Tag Archives: financial advice

Impossible Germany

Pieter_Bruegel_d._Ä._037My Comments: I’ve mentioned before how easy it is for us to discount the economic influence of Europe on the world stage. But it’s a mistake to do so. Collectively, the European Union is an economic engine that is just as critical to the economic welfare of the world as we are. If they go down the tubes, so do we, just not so far. But down is down and not a fun place to be.

One reason Europe has been reluctant to respond aggressively to what Russia has been doing to Ukraine and it’s environs is because Germany, and much of the rest of Europe, know they are already walking on thin ice. Shutting out Russia means pissing in your own well, to borrow a phrase.

And, of course, Russia is happy to push those buttons as long as they can get away with it. What makes it troubling for me is that it might simply be delaying the inevitable. And I for one don’t want that inevitable to be known 25 years from now, as World War III.

Nov. 16, 2014 Eric Parnell, CFA

• The economic and market outlook appears impossible for Germany over the next few years.
• The world’s fourth-largest, heavily export-dependent economy is facing a fundamental problem.
• With future growth prospects increasingly fading, this bodes ill for the future performance of the German equity market.

The economic and market outlook appears impossible for Germany over the next few years. The world’s fourth-largest, heavily export dependent economy is facing the fundamental problem of struggling to thrive within the currency union it went to such lengths to help form over the last several decades. Future growth prospects are increasingly fading, and this bodes ill for the future performance of the German equity market.

German economic growth has effectively ground to a halt in recent years. After what was initially a fairly solid bounce in the early years of the “post-crisis” period, real GDP growth in Germany slowed to +0.7% in 2012 and +0.4% in 2013.

As for 2014, German real GDP growth projections for the year were recently revised meaningfully lower from 1.9% to 1.2%. More specifically, the economy just barely skirted past entering a technical recession by generating +0.1% growth in the third quarter, after having posted a negative -0.3% growth reading in the second quarter. It is worth noting that Germany managed to clear the bar into positive territory thanks to a surprisingly solid export number to non-Euro trading partners in September, a outcome that may not prove repeatable in future months. And despite the fact that Germany just barely avoided officially having the dreaded “R” word tied to their economy, these are still hardly growth numbers about which to get excited.

As for 2015, the growth projections have already been reduced to just 1.0%. And experience in the post-crisis world has repeatedly shown us that future economic and corporate earnings growth projections are simply made today to be lowered in the future. As a result, a final number for 2015 that is closer to 0%, if not outright negative, should not be completely ruled out.

Economic growth is grinding to a halt in Germany. But so what? Economic growth has been sluggish in the United States for years, yet the stock markets in both countries are now well above their pre-crisis highs. Can’t we simply expect the same degree of perpetually blind optimism among German stock investors to bid their own stocks to the stratosphere as well, fundamentals be damned? After all, it has worked well so far, as both the U.S. S&P 500 Index (NYSEARCA:SPY) and the German DAX have moved in virtual lockstep with each other in local currency terms dating back to the very beginning of the financial crisis in July 2007. That is, of course, until this past July, when these markets suddenly started to diverge widely from one another.

It is worth noting that currency effects have amplified the return differences between the U.S. and Germany since the summer of 2011. This is due to two specific periods – the first from the summer of 2011 to the summer of 2012, and the second since April 2014 – where the euro currency weakened sharply relative to the U.S. dollar. Thus, for those investors that have not hedged the currency, exposures associated with their German stock investments through vehicles such as the iShares MSCI Germany ETF (NYSEARCA:EWG) have not performed nearly as well.

But what about a monetary policy rescue in Germany and across the eurozone? Unfortunately for stock investors in the region, Germany does not claim to want such stimulus, and even if the European Central Bank decided that it wanted to provide it, they, unlike their American and Japanese counterparts, do not have a central bank that has the unchecked power to decide to print a few trillion euros out of thin air simply because their central bank head thinks that it is a good idea over his cereal one morning. Instead, ECB President Mario Draghi faces far more restrictions on his ability to engage in outright quantitative easing, and that includes getting clearance from German policymakers that have stated they do not want it.

What has been absolutely extraordinary to this point is how Mr. Draghi has been able to repeatedly boost regional stock and bond markets including Germany for years by doing nothing more than making promises about things he intends to do (and may not technically be able to do), without actually doing much of anything. How much longer his power of the podium can sustain itself remains to be seen, but the recent performance of stocks across the region suggest that equity investors both in Germany and elsewhere may be growing increasingly tired at this stage, particularly now that the spillover tailwind from the Fed’s quantitative easing has finally gone away.

Looking forward, the German stock market faces a fundamental problem that investors would be well served to confront sooner rather than later. In short, the German economy has experienced real growth of only 3% above pre-crisis levels from late 2007 and early 2008. Yet, the German DAX is nearly 20% above pre-crisis levels. More specifically, the German economy has posted a real GDP increase of just 1.4% since the summer of 2012, yet the DAX is up nearly 50% over this same time period. Put more simply, German stocks have skyrocketed over the last two years based on virtually nothing fundamental. Such are not the strong foundations of sustainable stock market gains into the future.

Adding to the forward-looking challenges for German stocks is the highly cyclical and economically sensitive make-up of the market. German stocks are more heavily concentrated in the variety of cyclical industries, including consumer discretionary, financials, industrials and materials. Overall, the allocation of the German stock market to cyclical industries is a notably high 82%. This is well above the U.S. reading at just over 70%. As a result, the German stock market is expected face more pronounced downside pressure if economic conditions in Germany deteriorate as we move into 2015.

Yet another issue for German stocks is valuation. For example, Germany’s 10-year cyclically adjusted price-to-earnings ratio is 16.4. While this reading is not the extraordinarily high 26.6 reading currently hanging over the United States, it is still a fairly lofty number in its own right. Moreover, Germany’s trailing 12-month price-to-earnings ratio is a notable 17.1, which is fairly reasonable but not necessarily what would be considered cheap. As a result, German stock investors should not expect to find comfort and support in deeply discounted valuations, as we are far from such an outcome at this point.

For those possibly interested in exploring individual German stock themes as an alternative to a broader exchange traded fund, it is worth noting they will find a limited selection of stocks from which to choose. At present, only six companies that are domiciled in Germany trade on the U.S. exchanges. And only three – SAP (NYSE:SAP), Deutsche Bank (NYSE:DB) and Fresenius Medical Care (NYSE:FMS) – are of any meaningful size from a market capitalization standpoint. Other larger names such as Siemens (OTCPK:SIEGY) and BASF (OTCQX:BASFY) that once traded in the U.S. have since departed from the American exchanges back to Germany.

For reasons discussed here and more, owning German stocks is less than desirable at the present time even after the recent pullback, given the persistent potential downside risks. And while U.S. may not be listening, what is unfolding in Europe along with many other global stock markets is important, for it is foreshadowing what is likely to arrive on U.S. market shores someday. For while U.S. stock investors can continue to ride off of “the best house on a bad block” theme, if conditions on the block continue to deteriorate, it is only a matter of time before the spillover effects begin to adversely and directly drag down this remaining “best house”.

Fear Lower Oil (prices)

My Comments: Frankly, I enjoy paying less to fill up the car with gas. There is more cash left in my wallet for me to deal with other things I need to buy. At the macroeconomic level, it will help retailers have a stronger holiday shopping season. That will help the economy. But like most things in life, what gets added with one hand results in something being taken from the other.

The following comments are by someone who speaks a language that few of us understand. I’ve highlighted one sentence in para 4 that I think is a takeaway from this. While you may like the idea of shale producers going bankrupt, it’s not a good sign for down the road.

Additionally, the comments in the last paragraph help me better understand why it’s been so hard for investment clients to participate in the historic climb of the DOW and the S&P500 these past two years. The Fed’s activities have overridden the usual strategies to participate without being over exposed to risk. That risk is now more meaningful than ever.

By Michael A. Gayed, CFA  /  Nov. 17, 2014

• The Utilities sector, perhaps the most predictive sector of the stock market, broke down meaningfully.
• The faster Utilities underperform, the more likely on a short-term rolling basis in the coming weeks they are to outperform.
• Wall Street seems to be under the impression the year is over, forgetting that the last time QE1 and QE2 ended, stocks corrected severely a month later.

The S&P 500 (NYSEARCA:SPY) stocks held on to moderate gains as the average stock was flat to down in a week that on the surface looked uneventful, but from a sector standpoint had important movements take place. The Utilities sector (NYSEARCA:XLU), perhaps the most predictive sector of the stock market, broke down meaningfully relative to the broader stock market starting Wednesday. At first glance, one might think after reading the 2014 Dow Award paper on Utilities (click here) that this is inherently bullish for stocks given that when the Utilities sector underperforms, historically going back to 1926 stock market volatility drops and equities rally.

And while this is true, the issue is the speed of underperformance. The faster Utilities underperform, the more likely on a short-term rolling basis in the coming weeks they are to outperform as that lower relative level dictates the soon to come change in rate of change. This means that while Utilities breaking down is bullish, the speed may actually be a set up for another pulse of risk-off strength, potentially at the tail end of November for another trigger to get defensive through either an all-in rotation to defensive sectors away from cyclicals (as our equity beta rotation strategy does), or an all-in rotation out of equities into Treasuries (as our inflation rotation strategy does).

We are only a few short weeks after the end of Quantitative Easing, and Wall Street seems to be under the impression the year is over, forgetting that the last time QE1 and QE2 ended, stocks corrected severely a month later. That would imply December may actually be a high risk month. Ten-year Treasuries (NYSEARCA:IEF), which have held in a tight range just above 2.3% are still signaling concern about US growth and inflation, as yields still seem to ignore what tends to be negative seasonality for Treasuries that begins in November. Combined with Junk debt taking another relative hit, the precursors to a meaningful breakdown seem to be taking place potentially as credit spreads widen and fail to confirm overall bullish sentiment into year-end.

In Arkansas last week, I did a presentation on our award winning papers, and someone in the audience was joking sarcastically with a prior speaker that lower Oil is deflationary, making fun of the idea that saving money is bearish. When I got up, before beginning, I addressed his point quickly and said “be careful what you wish for” when it comes to lower Oil. The meme out there is that lower Oil is bullish, but that completely disregards the speed with which Oil breaks down. Historically, meaningful declines in equities have been preceded by Oil breakdowns.

Furthermore, the faster Oil (NYSEARCA:USO) breaks, the more likely highly leveraged shale producers go bust. Popular junk debt ETFs (NYSEARCA:JNK) and indicies have Oil and Gas as the heaviest sector overweight within those averages. Collapsing Oil could set off a deflationary butterfly effect whereby spreads widen and filter through to all corporates, which in turn would be a form of credit tightening forced by the market as opposed to the Fed.

For us, we believe the post QE3 environment is extremely positive for the types of aggressively defensive rotations both of our main strategies (one alternative, one equity) favor. Both are based on proven historical indicators of coming regime changes in stock market volatility. The challenge since QE3 began has been that the Fed steamrolled any kind of a “risk trigger,” causing any warning signs of volatility changes to be ignored by markets. With that distorting factor out of the way, it stands to reason volatility and correlations revert to historical cause and effect.

Three Visual Ways To Educate Clients In A Bull Market

My Comments: Much of the evidence we see these days tells us we are experiencing a bull market. The DOW hit a new all time historic high yesterday, which is dramatic. Some pundits believe this time it’s ‘different’ and a downturn is unlikely. I’m not one of them.

I’ve been playing this game for almost 40 years now and I can tell you with absolute certainty that a downturn is coming. What I can’t tell you is when it will arrive nor how deep it will be. Just that you better plan for it.S&P500-1993-2014

The chart above shows the S&P500 over the past 20 years. If you don’t believe the next direction is down, I’ll be happy to listen to your logic. As an advisor, my role is to help clients and prospective clients better understand what they have to do to keep their money growing. Here are 3 ideas I came across a few months ago. They are good ideas and I use some of them, but the visual above is pretty compelling too.

August 26, 2014 • Christophe Gauthron

In the face of a relentless bull market in equities, advisors have the difficult task to justify balanced allocations to clients who have grown increasingly ambitious on returns. As the memories of the 2008 crisis start to fade, investors have become less realistic and more greedy.

Financial advisors have stated that some their clients at the start of 2014 have demanded of them why don¹t you allocate more of my portfolio to stocks? Advisors have naturally justified their choices by pointing to the allocations agreed upon in the policy statement. Often this reasoning is insufficient to preserve the client¹s trust and satisfaction.

A mid-year review in 2014 now brings on the same line of questioning as financial advisors must manage their clients risk and expectations in a bull market. A recent study of mass affluent investors by AssetMark finds critical gaps in knowledge and expectations between advisors and their clients. Nearly half of the study respondents say they would risk 25 percent to 100 percent of their portfolios for commensurate returns, yet the vast majority claims to be moderate to low risk takers.

On a positive note, the study reveals that investors want to be more educated about risk by their advisors. However risk is difficult to measure and communicate. What is the best way to explain risk, negotiate risk/reward tradeoffs and set realistic expectations? Or would you rather have your client educate themselves on social media? After conversing with many financial advisors on this topic, it appears that judicious use of portfolio analytics ¬ backing your arguments with easy to understand metrics and rich visuals ¬ may significantly improve your communication and trust with clients. To create this valuable opportunity, you must become a story-teller to your client. The following three visual analytics will greatly educate your clients in a bull market:

• Present risk/reward visuals for long term periods. Over a 10 years or even 20 years horizon, balanced allocations have done nearly as well as pure equity portfolios but with less volatility. The risk/reward visual is simple to understand and puts risk and return on an equal footing. The risk metric used is typically the portfolio volatility. Astute investors may point out that volatility of investments going up in value (like recent equities) is a good thing. Explain that the faster an investment has gone up, the faster it can go down, so high volatility – even on the upside ¬ is a still a sign of risk. To drive the point home, highlight investments with high volatility on the upside in the tech sector of the stock market just before the crash of 2000.

• Emphasize the maximum drawdown on return charts. The maximum drawdown is the amount of loss from a portfolio peak value, to the portfolio lowest value within a given period. Since this is a measure of the actual amount of money lost, the client can relate to this better than volatility. The maximum drawdown is best shown on a return chart. To emphasize the loss, highlight not only the depth of the draw, but the length of time it takes to recover from the draw. Ask the client if they will have the nerve to cope with a steady decline over several months or even years.

• Stress test the clients portfolio. This may be the most effective visual to remind clients that adverse events (black swans) causing crashes can happen at anytime, and by nature these events can’t be forecasted. To quantify the effect of adverse events, present the client with a portfolio stress test. How much would the portfolio lose in case of a currency crisis? a war? a liquidity crisis? Portfolio stress tests have been used by institutional investors for years.

More recently, stress test features have been made available in more affordable and easy-to-use packages for financial advisors. With these packages you can construct hypothetical scenarios, but for simplicity you may also use historical scenarios such as the tech bubble in 2000 and the financial crisis. Historical scenarios have the advantage of requiring no setup, they can be presented in seconds for any portfolio and they are easy to relate to. A side-by-side A/B comparison of portfolios is always the most powerful way to educate the client.

At the end of this presentation, your message to the client should express, “Let us construct a strategy that conforms to your long-term goals, not to a hot market.” Successful advisor-client relationships is a two-way street. Just as clients seek educated financial advisors to manage their investments, advisors should seek resources that not only provide safe returns to clients but educates them as well.

Christophe Gauthron, CFA, is founder of Kwanti, a software provider serving financial advisors and investment managers.

The Euro Is In Greater Peril Today Than At The Height Of The Crisis

My Comments: Here in the US we tend to think of Europe as a mis-directed older sibling, someone who can’t quite make it, by our standards. We forget that most of our laws and even the language we speak came from Europe. And those foundations were forged in a melting pot as violent and as culturally diverse as the chaos we see today in the Middle East. Talk about tribal warfare!

The European Union is an effort to eventually federalize the countries of Europe that emerged and existed following World War II. A common currency was thought to be a mechanism that echoed what we have here in the US among all 50 states. It’s in our best interest as a global peacemaker and economic engine of the future that we help Europe evolve and thrive.

Wolfgang Münchau / November 9, 2014 / The Financial Times

The eurozone has no mechanism to defend itself against a drawn-out depression.

If there is one thing European policy makers agree on, it is that the survival of the euro is no longer in doubt. The economy is not doing great, but at least the crisis is over.

I would challenge that consensus. European policy makers tend to judge danger in terms of the number of late-night meetings in the Justus Lipsius building in Brussels. There are definitely fewer of those. But that is a bad metric.

I do not have the foggiest idea what the probability of a break-up of the euro was during the crisis. But I am certain that the probability is higher today. Two years ago forecasters were hoping for strong economic recovery. Now we know it did not happen, nor is it about to happen. Two years ago, the eurozone was unprepared for a financial crisis, but at least policy makers responded by creating mechanisms to deal with the acute threat.

Today the eurozone has no mechanism to defend itself against a drawn-out depression. And, unlike two years ago, policy makers have no appetite to create such a mechanism.

As so often in life, the true threat may not come from where you expect – the bond markets. The main protagonists today are not international investors, but insurrectional electorates more likely to vote for a new generation of leaders and more willing to support regional independence movements.

In France, Marine Le Pen, the leader of the National Front, could expect to win a straight run-off with President François Hollande. Beppe Grillo, the leader of the Five Star Movement in Italy, is the only credible alternative to Matteo Renzi, the incumbent prime minister. Both Ms Le Pen and Mr Grillo want their countries to leave the eurozone. In Greece, Alexis Tsipras and his Syriza party lead the polls. So does Podemos in Spain, with its formidable young leader Pablo Iglesias.

The question for voters in the crisis-hit countries is at which point does it become rational to leave the eurozone? They might conclude that it is not the case now; they might oppose a break-up for political reasons. Their judgment is prone to shift over time. I doubt it is becoming more favourable as the economy sinks deeper into depression.

Unlike two years ago, we now have a clearer idea about the long-term policy response. Austerity is here to stay. Fiscal policy will continue to contract as member states fulfil their obligations under new European fiscal rules. Germany’s “stimulus programme”, announced last week, is as good as it gets: 0.1 per cent of gross domestic product in extra spending, not starting until 2016. Enjoy!

What about monetary policy? Mario Draghi said he expected the balance sheet of the European Central Bank to increase by about €1tn. The president of the ECB did not set this number as a formal target, but as an expectation – whatever that means. The most optimistic interpretation is that this implies a small programme of quantitative easing (purchases of government debt). A more pessimistic view is that nothing will happen and that the ECB will miss the €1tn just as it keeps on missing its inflation target. My expectation is that the ECB will meet the number – and that it will not make much difference.

And what about structural reforms? We should not overestimate their effect. Germany’s much-praised welfare and labour reforms made it more competitive against other eurozone countries. But they did not increase domestic demand. Applied to the eurozone as a whole, their effect would be even smaller as not everybody can become simultaneously more competitive against one another.

Two months ago Mr Draghi suggested the eurozone fire in three directions simultaneously – looser monetary policies, an increase in public sector investments and structural reforms. I called this the economic equivalent of carpet-bombing. The response looks more like an economic equivalent of the Charge of the Light Brigade.

These serial disappointments do not tell us conclusively that the eurozone will fail. But they tell us that secular stagnation is very probable. For me, that constitutes the true metric of failure.

‘Risk On’ for Now

financial freedomMy Comments: Continuing with the theme that if you have exposure to the markets you need to be very careful, here is another metric from someone who knows how to read the tea leaves.

I’m reluctant to continually use fear to motivate people to act. But if you are not now in cash, then you need to be able to move to cash quickly. As an added benefit, if you also have the ability to move further and make money while others are losing theirs, you just may come out the other side as a happy camper. At least that’s the plan.

November 07, 2014 Commentary by Scott Minerd, Chairman of Investments and Global Chief Investment Officer – Guggenheim Investments

Last week’s investment roller coaster was something we had been expecting—U.S. stocks delivered their usual bout of seasonal volatility right on cue. For now, recent spread widening in high-yield bonds and leveraged bank loans seems to be over, and it also appears that equities have regained their footing after a turbulent week.

With the anticipated seasonal pattern of higher volatility in September and October now largely fulfilled, we anticipate more positive seasonal factors over the next two months. Over the last 68 years, the S&P 500 has averaged monthly gains of 0.9 percent in October, followed by even stronger increases of 1.2 percent in November and 1.8 percent in December.

The current dark cloud that hangs over Europe is a serious threat and something that investors should closely monitor. If the anticipated seasonal strength—which is typically driven by an influx of cash into pension funds that their managers are keen to put to work—is not forthcoming, investors should seriously question how much further the current bull market can run. As of now, we remain cautiously optimistic as we await some crucial economic data.

Chart of the Week

Can U.S. Equities Sustain this Rally?

Despite the Dow Jones Industrial Average high made on Nov. 6, the New York Stock Exchange Cumulative Advance/Decline line remains 1.1 percent lower than its peak on Aug. 29. Historically, a persistent divergence between the DJIA and the Advance/Decline line usually leads to a major correction in equities. Whether or not the Advance/Decline line can catch up with the increase in equity prices over the next few weeks will determine whether the current rally is sustainable.

Economic Collapse Scenario

investmentsMy Comments: I know, I know, I sound like a broken record. Last Friday I spoke to a gathering of about 100 retired people. And fear of the markets was shared by almost all. For many, uncertainty itself causes fear, but when added to the doubts about how to avoid the inevitable, it becomes palpable.

I first heard about Harry Dent in the 90’s when he published a book that talked about the DOW at 20,000. By the time 2001 arrived, that idea had been pushed onto the dustheap of history. Only now it’s not so far fetched given the markets highs reached last week.

Nevertheless, Mr. Dent is a prodigious economic thought leader and these comments sound all too familiar. If you haven’t yet put your money where it will be protected from the next downturn, you should. Talk with me.

Harry Dent Nov. 5, 2014

• From late 2014 to early 2015, the scene will be ripe for a major shift in the markets.
• Global growth has been declining steadily from a peak in late 2009 of 5% to a low of 2.2% in mid-2012 and 2.7% recently.
• Stocks from emerging markets represented by EEM are down 20%+ in recent weeks with its pattern suggesting a drop to at least $27 in the coming year.

The third round of QE is finally over. And stocks keep edging up. They’ve been slower than in 2013 and the recent correction took them temporarily into negative territory. The trend currently is that investors simply have nowhere else to go with bonds fluctuating constantly and commodities faring even worse.

Despite the slowing of affluent spending ahead in the U.S., it continues to look stronger than Europe. China’s economy is consistently slowing and Germany is not doing well at all… these are all things we’ve warned were coming.

But even after the 10% setback into October 15 for stocks, they’ve roared back stronger than ever. This may be the final hoorah for the “market on crack.” The Fed has rigged the markets so there’s nowhere else to go, but stocks and the bulls keep running… and they’ll run until they’re out of steam, which looks like it’ll be very soon at this point.

Today’s latest surge comes from another doubling down on QE from the most desperate country in the world, Japan. This is insanity!!!

I see a big shift coming by looking at chart patterns across financial sectors… The clearest one is the Megaphone pattern on the Dow (and many other sectors like the Russell 2000 for small-cap stocks).
megaphone 1995-2020Each bubble over the past 14 years has taken the markets to new highs in 2000, 2007 and now 2014, but each crash has also taken us to new lows. I’ve been predicting the Dow would peak just over 17,000 and then fall to a level between 5,500 and 6,500 depending on when the bottom trend line above is tested.

Throughout 2013, the Dow gained 25%. Yet if you look at the last bull run from mid-November 2012 to the end of 2013, the Dow gained 33% – from 12,500 to 16,600. At its top on September 19 of this year and the retest of that today on October 31, the Dow only gained 4.2% at best.

Why? It’s hitting resistance at the top trend line of this massive Megaphone pattern… and the Fed is tapering and taking away the punch bowl.

Not including China, the emerging markets are the only ones that still have strong demographic trends, but they’ve stayed consistently down since early 2011. Why? They correlate much more with commodity prices than with the U.S. and other developed countries stock markets.

Commodity prices are down about 27% since late April 2011 and stocks from emerging markets represented by the iShares MSCI Emerging Markets ETF (NYSEARCA:EEM) below are down 20%+ in recent weeks. Look how EEM has traded between $36 and $45 since September of 2011 in a long A-B-C-D-E sideways channel.

This consolidation should be about over and it should break strongly, regardless of whether it is up or down. The best interpretation was that the recent high peak (E) that broke back to the top of the channel at $46 was the final wave up.

This pattern suggests a drop to at least $27 in the coming year, especially if it pushes below that $36 level ahead convincingly. That’s 41% down from the recent high… and that’s just the next drop coming most likely in the next year. That would only be consistent with a continued fall in global growth.

In respect to gold, most people are keenly aware that its prices have been plodding along in a sideways pattern since May of 2012, with a distinct line in the sand around the two bottoms it hit when it neared $1,180. Gold broke below that level today. Hence, another drop is likely approaching with the next support at around $700. Oil is also close to breaking down from a long sideways pattern at just below $79. It could fall as low as $10 to $20 in the next several years.

Another commodity that best represents global growth is copper. Its horizontal movement has been going on since about May of 2013. It’s been hovering near $3 recently, but keeps bouncing off of $3. If it falls much below $2.90… it’ll be curtains for copper, commodities in general and global growth.

Global growth has been declining steadily from a peak in late 2009 of 5% to a low of 2.2% in mid-2012 and 2.7% recently.

Here’s the bottom line. From late 2014 to early 2015, the scene will be ripe for a major shift in the markets. The chart patterns and our fundamental indicators and cycles all strongly suggest it will begin slipping down starting in early 2015 at the latest.

Be selling on rallies, especially as the Dow hits one more new high at 17,400+. Look to get out a little before rather than after a peak as bubbles like this one will burst quickly… just as gold’s did in early 2013.

5 Answers Every Investor Needs to Know About Annuities

retirement_roadMy Comments: Giving answers implies there are questions that need answers. And anyone asking about personal money these days needs to know more about annuities.

Not because you should necessarily put money into them, but because they are uniquely qualified to provide solutions that can can be found no where else. It turns on whether or not your quest for financial freedom includes concerns and issues that other choices do not resolve.

The financial industry is constantly coming up with better products. And coming up with worse products whose sales language is designed to confuse and frighten you. So beware. Talk with people who work explicitly for YOU, and not for someone else. This is a long article so you may have to bookmark it and come back later.

Article added by Daniel Williams on October 20, 2014

From Oct. 15-17 many of the major players in the annuity world gathered in Scottsdale, Ariz. at the Westin Kierland Resort & Spa for the 2014 IMO Summit. Prior to the Event, NAFA sent out a paper, “Answers every investor needs to know about annuities,” that can benefit advisors as well as consumers.

On the following pages, NAFA answers five of the most important questions you’ll ever receive about annuities. These nuggets can be vital in helping producers educate clients and prospects on annuity products.

1. What kinds of returns can I expect with an annuity?

There are two types of annuities: fixed and variable. Variable annuities earn investment returns based on the performance of the investment portfolios, known as “subaccounts,” where you choose to put your money. The return earned in a variable annuity isn’t guaranteed. If the value of the subaccounts goes up, you could make money. However, if the value goes down, you could lose money. Also, income payments to you could be less than you expected.

Fixed annuities earn interest and not “returns.” This is an important distinction because investments earn returns and a rate of return calculates investment losses as well as investment gains. Life insurance and fixed annuities earn interest. Since there are no investment losses in an insurance product like fixed annuities, the use of “return” is confusing and misleading.

Unfortunately, mixing up these two distinct concepts is a common mistake made by those who don’t sell or understand fixed annuities and who, perhaps, make their living selling risk-based investments. With fixed deferred annuities, the insurance company either calculates and determines the interest to be credited based on the insurance company’s earnings (for set or declared rate annuities) or based on the positive performance of a market index (for indexed annuities).

The National Association of Insurance Commissioners (NAIC), which regulates fixed annuities, considers both products fixed annuities, regardless of how interest is calculated. All fixed annuities, including indexed rate and declared rate annuities, guarantee you will not suffer losses because the markets do.

2. Is it true that indexed annuities can limit how much interest I earn?

The main difference between fixed indexed annuities and other forms of fixed annuities is the way interest is calculated. And, just as you don’t receive all of the positive earnings from the insurance company investment portfolio in a declared rate annuity, you do not earn all of the positive index performance in an indexed annuity.

The insurance company must pay for the insurance guarantees of the annuity, as well as the usual and customary company expenses to develop, market and service the annuities sold. Insurance companies use participation rates and caps in indexed annuities to pay for these expenses and ensure profitability.

A participation rate or a cap can be raised up or down, reflecting current market and economic conditions. During strong economic times, these rates and caps will be higher; during weak or negative economic times, they will be lower. This flexibility is advantageous for the consumer: the annuity contract adapts to market conditions while also being protected with minimum guarantees and suffering no losses because the index change is negative.

Sometimes folks that “hate” annuities like to show “hypothetical” performances of an indexed annuity by cherry picking economic cycles or other market variables. But, since indexed annuities have been sold for almost 20 years, we have studies that review actual interest earnings paid into the annuity contract using a statistical sample of over 300 real-life indexed annuity contracts. NAFA encourages you to read the full academic paper called, “Real-World Index Annuity Returns.”

The authors of this study are often called upon to discuss real, historical scenarios, not hypothetical examples using select periods, explaining how fixed indexed annuities actually perform for their owners.

3. Okay, so please explain about the kinds of expenses associated with the annuity?

It is common for those who do not sell fixed annuities and engage in negative advertising about annuities to confuse concepts and features between fixed and variable annuities. Both types of annuities can play a role in financial and retirement planning, but it is important to understand the differences between the two products.

Fixed annuities have charges (called surrender charges) that are made only when you take money out of the annuity. Most fixed annuities allow you to take a certain amount of money without paying any charges, but if you take more, the amount over the maximum will be charged a penalty. Also, if you terminate your annuity contract early, before the charges have expired, you will pay a surrender charge.

All charges, and under what conditions they are imposed, must be clearly explained in the documents you receive both before and after you purchase the annuity. Fixed annuities may also offer riders that provide additional benefits and features, and you may be charged for those riders. All insurance companies are required by law to fully disclose all charges and under what circumstances they may be incurred. This information must be disclosed both before you buy the annuity and in the insurance policy you receive from the insurance company.

Also, unlike investment products, all annuity policies issued come with a money-back guarantee, called a “free-look period,” during which time you can return and cancel the policy and receive ALL of your entire premium back. This is an insurance guarantee and consumer protection that investment products do not provide.

4. Can you explain why there are surrender charges?

The insurance guarantees of complete protection from market losses, income for life, minimum interest, and additional interest above the minimum are not free and are an expense to the insurance company. As with any company, there are other costs of business, including: regulatory compliance, mandated reserving, product development, marketing, and servicing annuity customers. In order to pay for the expenses and the mandated reserves required to remain a solvent and a viable business, the insurer invests the premiums it receives.

However, like any investment, it can only cover the expenses and profit requirements if it retains the investment for a sufficient period, often several years. If an annuity contract is cancelled too early, these expenses will more than likely be greater than their investment returns, and the insurance company will suffer a loss. It is left to the insurance company to determine prevention measures to avoid a loss. All prudent buyers of financial products want their company to operate at a profit.

So, the question becomes, what do you consider the fairest loss prevention method? Some methods assign the cost of offsetting the potential loss to all buyers, whether they surrender their contracts early or not. By contrast, the surrender charge method imposes the burden of repaying unrecovered expenses only to those who caused the loss by not fulfilling the contractual obligation. There are fixed annuities with no surrender charge and some with 12-year surrender charges — and everything in between.

Surrender charges must be properly explained and understood by the consumer considering purchasing an annuity. Surrender charges are the best tools for ensuring that all consumers receive the most competitive interest rate and annuity features possible and that the insurers are adequately protected from a “run on the bank.”

5. Is it true that many income riders are beneficial only if the annuity performs poorly and that they require turning my annuity into a stream of income payments?

When you hear or read about income riders, it is extremely important to understand what information is applicable to variable annuities and what information is applicable to fixed annuities. Variable annuities have market risk, and the value of the subaccounts chosen could go up or down. If they go up, you could make money. If they go down, you could lose money. Also, income payments to you could be less than you expected. By contrast, many fixed indexed annuities have a baseline income guarantee, and you can also utilize performance of the annuity to increase the guaranteed income exponentially.

Fixed indexed annuities available today do not require annuitization on their income riders. These income riders for fixed annuities (typically called guaranteed lifetime withdrawal benefit riders) provide a guaranteed income stream, typically a percentage of the premium, but the income stream lasts your entire life, even if your annuity account value falls to zero.

Most income riders allow you to turn the income payments on and off or take out the money remaining in your annuity that has not been paid out or withdrawn by you. An income rider should not be confused with annuitization, available in all fixed deferred annuities, which guarantees the amount you will be paid and guarantees that you can receive those payments as long as you live.

The key difference between an income rider and annuitization is that with the income rider you still own and have control of the annuity account value. With annuitization, you convert all value to a promised payment stream.

Originally published on LifeHealthPro.com