits of capitalism have recently only gone to the top 1%. There seems to be a crisis in confidence as the Supreme Court has a ranking of only 30%, public schools 26%, the criminal justice system 23%, and Congress 7%. The recent election showed just how unsatisfied people are. They voted for change, but change is unlikely to come. Since Citizens United, that declared corporations are people (If they are people, they are sociopaths), most changes in government is dictated by donors and election contributions. A recent Princeton study has shown that public opinion has no effect on the outcome of an issue in Congress, whether there is 0% approval or 100% approval, the line of accomplishment is flat-lined. Donor power has taken over the rights of ‘we the people’. The current illusion that voters are being heard and are connected, will soon diminish in my opinion. The risk now is that since government agencies are not responding to the public “we the people”, they have pursued policies which I believe, are damaging the common good.

It was George Orwell book of  1984 fame who said: “anyone who challenges the prevailing authority, can find himself suddenly silenced”.  I believe political stagecraft, through skilled manipulation of facts, has given the public the perception and the illusion of power, rather than participation in real power. Public opinion has been manipulated and nullified.  We have only ourselves to blame. Like Pogo said “We have seen the enemy and it is us”. My fear is that this process has corporations and the top 1% dominating  the financial industry and has left small businesses and the investing public very vulnerable and the general public has become to weakened and powerless to stop it from progressing.

Carl M. Birkelbach 11/25/14

THE INVESTMENT STRATEGY LETTER

ANOTHER DAY OF DULL NEW HIGHS

Just another normal day of all time new highs and a 2% gain in the China market. The DAX and Nikkei markets are quiet. The RUSSEL 2000 was up 1 1/4% although since March, it has avoided making new highs. The STANDARD AND POORS index hasn’t dropped more than 0.3%  in the last 23 days. That is among the longest such upward streaks since 1960. The current up is being driven both by seasonal factors, (the last two months of the year tends to be among the strongest for stocks) and the need for under-invested participants to play catch-up, such as hedge funds. What continues to bother me is the lack of economic resilience in Europe and Japan and a slowing economic growth in China. Stimulus packages are online for all three. However, I see these economies as listless THAT eventually will affect the United States  economies.
It would not take much to set off a vicious cycle of a reallocation of 1% of the total holdings of the world’s 500 biggest asset managers, away from emerging markets. With a $1.3 trillion dollars in the flow of this year a I continue to be concerned about investors seeking high yielding asset in an unliquid market.

Last week was not a good week for the Feds.
A Senate report indicated that banks such as Goldman Sachs can influence commodity prices.Carl Levin, Democrat of Michigan said the current rules were not adequate to stop the problem . There have been allocations by Congress suggesting that FED supervisors when soft on such firms as Goldman. That regulators called some transactions legal but shady.
Barron’s Magazine released its list of 1200 state-by-state rankings of the top Investment Advisers. In case you haven’t noticed, investments advisers have taken over the job of the old traditional stockbrokers. Of the 1200 investment advisers most are serviced by large firms such as Merrill Lynch owned by J.P. Morgan, Morgan Stanley, Wells Fargo and UBS.( all banks). When I grew up small brokerage firms where is as common as Starbucks franchises are today Registered broker dealers have gone from 10,000 to some 4606. Within this group are a very small group of small broker-dealers. Small broker-dealer are considered ones that have less than 150 brokers. The industry has been taken over by investment advisers and the banks control the investment advisers. These small regional brokerage firms were helping small businesses that wanted to go public. This option is no longer available for small businesses. Your only option is to go to the banks for loans that are servicing mostly a large clove conglomerates. Rather than investing in a portfolio of stocks, investment advisers suggest that you diversify your money in a series of no load mutual funds, also owned by the banks.
I bring all this up, because it appears to me that the stock market at current levels is living off hype, rather than real growth prospects. This can work for a while, such as it did in 2000 with the dot.com companies and inflated real estate prices of 2008. Eventually, the situation collapses along with stock prices. As I said earlier, this is a period of time, for the next two months where the stock market usually has its best performance. Don’t let the hype and hubris overcome her common

Carl M. Birkelbach 11/24/14

THE INVESTMENT STRATEGY LETTER

THE MARKETS IN THE US SURGE TO NEW RECORD LEVELS

China, Japan and Europe are all encouraging growth of their economies in face of a global economic slowdown.  I find it strange that the markets are encouraged by the stimulus and not concerned of why the countries need to artificially stimulate their economies. Neither are investors worried about the $1.2 trillion of bonds issued by emerging market nations, which are also faceting a global slowdown. So, it is full speed ahead and dam the torpedoes! There actually is some good news. Congress will only be in session 8 day until the end of the year.
Carl M. Birkelbach 11/21/14

THE INVESTMENT STRATEGY LETTER

Another sleepy Day/ and once again All Time New Highs

The New York Stock Exchange finished quietly with barely eking out a new all-time high in the Dow to new  record levels. Action across sectors was more colorful as gains in energy and technology sectors outweighed losses in healthcare and consumer staples stocks. Investors appeared to focus on positive earnings results from retailers such as Best Buy and Urban Outfitters, while a rise in oil prices lifted energy stocks. Helping all sectors was a binge of information data that pointed to continuing improvement in the economy. Small companies outperformed large companies with the Russell 2000 adding 1.1%, the DAX, China and Nikkei averages were about unchanged. Transportation stocks were up one half of 1%, gold was up slightly.

.
Because stocks are surging corporations are ambitious. Also debt is reasonably cheap. The result is that mergers and acquisition transactions are being booked at about $1.5 trillion, so far this year. This is the largest amount of mergers and acquisitions since the year 2000 during the.com bubble and in 2008 just before the financial crisis. The other thing that corporations are doing, is buying back their own stock, as treasury stock. Corporations are doing everything they can to spend their money on anything except creating new employment. This kind of exuberance for mergers and acquisitions, is usually unsustainable.
Just as a side note, China’s inflated and highly leveraged Real Estate prices are beginning to fall.

Carl M. Birkelbach 11/120/14

THE INVESTMENT STRATEGY LETTER

Another Quiet Day/ But No New Highs
It was another quiet day of trading all the major averages barely punched as did the DAX China and Nikkei markets. I continue to feel that the market is entering a topping process. Nobody has a crystal ball as to know exactly if this is a top, or when exactly the market will start to fall. My main concern continues to be that the growth of income continues to be sucked up by the top 1%. This is neither good for those on the bottom or the top. Senator Bernie Sanders was heard today on National Public Radio. He felt that the Democrats did not accurately conveyed their policies. He thought the Democrats should have concentrated on the question, Do you still have upward mobility? For the working poor and those working for minimum wage, a decent lifestyle and college for their children is out of reach.  Both parties are immobilize to make any significant changes, so my worries about the consumer and the economy continues!

Apparently, markets were boosted yesterday by the healthcare sector. The New York Times reported that the Affordable Care Act has evolved into a powerfully mutual beneficial partnership and has led to a profitable increase in enrollment.At the same time health care cost are decreasing. United Healthcare group even helped the administration repair the government website. Insurers and the government have developed a symbiotic relationship, nurtured by tens of billions of dollars that flow to the medical insurance industry. Just think of how more successful Obama Care could be if the Southern states and various other Republican dominated states, had joined the union.
Because stocks are surging corporations are ambitious. Also debt is reasonably cheap. The result is that mergers and acquisition transactions are being booked at about $1.5 trillion, so far this year. This is the largest amount of mergers and acquisitions since the year 2000 during the.com bubble and in 2008 just before the financial crisis. The other thing that corporations are doing, is buying back their own stock, as treasury stock. Corporations are doing everything they can to spend their money on anything except creating new employment. This kind of exuberance for mergers and acquisitions, is usually unsustainable.
Just as a side note, China’s inflated and highly leveraged Real Estate prices are beginning to fall.

Carl M. Birkelbach 11/19/14

THE INVESTMENT STRATEGY LETTER

JUST ANOTHER DAY OF ALL-TIME NEW HIGHS
Another dull day, and yet the market made all-time highs once again.The DAX was up 1.6%, China down 1.1% and Japan recovered almost all of his 3% loss from yesterday. Apparently, markets were boosted by the healthcare sector. The New York Times reported that the Affordable Care Act has evolved into a powerfully mutual beneficial partnership and has led to a profitable increase in enrollment.At the same time health care cost are decreasing. United Healthcare group even helped the administration repair the government website. Insurers and the government have developed a symbiotic relationship, nurtured by tens of billions of dollars that flow to the medical insurance industry. Just think of how more successful Obama Care could be if the Southern states and various other Republican dominated states, had joined the union.
Because stocks are surging corporations are ambitious. Also debt is reasonably cheap. The result is that mergers and acquisition transactions are being booked at about $1.5 trillion, so far this year. This is the largest amount of mergers and acquisitions since the year 2000 during the.com bubble and in 2008 just before the financial crisis. The other thing that corporations are doing, is buying back their own stock, as treasury stock. Corporations are doing everything they can to spend their money on anything except creating new employment. This kind of exuberance for mergers and acquisitions, is usually unsustainable.
Just as a side note, China’s inflated and highly leveraged Real Estate prices are beginning to fall.

Carl M. Birkelbach 11/18/14

THE INVESTMENT STRATEGY LETTER
The continuing saga of looking for a top in the markets
WE ARE NOT NUMBER ONE, BUT WE COULD BE
The markets are once again pretty flat with the exception of Japan which was down 3% yesterday. The S&P index made a lethargic new all time high by rising 1.5 points. This dullness of our markets is not a good sign, particularly because hedge funds usually do buying toward the end of the year to increase their profits. My concerns have been voiced over the last week or so of market comments. I continue to be concerned that the market is topping. It’s not that earnings are bad or that there are any major problems. It’s just something that happens every now and then when the lack of momentum can set off a decline that has trouble stopping. However,there are some academic pitfalls that are accumulating, such as the breath that I see leaving the market, by all income increases going to the top 1%. That negative may show up at any time.

The latest Social Progress Index has just been announced. The US ranks 16th overall, ranks 70th in health, 69th and in echo systems sustainability, 39th in basic education, 34th in access to water and sanitation and 31st and personal safety. Even access to cell phones and the Internet ranks us at a disappointing 23rd, partially because one of Americans in five lacks Internet access. The winners are New Zealand number one, followed by Switzerland, Iceland, the Netherlands and  Canada. All are somewhat poorer than America per capita, yet they appear to do a better job of meeting the needs of their people, including free healthcare and reasonably priced colleges. Some politicians who propose cuts in Medicare and ending Obama Care and reducing food stamps and public services believe that such trends could boost America’s competitiveness. However, looking at this report, it seems that the opposite is true. In America, capitalism spiritual home, a survey conducted in 2013 found that just 54% had a positive view of the term. This seems to be the case because the benefits of capitalism have recently only gone to the top 1%. There seems to be a crisis in confidence as the Supreme Court has a ranking of only 30% public schools 26%, the criminal justice system 23% and Congress 7%. The recent election showed just how unsatisfied people are. They voted for change, but change is unlikely to come. Since Citizens United, that declared corporations are people, most changes in government is dictated by donors and election contributions. A recent Princeton study has shown that public opinion has no effect on the outcome of an issue in Congress, whether there is 0% approval or 100% approval, the line of accomplishment is flatlined. Donor power has taken over the rights of ‘we the people’. The current illusion that voters are being heard and are connected will soon diminish in my opinion. The risk now is that voters of both parties may pursue policies which damage the common good.

Carl M. Birkelbach 11/18/14

The INVESTMENT STRATEGY LETTER
Looking for a Top in the Stock Market/OR/Warning Signs

It was another day in the markets that saw the markets making new highs and yet traded in a very narrow trading range. Richard Arms, well-known stock market technician, joined my ranks today when he said the market looks like it’s going through a topping process. Art Cashin on CNBC said he agreed with him. I highly respect these people and are happy to see them join my minority view. However, I’m looking for a much larger drop and they are.

Let’s take a look at some market indicators. 1) Volatility increased with the 10% market drop which was followed by a 11% gain to new highs. Now, volatility has decreased to a narrow range. I would say, this is a bearish indicator. 2) Sentiment for the Bulls is becoming very euphoric  and close to its highest levels ever. On the other hand, Bearish sentiment is at a nine-year low. That Kool-Aid flavor of euphoria sure tastes good! But this sentiment is quite bearish for the market. 3) The market appears ‘overbought’ as it has stayed above the five day moving average level for a record 19 days. This is very unusual and indicates that the market is overbought. I do not yet, have the ability to show charts in this blog. But my old reliable STRATEGY INDEX indicates that the market is overbought. 4) There appears to be liquidity worries for high-yield bonds, which in previous blogs (October 11) I called these securities ‘junk’. 5) There seems to be interest rate uncertainty as there is full employment, low energy costs, and QE buying by the Fed has stopped. This is also a bearish factor. The five areas I mentioned above are known to professional traders as the FIVE RED FLAGS.

The subject of a November 11 blog was about investing locally. When I first entered the business in 1963, there were brokerage firms on every corner. I was working at one of them, called McCormick and Company. We made markets an local stocks that normally traded below three dollars a share, in what was called the pink sheets. These stocks are now banned from ‘solicited trading’ under the guise that the SEC and FINRA are protecting the public from ‘speculative securities’. McCormick and Co. also helped regional Midwest firms  go pubic. One of those firms was Kentucky Fried Chicken. Yes the Col. in 1963 was there, all dressed in white. There wasn’t a big demand for the stock, as people were unsure as to whether franchising would work.That was considered a  new concept then.My Dad bought 1000 shares and doubled his money. My Uncle bought 1000 shares and kept it until his death. It was his largest asset. Those times are gone and probably forever. I don’t believe the regulators understand what the ruined. In my opinion, they certainly are not serving the best interests of the public. They knowingly or unknowing represent only the Big Bucks. Hot deals now go to the professionals and hedge funds. A local small business is pretty much cut off from bank loans, unless they don’t need the money.  Brokerage firms don’t help local firms go public anymore because the local firms are all gone and the current brokerage firms are now global and owned by the banks or international conglomerates, as are the mutual funds. Also, most people don’t invest in stocks anymore. Most invest in no-load mutual funds controlled by the banks, through their well-trained investment planners.

However, in an attempt to encourage more training of smaller US stocks, the SEC is now initiating a pilot program which is meant to spur trades in about 30% of publicly traded US companies, called A TRADE AT RULE. Members of the investment community have said that this is really a stealth attempt to hurt brokers that run private trading systems, which compete with the likes of the New York Stock Exchange. The title of the article in Traders Magazine, has the headline BROKERS ATTACK SEC’S PLAN AS TROJAN HORSE DESIGNED TO HURT THEM. For those interested in the article, the link is below. Have a great weekend. The battle starts again Monday morning.

http://www.tradersmagazine.com/news/brokerage/brokers-attack-secs-plan-as-trojan-horse-designed-to-hurt-them-113102-1.html?zkPrintable=true

Carl M. Birkelbach 11/14/14