Category Archives: Investment Planning

The Left Is So Wrong On Trade

flag USMy Comments: When I first heard about the TPP (Trans-Pacific Partnership) and understood the broad outlines of the idea, I had no problem with it. Then along came Robert Reich, someone whose intellect I respect, saying it was terrible and should be scuttled. So I started looking a little closer, mindful I didn’t have access to the actual language.

The issue has now given the GOP another imaginary arrow to put down the White House. To my mind, Elizabeth Warren and Bernie Sanders are a breath of fresh air, but are pandering to their base just like Ted Cruz is pandering to his base. I’ve concluded, as an economist and financial professional, that it will be, on balance, a good thing. Does it have flaws? Most certainly. Should they be fixed? Maybe.

The 21st Century is evolving rapidly, and there will be unintended consequences, but to argue that not advancing the TPP will somehow miraculously result in jobs returning the US is nuts. Maybe some CEOs will make hundreds of millions; so what? My professional gut tells me the left has overlooked the benefits and the real chance to boost economic growth in this country, in a way that has to happen. They are just as fixated on their personal bias as are those on the right.

May 14, 2015 / Froma Harrop

The left’s success in denying President Obama fast-track authority to negotiate the Trans-Pacific Partnership is ugly to behold. The case put forth by a showboating Sen. Elizabeth Warren — that Obama cannot be trusted to make a deal in the interests of American workers — is almost worse than wrong. It is irrelevant.

The Senate Democrats who turned on Obama are playing a 78 rpm record in the age of digital downloads.

Did you hear their ally, AFL-CIO head Richard Trumka, the day after the Senate vote? He denounced TPP for being “patterned after CAFTA and NAFTA.” That’s not so, but never mind.

There’s this skip on the vinyl record that the North American Free Trade Agreement destroyed American manufacturing. To see how wrong that is, simply walk through any Walmart or Target and look for all those “made in Mexico” labels. You won’t find many. But you’ll see “made in China” everywhere.

Many of the jobs that did go to Mexico would have otherwise left for low-wage Asian countries. Even Mexico lost manufacturing work to China.

And what can you say about the close-to-insane obsession with CAFTA? The partners in the 2005 Central American Free Trade Agreement — five mostly impoverished Central American countries plus the Dominican Republic — had a combined economy equal to that of New Haven, Connecticut.

(By the way, less than 10 percent of the AFL-CIO’s membership is now in manufacturing.)

It’s undeniable that American manufacturing workers have suffered terrible job losses. We could never compete with pennies-an-hour wages. Those low-skilled jobs are not coming back. But we have other things to sell in the global marketplace.

In Washington state, for example, exports of everything from apples to airplanes have soared 40 percent over four years, to total nearly $91 billion in 2014, according to The Seattle Times. About 2 in 5 jobs there are now tied to trade.

Small wonder that Sen. Ron Wyden, a liberal Democrat from neighboring Oregon, has strongly supported fast-track authority.

Some liberals oddly complain that American efforts to strengthen intellectual property laws in trade deals protect the profits of U.S. entertainment and tech companies. What’s wrong with that? Should the fruits of America’s creativity (that’s labor, too) be open to plundering and piracy?

One of TPP’s main goals is to help the higher-wage partners compete with China. (The 12 countries taking part include the likes of Japan, Australia, Canada, Chile, Mexico, and New Zealand.) In any case, Congress would get to vote the finished product up or down, so it isn’t as if the public wouldn’t get a say.

But then we have Warren stating with a straight face that handing negotiating authority to Obama would “give Republicans the very tool they need to dismantle Dodd-Frank.”

Huh? Obama swatted down the remark as wild, hypothetical speculation, noting he engaged in a “massive” fight with Wall Street to get the reforms passed. “And then I sign a provision that would unravel it?” he told political writer Matt Bai.

“This is not a partisan issue,” Warren insisted. Yes, in a twisted way, the hard left’s fixation over big corporations has joined the right’s determination to undermine Obama at every pass.

Trade agreements have a thousand moving parts. The U.S. can’t negotiate with the other countries if various domestic interests are pouncing on the details. That’s why every president has been given fast-track authority over the past 80 years or so.

Except Obama.

It sure is hard to be an intelligent leader in this country.

Sine of the Times

200+year interest ratesMy Comments: Many of you have read my comments about interest rates lately. (Yesterday!) For many, many months, the Fed has used its powers to keep them low to encourage economic growth. Now that growth is again endemic, sooner rather than later, pressures will exist to cause interest rates to increase.

The chart at the top of this post shows interest rates in this country going back to the late 1700’s. You can expect the curve to start changing its direction soon. When that happens, you should not own many long term bonds, unless you’re happy watching your net worth decline.

Commentary by Scott Minerd, Guggenheim Partners, April 24, 2015

For the past 30 years, 10-year U.S. Treasury yields have shown a clear downward linear trend, falling from over 10 percent in 1985 to less than 2 percent today. Around this linear trend, yields have also exhibited a fairly consistent cyclical fluctuation, with the size of the fluctuation about 200 basis points from peak to trough, and with the cycle repeating every six years. This fluctuation can be thought of as a sine function, allowing us to model 10-year yields by combining the sine function with the linear trend:Chart-of-the-Week-04232015_600px

If we assume the secular, linear downward trend in yields will continue in the near term, we can predict the short-term outlook based on the model of cyclical fluctuations. This model currently shows that rates are just beginning to undershoot the linear trend, with the model predicting that rates will bottom at 0.82 percent in March 2016. What’s even more interesting is that the average actual bottom in rates has been 73 basis points lower than the model predicts, which would put rates at just 0.09 percent.

Now, I am not necessarily predicting that U.S. 10-year Treasury yields will test zero like its counterpart the German 10-year bund, which currently stands at around 16 basis points and I believe could provide negative yields at some point. What I am saying is that there are many powerful secular and fundamental forces at work that signal the risk to U.S. interest rates remains to the downside.

With Federal Reserve tightening drawing closer, the continuation of this downward trend could be called into question. However, a number of factors, including lower first quarter gross domestic product (GDP) growth, high demand from overseas investors (with yields approaching negative territory in much of Europe), and expectations of a slow liftoff by the Fed, are working to exert downward pressure on U.S. yields, thus limiting any upside in rates in the near term.

The prospect of a stronger dollar as a result of upcoming U.S. rate hikes only serves to heighten foreign demand for U.S. Treasuries. International investors are likely to seek to preempt Fed action and invest while their currency has greater relative strength. Betting against the downward trend in U.S. rates has proved to be a widow-maker trade for many years—and with fundamental and technical factors pointing to downside risks in rates in the near term, there appear to be few reasons to bet against the trend now.

 

Get Ready For The Biggest Margin Call In History

My Comments: Like a broken clock that is right twice every 24 hours, I’ve been talking about the probability of us having a severe market correction for the past 12 months or more. It’s obviously not happened yet.

But every time I turn around, there are new observations from people who understand this better than I do. Most of them agree it’s going to happen. Each of us in our own way, depending on where we are in life and what we expect to achieve with our savings and investments, need to pay attention. There are ways to protect yourself and it won’t cost an arm and a leg to make it happen.

Chris Martenson | Apr. 20, 2015

Economist Steen Jakobsen, Chief Investment Officer of Saxo Bank, believes 2015 will be another “lost year” for the economy. And he predicts the Federal Reserve will indeed start to raise rates later this year, surprising the market and taking the wind out of asset prices.

He recommends building cash and waiting to see how the coming storm – which he calls the “greatest margin call in history” – plays out:
0% interest rates at $0 down has not created the additional momentum to the economy The Fed was hoping for. The trickle down effect, the wealth effect, has instead made for bigger inequality in society. So I think we’re set for a rate hike in either in June or in September. I think this will be the biggest margin call in history on the asset inflation created by the Fed.

That’s where I differ from most Fed watchers. Everyone else is looking at employment, inflation targeting. I don’t think Fed is at all looking at those. They are saying “Listen, the 0% interest rate is getting us absolutely nowhere, we think it’s very, very important for us to move to a more neutral place”. At the same time we will communicate that we are open-minded to additional programs or whatever needs to be done to secure the long term growth of the economy. But that will be on the down side, not on the up side. And as year has progressed, and I’ve said this publicly, I think 2015 is already lost in terms of recovery here. And that will take the market by surprise.

The market will ask in September when the Fed hikes: “Why are you hiking interest rate when growth is below target, inflation below target”? Well, the Fed’s response will be “Because this is the biggest asset inflation we’ve seen in human history and we need to address it“.

What the Fed is saying is that we have unintended consequences of low interest rates. Money is chasing yield: it’s going to real estate making it over-valued, and flowing into the equity markets making them over-valued. And then the Fed says “Well, we have two choices. We can allow the market to run into a bubble, or we can burst the bubble and start all over again”. But they wrongly, in my opinion, believe they can actually micro manage that, even macro manage this. So what they would rather do is “lean up against the market”. To take some of the excess out of prices by going in and telling in the market “We are concerned, we don’t want you to have more leverage. We want you to have less. And we certainly would like to see that market become flat-lined for a while in terms of return.” Which by all metrics of measurements is actually also the expected return of the stock market. Don’t forget three, five and seven years expected return at the present multiples is exactly 0%.

Given this, at a bare minimum, I recommend taking the leverage out of your own portfolio so you sit with a nice pot of cash if the market does correct. If it doesn’t, you’re not really losing out much because again, they expect a return is 0% for the next couple of years.

Some time the best advice to anybody is to do nothing. And of course being, part of an online bank I’m not exactly popular with management for putting this advice out there. But I have to give the advice I believe in and share what I do myself; and I’m certainly reducing whatever equity I have in my portfolio to a minimum. So I’m scaling back to where I was in January last year.

I’ll put it another way. I’m advising a hedge fund in London, analyzing 10,500 stocks from the bottom up. How many do you think of these 10,500 world stocks are cheap? Only 23. Which means 98% of all stocks are either fairly-priced or expensive.

Click the link below to listen to Chris’ interview with Steen Jakobsen (40m:27s)

https://www.youtube.com/watch?v=fnp5ETnKylU

The First Sign of an Impending Crash

080519_USEconomy1My Comments: Another in a littany of warnings about pending doom. It gets a little tiresome,doesn’t it? Especially when there are others who swear the signs are there for continued gains. My gut tells me this guy is probably right.

By Jeff Clark Thursday, February 12, 2015

Investors have plenty of reasons to be afraid right now…

There’s the rapidly falling price of oil… The big decline in the value of global currencies… The Russian military action in the Ukraine… And the possibility of the European Union falling apart.

It’s unsurprising that many investors are looking for the stock market to crash. And – as I’ll show you today – we’ve seen the first big warning sign.

But here’s the thing…

Stock markets don’t usually crash when everyone is looking for it to happen. And right now, there are far too many people calling for a crash…

Once we get through this current period of short-term weakness that I warned about on Tuesday, the market is likely to make another attempt to rally to new all-time highs.

This will suck investors in from the sidelines… And get folks to stop worrying.

Then, later this year, when nobody is looking for it… the market can crash.

But for now, just to be on the safe side… Keep an eye on the 10-year U.S. Treasury note yield…

The 10-year Treasury note yield bottomed on January 30 at 1.65%. Today, it’s at 2%. That’s a 35-basis-point spike – a jump of 21% – in less than two weeks.

And it’s the first sign of an impending stock market crash.

As I explained last September, the 10-year Treasury note yield has ALWAYS spiked higher prior to an important top in the stock market.

For example, the 10-year yield was just 4.5% in January 1999. One year later, it was 6.75% – a spike of 50%. The dot-com bubble popped two months later.

In 2007, rates bottomed in March at 4.5%. By July, they had risen to 5.5% – a 22% increase. The stock market peaked in September.

Let’s be clear… not every spike in Treasury rates leads to an important top in the stock market. But there has always been a sharp spike in rates a few months before the top.

It’s probably still too early to be concerned about a stock market crash… But keep an eye on the 10-year Treasury note yield. If it continues to rise over the next few months, then you can start to worry.

Good investing,

Jeff Clark

Stock Buybacks Are Killing the American Economy

US economyMy Comments: This is a helpful analysis if you are like me and worried about our financial future.

Retirement planning and what to do with our money so it grows and remains safe for the future is what I do. I’m not sure I like it all the time, but at this stage of my life, doing something else is probably not in the cards.

What caught my attention here is that I had no idea anything was killing the American economy. But a quick read of this caused me to include these thoughts with those I have about income inequality and how, if left unchecked, will lead to social chaos in this country.

By Nick Hanauer / February 8, 2015

President Obama should be lauded for using his State of the Union address to champion policies that would benefit the struggling middle class, ranging from higher wages to child care to paid sick leave. “It’s the right thing to do,” affirmed the president. And it is. But in appealing to Americans’ innate sense of justice and fairness, the president unfortunately missed an opportunity to draw an important connection between rising income inequality and stagnant economic growth.

As economic power has shifted from workers to owners over the past 40 years, corporate profit’s take of the U.S. economy has doubled—from an average of 6 percent of GDP during America’s post-war economic heyday to more than 12 percent today. Yet despite this extra $1 trillion a year in corporate profits, job growth remains anemic, wages are flat, and our nation can no longer seem to afford even its most basic needs. A $3.6 trillion budget shortfall has left many roads, bridges, dams, and other public infrastructure in disrepair. Federal spending on economically crucial research and development has plummeted 40%, from 1.25 percent of GDP in 1977 to only 0.75 percent today. Adjusted for inflation, public university tuition—once mostly covered by the states—has more than doubled over the past 30 years, burying recent graduates under $1.2 trillion in student debt. Many public schools and our police and fire departments are dangerously underfunded.

Where did all this money go?

The answer is as simple as it is surprising: Much of it went to stock buybacks—more than $6.9 trillion of them since 2004, according to data compiled by Mustafa Erdem Sakinç of The Academic-Industry Research Network. Over the past decade, the companies that make up the S&P 500 have spent an astounding 54 percent of profits on stock buybacks. Last year alone, U.S. corporations spent about $700 billion, or roughly 4 percent of GDP, to prop up their share prices by repurchasing their own stock.

In the past, this money flowed through the broader economy in the form of higher wages or increased investments in plants and equipment. But today, these buybacks drain trillions of dollars of windfall profits out of the real economy and into a paper-asset bubble, inflating share prices while producing nothing of tangible value. Corporate managers have always felt pressure to grow earnings per share, or EPS, but where once their only option was the hard work of actually growing earnings by selling better products and services, they can now simply manipulate their EPS by reducing the number of shares outstanding.

So what’s changed? Before 1982, when John Shad, a former Wall Street CEO in charge of the Securities and Exchange Commission loosened regulations that define stock manipulation, corporate managers avoided stock buybacks out of fear of prosecution. That rule change, combined with a shift toward stock-based compensation for top executives, has essentially created a gigantic game of financial “keep away,” with CEOs and shareholders tossing a $700-billion ball back and forth over the heads of American workers, whose wages as a share of GDP have fallen in almost exact proportion to profit’s rise.

To be clear: I’ve done stock buybacks too. We all do it. In this era of short-term-focused activist investors, it is nearly impossible to avoid. So at least part of the solution to our current epidemic of business disinvestment must be to discourage this sort of stock manipulation by going back to the pre-1982 rules.

This practice is not only unfair to the American middle class, but is also demonstrably harmful to both individual companies and the American economy as a whole. In a recent white paper titled “The World’s Dumbest Idea,” GMO asset allocation manager James Montier strongly challenges the 40-year obsession with “shareholder value maximization,” or SVM, documenting the many ways that stock buybacks and excessive dividends have reduced business investment and boosted inequality. Almost all investment carried out by firms is financed by retained earnings, Montier points out, so the diversion of cash flow to stock buybacks has inevitably resulted in lower rates of business investment. Defenders of SVM argue that investors efficiently reallocate the profits they reap from repurchased shares by investing the proceeds into more promising enterprises. But Montier shows that since the 1980s, public corporations have actually bought back more equity than they’ve issued, representing a net negative equity flow. Shareholders aren’t providing capital to the corporate sector, they’re extracting it.

Meanwhile, the shift toward stock-based compensation helped drive the rise of the 1 percent by inflating the ratio of CEO-to-worker compensation from twenty-to-one in 1965 to about 300-to-one today. Labor’s steadily falling share of GDP has inevitably depressed consumer demand, resulting in slower economic growth. A new study from the Organization for Economic Co-operation and Development finds that rising inequality knocked six points off U.S. GDP growth between 1990 and 2010 alone.

It is mathematically impossible to make the public- and private-sector investments necessary to sustain America’s global economic competitiveness while flushing away 4 percent of GDP year after year. That is why the federal government must reorient its policies from promoting personal enrichment to promoting national growth. These policies should limit stock buybacks and raise the marginal rate on dividends while providing real incentives to boost investment in R&D, worker training, and business expansion.

If business leaders hope to maintain broad public support for business, they must acknowledge that the purpose of the corporation is not to enrich the few, but to benefit the many. Once America’s CEOs refocus on growing their companies rather than growing their share prices, shareholder value will take care of itself and all Americans will share in the benefits of a renewed era of economic growth.

The Next Great Market Meltdown

My Comments: My hope for the future about this is that I will be wrong. But I’m also aware that hope is not a very effective investment strategy. So, apart from my hope that you and yours have a spectacular 2015, it’s tempered by my expectations of reality. This writer is well known to those of us in this business.

This chart appeared in April of 2013. Meanwhile the market has now exceeded 18,000! What do you think is likely to happen next? I suggest you be prepared.

by Bob Veres / DEC 17, 2014

Ever since Congress and regulators failed to fix the sales incentives that drove us to the epic global meltdown of 2008, I’ve been watching for the next debacle — and I think it’s finally coming into view.

If I’m right, we’re approaching a confluence of failures that will feed on each other. The next great debacle will end up tarnishing (yet again) Wall Street’s reputation. But this time I’m afraid it will also stain the good name of financial planners and advisors.

Let’s start with nontraded REITs, which seem to be imploding right before our eyes. I warned anybody who would listen about recommending opaque illiquid products that use investor dollars to pay huge commissions and generous due diligence fees to broker-dealers.

How could anybody believe that this toxic combination adds up to a viable investment? Unless, of course, the promoter is stuffing money in your shirt pocket.

Now broker-dealers, custodians and investors have all started to back away from the sector; I suspect the stench has become so awful that they have, somewhat belatedly, gotten cautious about taking on the liability associated with selling at least some of this junk.

They may be remembering a lesson we all learned in the last go-around with investments like these, during the tax shelter era. The general partner business model for illiquid investments is only sustainable if ever-greater amounts of money are being raised. Once the sales dry up, the sponsors pack their bags and move on to the next opportunity — or retire in luxury with millions of dollars sucked right out of the accounts of workers and retirees.

If I’m right, the next great debacle will see thousands of customers — who put their trust in people who call themselves financial planners and investment advisors — discover that they can no longer afford retirement. The lawsuits over billions of lost investor dollars will, once again, test the viability of the independent broker-dealer industry. Headlines will paint the entire financial planning profession as a bunch of greedy sales agents.

YIELD-BASED APPEAL

Nontraded REITs are sold as a high-yield investment in a yield-starved marketplace. Using essentially the same pitch, a growing number of reps are also selling load-bearing fixed-income mutual funds that offer impressively higher yields than their peers.

Their secret? Load up on the diciest (unrated) private bond issues, BBB-rated or lower investments and higher-duration bonds that are going to get creamed when interest rates tick up.

The Fed has kept rates so low for so long that thousands of questionable issuers have been able to float bonds and rake in money at above-market rates that are low by historical standards. Since the Lehman Brothers collapse, aggregate corporate bond debt has increased an astonishing 53%, according to Bank of America-Merrill Lynch research, with three straight record $3 trillion years of new paper issued.

And emerging market countries set a record for debt issuance last year, at more than three times 2006 levels, according to Thomson Reuters. Kenya issued the largest sovereign bond issue ever by an African nation, equivalent to about a third of its total tax revenues — and the offering was four times oversubscribed.

This is looking like a bond bubble of epic proportions, as the potential default of some Puerto Rican bonds — a prominent holding of many of these yield-chasing funds — is starting to make clear. Any reasonable due diligence effort would question whether Puerto Rico will ever be able to pay back outstanding municipal debt that equals $18,919 per resident of that impoverished island.

Yet last year, an article in The Bond Buyer noted that a Franklin Templeton fund had amassed an astonishing 61% weighting in Puerto Rican debt, while a number of Oppenheimer funds were more than 20% invested in Puerto Rican bonds.

BOND CRASH AHEAD?
It’s not hard to predict that, early in the next great debacle, interest rates will tick up just enough that nobody on the secondary market is going to want to buy dicy paper when they can get equivalent yields from new-issue Treasuries. At current rates, even small shifts could cause risky bond values to fall hard enough to startle lay investors.

Millions of people could see losses on their quarterly statements in a part of a portfolio that their sales rep, masquerading as a financial planner, told them was rock-solid stable — and many of them are going to want to redeem their shares. A run-on-the-bank phenomenon would make the liquidity problem much, much worse.

Imagine the panic reaction if word gets out that certain funds are unable to liquidate and give investors their money back.

I’m going to go out on a limb and predict that at least some of these funds will decide to calculate their NAV using optimistic valuations for bonds that nobody wants at any price. When the regulators step in and demand a repricing, and investors see dramatically higher losses than were being reported, the whole downward spiral will go around one more turn.

In a related scandal, policyholders might discover that the universal life contracts they were sold are nowhere near performing as they were projected when these sales reps sold them the policies. As insurance companies demand new premium payments to keep the policies in force, and investors complain about double-digit losses in their bond funds, the media will have yet another reason to question the value of a financial planning engagement.

ANOTHER BIG SHOE
Somewhere in this mess, I expect another big shoe to drop. Does anybody want to bet that the wirehouses are not selling trillions of dollars worth of undisclosed, unregulated derivatives contracts that allow companies and banks to hedge against higher interest rates?

If rates jump faster than their models predict, I can envision Wall Street firms being on the hook for more than their aggregate net capital holdings — and, given the size of the derivatives market, the liability might actually be comparable to gross global GDP.

I wouldn’t be surprised if, as the next great debacle unfolds, we were to discover that the brokerage firms had also been quietly selling packaged combinations of privately issued bonds to their institutional and highly leveraged hedge fund customers — junk disguised as high-quality paper.

Welcome to the next government bailout.

I hope none of this comes to pass; I really do. But I think the next great debacle that I’ve outlined here is a grimly logical consequence of all the sales incentives that still govern so much of the financial services marketplace. It’s a shadowy world where what you make is infinitely more important than what the customer makes.

Unless those incentives are fixed — and unless the public is given a fair chance to know who is and who is not motivated to sell them junk investments — we’re going to see this same unhappy scenario play out over and over again. The particular investments and shady scams may change from debacle to debacle, but the underlying driver remains the same.

As the next great debacle unfolds, I would ask that both regulators and journalists pay close attention to the fact that those who could trigger this multiheaded scandal — ruining millions of financial lives with self-serving recommendations — were allowed to call themselves financial planners and financial advisors. But that doesn’t mean that they actually were.

Bob Veres, a Financial Planning columnist in San Diego, is publisher of Inside Information, an information service for financial advisors. Follow him on Twitter at @BobVeres.

5 Reasons Why You Should Be Afraid Of A Bear Market

question-markMy Comments: Until I found this, I had never heard of hedgewise.com. I make absolutely no assertion that they know what they are talking about. My personal solution for you is quite different from what you read below, but this part of life is almost always a guessing game.

Oct. 30, 2014 http://www.hedgewise.com/

Summary
• The Fed officially just ended its bond buying program, marking the close of a financial era.
• With the bull market now in its 6th year, stocks may struggle to continue their run without the Fed’s help.
• Many significant warning signs are signaling an oncoming bear market.
• There are smart steps you can take to better hedge your portfolio.

1) There have only been 2 longer bull markets in recent history

Beginning in January 2009, this bull market is now in its 71st month. Only two bull markets have lasted longer in the past century, during the 1920s and the 1990s.


2) Price-to-earnings ratios are approaching 2006 levels

The widely-recognized “Shiller-PE” ratio compares average inflation-adjusted earnings from the previous 10 years to the current price of the S&P 500. This helps to smooth out variance over time caused by natural fluctuations in the business cycle. The current level of the Shiller-PE ratio of over 25 is near that of 2006 and well above the mean of 16.5. While this does not indicate an imminent collapse, history would suggest that the stock market may not be the best investment for the next ten years.


3) The Fed is removing the punch bowl

Interest rates have been at historic lows for the past five years. This has created a sensational environment where stocks are one of the only reasonable investment options. However, the Fed just stopped their bond buying program altogether, and interest rates can only go in one direction. Moving forward, the market faces a cruel double-edged sword. If there is strong growth, it will prompt the Fed to begin raising rates, causing investors to demand higher returns and businesses to cut back. If there is weak growth, it will threaten corporate earnings and spark worries about another recession. Either way, stocks may fall.

4) The volume of the October rally has been light

October was a rollercoaster ride for the markets. While most of the losses have been offset here at month-end, the gains have occurred with relatively light trading volume. This suggests that the major players aren’t the ones buying.


5) Global growth is shaky

As recently studied by Larry Summers, India and China may be on the brink of a major slowdown. China has experienced a 32-year streak of extremely rapid growth, perhaps one of the longest streaks in all of history. Its economy is supported by approximately six trillion dollars of ‘shadow debt’, which may eventually create major systemic issues. While the US may not be the primary source of the next global slowdown, it would still certainly be a victim of the ripple effect.

How to Protect Your Portfolio (by hedgewise.com)

The two most likely scenarios for the economy are a rising interest rate environment with moderate growth, or a continued global slowdown which carries the risk of another recession. Unfortunately, US stocks face an uphill battle in both cases. If the Fed begins to raise rates, it will be a drag on both stocks and bonds. If rates remain low, it will probably only be due to a poor overall economic environment.

If you are seeking alternatives for your portfolio, you may want to consider a few contrarian investment options. When the Fed does raise rates, it will probably be on the heels of stronger growth and higher inflation. In that environment, Treasury-Inflation Protected Bonds (NYSEARCA:TIP) can help keep you safe from the rising price level, and commodities like gold (NYSEARCA:GLD) and oil (NYSEARCA:USO) may outperform due to a weaker dollar and stronger demand. On the other hand, if a significant slowdown occurs, investors may flee back into the safety of Treasury bonds (NYSEARCA:TLT), sending interest rates down yet again. Since it is unclear how the future will unfold, it may be wise to hedge your portfolio with some or all of these investments for the time being.