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.

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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

The INVESTMENT STRATEGY LETTER
Looking for a Top in the Stock Market/OR/It is OK to be Bearish

While I was having lunch today with a business associate (thanks for lunch) and talking about this blog, I mentioned how much easier it is now, to be bearish and warning about a possible new Bear Market, when you don’t have to worry about panicking your clients. It is one thing to write a philosophical blog (just for the fun of it) and it is quite another to have the fiduciary responsibility of clients on your hands. Therefore, I feel much more at ease, talking about a top in the stock market, than would a money manager. Besides, for those who have a fiduciary responsibility, ‘market timing’, is frowned upon by such regulatory entities as the SEC and FINRA.
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.

Bear markets do not offer the average investor in mutual funds many alternatives to protecting their portfolio in a Bear Market. Professional investors  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. At one time I use the word ‘good;, when the stock market broke out on the upside and ‘bad’ when a breakout occurred on the downside. This is a bad habit, that we as investors have to break. The outcome for us is only ‘good’ if we are long the security, when the market  goes up or short a security when it goes down. There is a misconception among most investors that they can only make money, if the market goes up. With the use of options, such as puts and the ability to go short a stock as easily as you can go long, investors no longer have to rely solely on mutual funds.

John Maynard Keynes said “markets can stay irrational longer than we can stay solvent.So,”Don’t be stubborn. If the market is topping ,don’t just ‘hang in there’ Your investment decisions have nothing to do with being positive or patriotic.We do not control world events, the economy or the markets. However, we do control our attitude and we can change our old investment habits and follow a strategy of being more flexible.

Be as a cold hearted money player, just as the professionals are. What did the mobster say to his victim in the movie Godfather just before he killed him? “Sorry it’s only business.” That does not mean to be cold hearted in your personnel life. Just making a killing won’t make you happy and the money won’t last long, unless you are in the right frame of mind to be deserving of receiving abundance.

I think tomorrow’s subject will be about five indicators that are showing red flags for a stock market top. For instance, did you know that investor sentiment for people who are bearish is at a nine year low whereas those who are bullish are at a new high? That Kool-Aid flavor of euphoria, sure tastes good.

Carl M. Birkelbach 11/13/14

Is the Market Topping?
This is a continuing dialogue about why I believe the markets are in the ‘process’ of forming a major top.(This is an early warning. It could happen now, or take a year or less.) In the last two current market updates, I have indicated three reasons for my concern. The theme of today’s blog centers around the concerns of two recent best-selling books; This Time Its Different and House of Cards. History has shown us that booms and busts a can occur for a variety of reasons and are somewhat unpredictable across time. However, the one thing that doesn’t change is human nature. In Plato’s Republic in the Allegory of the Cave he describes prisoners that are chained in a cave in such a way that they can only view their shadows on the wall in front of them. In the allegory, Plato has Socrates suggest that the prisoners would believe that their shadows represent reality, not knowing what caused shadows. Socrates further suggests, that if the prisoners are freed and dragged into the sunlight, they would be unable to relate to the new reality and would continue to see things as they thought them to be. We are the prisoners in the cave and we are trapped in the chains of our beliefs.

The recent economic growth has been fueled by government debt, artificially low interest rates and federal reserve buying of bonds. Presently, corporate earnings are high, inflation low, and housing prices are returning to formal levels and the world is in a ‘relatively stable’ period. However, this could change quickly.Housing prices in places like Seattle and New York City are going through the roof. How can a young couple afford an average priced $800,000 house or condo. Because of lower energy prices, inflation appears to be flat. However, four tickets for a basketball game now cost a thousand dollars, college prices are beyond the means of the average person and healthcare costs and basic living expenses are skyrocketing. The average US worker  is not making enough money for a decent living and should be classified as ‘the working poor’.

The last banking crisis occurred because banks were too big to fail and were caught with derivatives that wound up to be close to worthless. Then, the 10 largest banks had approximately 30% of all US deposits, now they have above 55% of all deposits and 75% of total assets and they own more derivatives than there were in 2008. The most dangerous derivatives are in Europe (Greece and Spain for instance) and emerging nations. Also banks are holding bonds at prevailing lower interest rates, which was caused by the Fed’s stimulus buying. The Fed is no longer buying. Interest rates could easily double and once again crippled bank balance sheets. What will happen the next time banks need a federal bailout with a Conservative Republican dominated Congress? I don’t think they would approve a trillion dollar stimulus (like the democratic congress approved in last crisis), that would increase the deficit. Then what?

Carl M. Birkelbach

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INTRODUCING THE NEW INVESTMENT STRATEGY LETTER BLOG

LOOKING FOR A TOP IN THE MARKETS
Since 1978 I have written 573 market letters. This BLOG is a continuation of that tradition, to speak out for the individual investors and to give them an independent view of investing that has become dominated by market commentators that drink from one Kool Aid fountain of the large bank dominated financial industry. Just as I was one of the first in my Lone Bull Letters in the 1980’s and 1990’s to forecast a market (DJIA), that would rise from 1,000 to over 10,000. I now see STOCK AND BOND MARKETS THAT APPEARS TO BE READY FOR A TOPPING PROCESS.  I have been asked, why am I looking for a top in the stock market, when it keeps on making new highs? Good question. But, it deserves a long answer. Some of my reasoning is in the below section INVESTMENT STRATEGY with two of my concerns 1) the inequality of economic growth and wealth is confined to the top 1% and is sucking the air out of the economy. 2) high-yielding (junk) bonds are not liquid enough should investors holding mutual fund shares in high-yielding bonds decide to sell.
There are a lot of other reasons for my caution. One of them, of course, is the euphoria that investors now seem to have, as they are trained like Pavlov’s dog to not to worry about market setbacks. So, rather than trying to do this (explain my concerns), all at once. I will do this a little at a time on a daily basis

Today’s Subject: Investing Locally
When I was a kid, there were brokerage firms on every corner similar to the way you see Starbucks coffeehouses now. Due to pressure from above (probably from the banks, the SEC and FINRA), brokers have gone from about 10,000 entities to only 3000 entities, most of which are owned by banks. In the past, local brokers and investment bankers, helped small businesses go public. Here I defined small businesses as having 500 or fewer employees. They make up 99% of the businesses in the United States and account for 45% of US revenue and three out of every four jobs. The $26 trillion invested in stocks, bonds and mutual funds, goes mostly to multi national and international conglomerates. Less than 1% of money raised by banks (formerly investment banks, which were separate from the banking industry) goes to local productive use, which hires people and develops new products. Now the banks not only control the brokerage, and mutual fund industry, they also control the investment banking industry. Small companies (those with less than 500 employees) have been cut off by the banking industry from loans and investment banking alternatives. That’s because, the system is set up to help large companies only, those that are only interested in the national and international markets and many of which have corporate headquarters outside of the United States. Just as the top 1% and the 80 people who own 50% of the wealth in the world are sucking the air out of consumers’ pockets, the conglomerates are sucking the air out of small US companies. On a short-term basis, this has been good for the stock market and is corporations. However, the long-term effect could be devastating both the economy and stock market. For further references check out the book LOCAL DOLLARS, LOCAL SENSE by Michael Shuman (who has commented on this subject in the New York Times editorial section)
Tomorrow Subject; House of Cards. Reference book: THIS TIME IT’S DIFFERENT /Eight Centuries of Financial Folly by Renhart/Rogoff

INVESTMENT STRATEGY: Lighten up during rallies
The markets have steadily risen since 2009 and investors have been trained like Pavlov’s dog to not worry about setbacks. Stock markets tops and the beginning of a Bear Market happen when it is least expected. I tend to be suspicious when euphoria and hubris reach high levels ( I just got back from NY City and the euphoria is unbelievably high.) That happened in 2000 and 2008 after which the market corrected 50% of its gains in a very short period of time.
So what could go wrong? There are two bubbles that I am concerned about. 1) All economic growth in last 20 years has gone to the top 1% in the US and to the top 80 people who control 50% of the wealth in the world. There is nothing wrong with accumulating wealth; however its effect on the general economy could make future economic growth unsustainable. How many bars of soap and how many cars can each of the wealthy people buy? These excessive conditions have taken the breath out of the economy for consumers and sooner or later will affect the entire economy negatively. 2) The FED has stopped its stimulus package of buying bonds. Investors who have high-yielding bond mutual funds have immediate liquidity. However, the managers that hold these funds in high-yield bonds, have much less liquidity. PIMCO owns close to 50% of many foreign bonds and controls over 40% of the debt issued by the Bank of China, 40% of the State Bank of India and close to 30% of some Spanish banks. This is not a problem during the good times like now and when the stock market shows higher highs. However if the Fed starts raising interest rates and the stock market starts to fall, this could cause a problem with high-yielding bonds that are not very liquid, which could cause a precipitous drop in in high yield bond prices. ‘Junk bonds’ can suddenly become a new name for these high yielding bonds. Markets hate lack of liquidity!

As always, I will let the market tell me what to do, using my technical methodology outlined in Investment Strategy Handbook for Volatile Markets.(My book). If we start seeing new highs, the Dow could go up to about 18,000 by year end. To me,the market looks like it is running out of breath for 2015. If the market starts making new lows, there isn’t any Intermediate down side support until around the 15,000 area. Stay tuned!

Carl M. Birkelbach 11/11/14

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THE INVESTMENT STRATEGY LETTER
In my opinion the market continues to look as though it is topping.

So what could go wrong? There are two bubbles that I am concerned about. 1) All economic growth in last 20 years has gone to the top 1% in the US and to the top 80 people who control 50% of the wealth in the world. There is nothing wrong with accumulating wealth; however its effect on the general economy could make future economic growth unsustainable. How many bars of soap and how many cars can each of the wealthy people buy? These excessive conditions have taken the breath out of the economy for consumers and sooner or later will affect the entire economy negatively.  2) The FED has stopped its stimulus package of buying bonds.  Investors who have high-yielding bond mutual funds have immediate liquidity. However, the managers that hold these funds in high-yield bonds, have much less liquidity. PIMCO owns close to 50% of many foreign bonds and controls over 40% of the debt issued by the Bank of China, 40% of the State Bank of India and close to 30% of some Spanish banks. This is not a problem during the good times like now and when the stock market shows higher highs. However if the Fed starts raising interest rates and the stock market starts to fall, this could cause a problem with high-yielding bonds that are not very liquid, which could cause a precipitous drop in in high yield bond prices. ‘Junk bonds’ can suddenly become a new name for these high yielding bonds. Markets hate lack of liquidity!

As always, I will let the market tell me what to do, using my technical methodology outlined in Investment Strategy Handbook for Volatile Markets.(My book). If we start seeing new highs, the Dow could go up to about 18,000 by year end. To me,the market looks like it is running out of breath for 2015. If the market starts making new lows, there isn’t any intermediate down side support until around the 15,000 area. Stay tuned!

Carl M. Birkelbach

So what could go wrong? There are two bubbles that I am concerned about. 1) All economic growth in last 20 years has gone to the top 1% in the US and to the top 80 people who control 50% of the wealth in the world. There is nothing wrong with accumulating wealth; however its effect on the general economy could make future economic growth unsustainable. How many bars of soap and how many cars can each of the wealthy people buy? These excessive conditions have taken the breath out of the economy for consumers and sooner or later will affect the entire economy negatively.  2) The FED has stopped its stimulus package of buying bonds.  Investors who have high-yielding bond mutual funds have immediate liquidity. However, the managers that hold these funds in high-yield bonds, have much less liquidity. PIMCO owns close to 50% of many foreign bonds and controls over 40% of the debt issued by the Bank of China, 40% of the State Bank of India and close to 30% of some Spanish banks. This is not a problem during the good times like now and when the stock market shows higher highs. However if the Fed starts raising interest rates and the stock market starts to fall, this could cause a problem with high-yielding bonds that are not very liquid, which could cause a precipitous drop in in high yield bond prices. ‘Junk bonds’ can suddenly become a new name for these high yielding bonds. Markets hate lack of liquidity!

As always, I will let the market tell me what to do, using my technical methodology outlined in Investment Strategy Handbook for Volatile Markets.(My book). If we start seeing new highs, the Dow could go up to about 18,000 by year end. To me,the market looks like it is running out of breath for 2015. If the market starts making new lows, there isn’t any intermediate down side support until around the 15,000 area. Stay tuned!

Carl M. Birkelbach