Tag Archives: financial advisor

We’re Issuing a Formal Alert: Something Major is Coming in the Markets

My Comments: I know, I know, I said the worm had turned. Well, maybe not.

Phoenix Capital Research/Sep 29, 2016

Time for a reality check.

The market has had nothing but positives for three months now. BREXIT was contained. The Fed failed to raise rates again. The Bank of Japan and European Central Bank are printing a combined ~$180 billion per month (a record pace) and using it to prop the markets up.

And stocks are DOWN. While the bulls and CNBC shills talk about the markets like they’re in some incredible rally, the fact is that the S&P 500 peaked in mid-August. And if you want to go back further it’s gone absolutely NOWHERE since July 9th.

Seriously, if you cannot manufacture a roaring rally with follow through on the last three months’ worth of news, you’re not going to manufacture one ever.

Indeed, Central Banks have never been more aggressive in their easing.

1. Two of world’s FIVE major Central Banks (ECB and BoJ) are printing $180 billion per month and giving it to the banks.

2. One of the FIVE (the Swiss National Bank) is openly BUYING stocks outright.

3. Another of the FIVE (the Bank of England) just cut rates and announce a new QE program.

4. The last of the FIVE, and the only one that is supposed to be tightening policy (the Fed) hasn’t raised rates in nine months and will not do so until December at the earliest.

And the bulls can’t get it done. So… what do you think is coming next?

Here’s how bruised bears should approach this resilient stock market

bear-market-bearMy Comments: I’m facing increased criticism for preaching woe and gloom. In spite of a 24 month rain dance to herald the start of a storm, the sky is still clear, if a little overcast. Maybe it is different this time.

That being said, it’s time to stop with the woe and gloom and focus instead on steps to take advantage of the situation. As a friend pointed out yesterday, this stuff cycles and, yes, there will come a bad downturn, and you will be declared right. Meantime, you miss out on all the good stuff and end up stiffing your clients.

So… how do we set ourselves up to be successful? Here’s a start.

by Anora Mahmudova | Published: Sept 27, 2016

It is perfectly fine to be pessimistic about future stock market returns, as long as you’re prepared to think outside the box when it comes to seeking out safe investments, analysts said.

There is no shortage of scary charts and lousy fundamentals that point to equities being risky. But they rarely, if ever, can be used to pinpoint a market top. Indeed, bold bearish calls continue to get rebuffed in this long-running bull market.

Recall that in early January, RBS analysts made their highly publicized call to “sell everything except high quality bonds”.

Barely a month later, when the S&P 500 SPX, +0.64%  dropped to multiyear lows to mark a third correction in less than two years, it seemed the call would be vindicated. But after nine months, it is apparent that heeding it would have been costly as markets soon rebounded and then rallied to records.

Valuations are above historical averages and earnings growth has deteriorated over the past two years—all suggesting that, in the long term, returns are going to be low.

Wouter Sturkenboom, senior investment strategist at Russell Investments, said the current environment has been among the most trying he can recall for market bears.

“Normally, if you feel bearish about the stock market you would be looking for safe bets but right now, all the traditional safe bets are no longer safe,” Sturkenboom said, in an interview.

Even bonds, which tend to rally when things get gloomy, aren’t a reliable wager.

“Bonds are overvalued, which makes exposure to duration risky if inflation rises even by a bit,” he said.

Duration is a measure of the sensitivity of a bond’s price to a change in interest rates. Bonds with higher duration carry more risk.

The first step investors should take now is to accept that future returns will be low, said Michael Batnick, director of research at Ritholtz Wealth Management.

“Stocks are expensive on every metric you take and that means that future returns will be lower. Investors should simply accept it and act accordingly, which means saving more,” he said in an interview..

“The idea you can take lower returns and turn them to get higher returns by timing is ruinous for average investors. It doesn’t work for the vast majority of investors. Even if you knew with precision how much earnings will be next year, you won’t know what multiple millions of investors are going to pay,” he said.

While pessimism about returns is pervasive, there are still ways to invest and build wealth.

Both Batnick and Sturkenboom advocate adding assets with lower valuations while trimming exposure to expensive U.S. large-cap equities.

“For investors looking for safety bets, they should think outside of the box. Safety now comes in cheap valuations and there are several assets that could fit the bill out there,” Sturkenboom said.

Among assets that Sturkenboom prefers are Spanish and German real-estate investment trusts, gold ETFs, Treasury inflation-protected securities, or TIPS, and cash.

While cash gives investors the option to swoop in and sweep up bargains when the market tanks, it requires patience as big drawdowns are rare events, Sturkenboom said.

“Cash is good if you are tracking markets and can deploy it quickly. The past three years have been disappointing for those who held cash and were unable to buy at corrections, because they were very short-lived,” he said.

“But in the current environment it is still worth it to keep cash for the eventual 30%-40% drawdown, the likelihood of which is pretty high over the next three years,” he said.

Batnick is a fan of rules-based planning: “You have to have a plan and stick to it. Allocate to markets that are cheap on relative and absolute terms, but don’t try to wing it,” he said.

“Building wealth through investing in the stock market requires a lot of pain. There will be big drawdowns. But more money has been lost by trying to avoid drawdowns than by staying invested,” Batnick said.

5 Smart 401(k) Moves to Make Now

financial freedomMy Comments: You say you don’t have a 401(k)? Maybe you have a 403(b), or an IRA with exposure to the market. If you are in or close to retirement and your investment portfolio goes to hell, you simply don’t have enough time to hope it recovers and gets back on track. Be defensive for a while and sleep better at night.

by Carolyn Bigda | September 26, 2016

Storm clouds are forming, so take your nest egg off autopilot and steer to clearer skies.

Blissfully, making your 401(k) grow hasn’t been that hard in recent years. Since March 2009, the S&P 500 index of U.S. stocks has more than tripled in value. And thanks to the Pension Protection Act—now celebrating its 10th anniversary—many workers are automatically enrolled in 401(k)s. “Inertia has led to some pretty powerful results,” says Katie Taylor, director of thought leadership at Fidelity.

But inertia works only as long as the winds are blowing in the right direction. Today there are signs that momentum could be shifting. U.S. equities, for one, are as frothy now as they were leading up to the 2007–09 bear market and the Great Depression in 1929. The S&P 500 trades at a price/earnings ratio of 27.3 based on 10 years of averaged profits, a 63% premium to historical averages.

Meanwhile, corporate profits have been declining for five consecutive quarters, the worst such streak since the financial panic. And worried fund managers have amassed large piles of cash, according to a recent Bank of America Merrill Lynch survey.

None of this means your 401(k) needs a major overhaul. This is, after all, your long-term portfolio, meant to endure choppy air from time to time. But a few tweaks now can help ensure that inertia doesn’t work against you—and that you’re still on track no matter what happens in the market.

Get over your fear of bonds

If you haven’t rebalanced your 401(k) in a while, it probably looks different from what you remember. Without rebalancing, a moderate 60% U.S. stock/40% U.S. bond portfolio at the end of the last recession is now closer to an aggressive 80% equities/20% bond mix, according to Morningstar.

The rule of thumb: If your weightings are off-kilter by five percentage points or more from your desired mix, it’s time to take action.

Some investors, though, may be wary of rebalancing into bonds now, notes Maria Bruno, a senior investment analyst in Vanguard’s investment strategy group. That’s in part because fixed-income prices fall when interest rates rise, and the Federal Reserve could lift rates before the year is out.

But “rebalancing helps protect you from short-term volatility,” Bruno notes. Even if fixed-income prices fall, bonds can still serve as a cushion. The worst calendar-year loss for intermediate-term government bonds was 5.1%, in 1994. By contrast, the worst loss for blue-chip U.S. stocks was 43.3%, in 1931.

You can further reduce risk by choosing bond funds with an average “duration” of about five years or less, which are less sensitive to interest-rate moves, says Peter Mallouk, president of Creative Planning in Leawood, Kans. (A duration of five implies that if rates rise one percentage point, the fund could lose 5% in value.) You can look up this figure for your plan’s fixed-income offerings at Morningstar.com. If your 401(k) doesn’t offer a good low-duration option, go with a core fund such as Dodge & Cox Income DODIX 0% , with a duration of just four years, in your IRA. The fund, which has beaten more than 80% of its peers over the past five, 10, and 15 years, is in our MONEY 50 recommended list.

What All Bubbles Have In Common

My Comments: My brain is tired. Too much political angst, too much monetary crap, not enough positive feedback. And here’s some more monetary crap.

But if you are like me and are not expecting to win the lottery anytime soon, then bubbles become important. And like it or not, they tend to burst and create chaos. Look at this chart and read the article to determine where we are right now. Maybe.


Sep. 16, 2016


  • By far, the main cause of bubbles is excessive monetary liquidity in the financial system.
  • Investors are showing signs of behavior consistent with asset bubbles such as herding, hindsight bias, confirmation bias, anchoring, overconfidence and greater fool.
  • We’re at the final stages of the bubble and the rise in the LIBOR and government bond yields are the first warning signs.

What causes a bubble?

By far, the main cause of bubbles is excessive monetary liquidity in the financial system. Axel Weber, former Deutsche Budesbank President puts it this way: “the past has shown that an overly generous provision of liquidity in global financial markets in connection with a very low level of interest rates promotes the formation of asset price bubbles.” This makes you think about today’s Central Banks’ ultra-loose monetary policy for several years, right?

In fact, when too much liquidity is given to normal citizens, it usually ends up in inflation whereas when that additional liquidity finds its way to the hands of the wealthiest, it usually ends up in bubbles. That is because poor people have a higher propensity to consume than rich people who have a higher propensity to save.

So, an extra buck on a poor guy’s wallet will probably end up in consumption while an extra buck on a rich guy’s bank account will more likely end up in savings. This supports the claim that Central Bank’s monetary policy is not reaching the real economy and is only making the rich (who own assets) even richer.

What about investor’s psychology?

Bubbles also have an emotional component. As Dan Ariely said “humans may be irrational, but they are predictably irrational.” Here are a few common behaviors that lead to the creation of bubbles.

Humans are biologically wired to mimic the actions of the group. While this behavior allows us to quickly absorb and react based on the intelligence of others around us, it also leads to self reinforcing cycles of aggregate behavior. This is called herding and it explains popular investment strategies such as momentum or trend following.

Investors also overestimate their ability to predict the future based on the recent past. This tendency to overemphasize recent performance is called hindsight bias and just like herding is one of the reasons behind the success of momentum and trend following investment strategies.

Both herding and hindsight bias, explain why a growing number of investors use technical analysis alone to make their investment decisions and fewer investors care about fundamental analysis and about the price they pay for a certain asset. This is why, when faced with the warning that valuations are currently at very high levels, many investors say this is not “actionable.” For them, what is “actionable” is 2 moving averages crossing on a chart.

People also tend to seek information that supports their own theories, and usually ignore information that disproves their points of view. This is called confirmation bias and can be found in today’s failed attempts to justify expensive valuations with the fact that stocks earnings yield and dividend yield is higher than government bond yields.

Anchoring consists in investors’ need to have references. So, if a stock trades today at $100, investors will perceive $90 as cheap and $110 as expensive.

People also tend to overestimate their intelligence and capabilities relative to others. For example, a 2006 study showed that 74% of professional fund managers believe they delivered above average performance. This overconfidence grows as the asset prices increase and is usually at its high before the crash. It is just like the story of the turkey whose trust in the farmer grows by the day because the farmer feeds him every day. And when the turkey’s trust in the farmer is greater than ever, that’s when the turkey loses his head.

This year has been all about buying the dips because anytime there were bad news on China (in January), on the US (May jobs report), on Europe (Brexit vote in June) or on disappointing earnings (it has now been 5 consecutive quarters of earnings decline), everyone followed the same reasoning: The ECB will ease further, the BOJ will add stimulus, the Fed won’t hike and/or the BOE will cut interest rates.

But the current selloff is about the Fed raising rates and the BOJ and ECB reducing monetary stimulus. Will anchoring and overconfidence make investors buy this dip?

Finally, there’s the greater fool theory that says rational people will buy into valuations that they don’t necessarily believe, as long as they think there is someone else more foolish who will buy it for an even higher value. Do negative yielding bonds ring a bell here?

In which phase of the bubble are we?

Jean-Paul Rodrigue says every bubble goes through 4 stages: stealth, awareness, mania and blow-off.

The way I see it, the S&P 500  took-off in 2009, went through a bear trap in 2012 and is now somewhere between Delusion and the New Paradigm, if not already at the beginning of the denial.

In Summary

There’s evidence of exceptional amounts of liquidity in the financial system today as investors are showing the behavior we see in the final stages of a bubble.

In fact, there are reasons to believe that Central Bank policy is changing and when that happens, the Bubble will pop. On the one hand, the libor rose to 83 basis points over the summer, the highest since 2009 and surpassing the levels seen at the peak of the European sovereign debt crisis and it seems to have already incorporated a potential 25 basis point rate increase by the Fed. On the other hand, Government bond yields in Germany, Japan and the US have been rising over the summer specially in the longer part of the curve.

7 Tips To Maximize Social Security Benefits From A Former SSA Director

SSA-image-3My Comments: For millions of us, Social Security is our lifeblood. Without the monthly stipend, life as we know it would not happen. Getting your fair share can be a confusing and complicated process.

There is little chance to get it right if you first get it wrong. This demands you pay attention BEFORE you sign up for that monthly check. These 7 points are the best short summary I’ve seen to help you get it right the first time.

by Bernice Napach on September 16, 2016

As many financial advisors know, the devil is in the details when it comes to Social Security. There are many rules to follow — and changes to those rules — in order to maximize benefits. With that in mind, here are some fundamental points that advisors should know, courtesy of a webinar with former Social Security Administration Director Kurt Czarnowski, presented by the Retirement Experts Network.

1. Check the wage history on the Social Security statement

Social Security payments are based on a person’s work history, specifically on the average wage over the 35 highest earning years, adjusted for inflation. A person needs to work 10 years in order to accumulate the necessary 40 Social Security credits for that person or his or her spouse to collect Social Security benefits.

Information about one’s wage history can be found on their Social Security statement, which until two years ago was mailed to most adults annually. Not anymore. Mailings are done only once every five years for those under 60, so clients should set up an account at http://www.socialsecurity.gov/myaccount where they can view their statement at any time.

Wage errors can be corrected anytime so long as proper proof is provided, but correcting self-employment income errors is another story. There’s a statute of limitations. Errors need to be corrected no later than three years, three months and 15 days after end of the year in which the self-employment income was earned.

2. Know the full retirement age

Despite conventional references to 65 as the age of retirement, most people who are not yet collecting Social Security today won’t be able to collect full retirement benefits until age 66 or later.

As a result of amendments passed in 1983, the full retirement age (FRA) for those born between 1943 and 1954 is 66; for those born in 1960 or later, it’s 67. The FRA is 66 plus two months for every year from 1955 to 1959.

Clients can, of course, collect Social Security as early as age 62, receiving 75 percent of their full retirement benefit, or as late as age 70, collecting 32 percent more than their full retirement benefit, or at some age in between.

“If you live until the average life expectancy you’re better off waiting to collect Social Security,” said Czarnowski. In the U.S., the average life expectancy is 84.3 years for a 65-year-old man and 86.6 years for a 65-year-old woman. In addition, said Czarnowski, one in three 65-year-olds today will live to be 90 and one in seven will live to be 95. “Good things come for those who wait.”

He suggested using the Retirement Estimator to calculate expected Social Security payments, keeping in mind that the program was only intended to replace about 41 percent of one’s pre-retirement income.

The average Social Security benefit paid this year is $1,341 per month and the maximum paid is $2,639, said Czarnowski.

3. The benefits and costs of working in retirement

Almost 20 percent of Americans 65 and older are working, according to the latest data from the U.S. Bureau of Labor Statistics, and a recent Bankrate.com survey found 70 percent of non-retired Americans plan to work as long as possible during retirement.

But doing so can affect Social Security payments for those who are not yet at their full retirement age. If they earn more than $15,720 this year, every $2 above that threshold will reduce benefits by $1. There is no reduction in benefits for those who have already reached their full retirement age.

Earnings, however, are subject to regular FICA taxes, which finance Social Security and income taxes. But if those annual earnings are higher than the lowest earning years included in the 35-year wage history for Social Security purposes, they will be used instead in that calculation. That could potentially increase benefits.

Another benefit of working longer: it could help delay collecting Social Security until age 70, when benefits are 32 percent higher than they are at full retirement age.

“Good things come to those who work,” said Czarnowski.

4. Taxing Social Security benefits

Social Security benefits are subject to income taxes for individuals whose modified adjusted gross income (MAGI) tops $25,000 and for couples with MAGI above $32,000. More specifically, up to 85 percent of benefits can be taxed as ordinary income.

About half of those collecting Social Security pay income taxes on their benefits, said Czarnowski.

5. Spousal Benefits

A nonworking or even working spouse can collect spousal Social Security benefits so long as that person is 62 years old and his or her spouse, who’s likely the higher earner, has applied for Social Security.

If he or she has reached full retirement age, the benefit will be 50 percent of the higher earner’s benefits. At 62 years, he or she would collect about 35 percent of those benefits. In either case, the person collecting spousal benefits cannot also collect benefits of his or her own.

Spouses no longer have the ability to collect benefits from the husband or wife who has filed and then suspended his or her own benefits due to a change in the law last year, but there is still a grandfather provision to consider. Anyone born before Jan. 1, 1954 and at full retirement age can file what’s known as a restricted application to collect their spousal benefit while waiting until 70 to collect a more remunerative benefit of their own, but their spouse must also be collecting his or her own benefits.

6. Survivor benefits

Survivor benefits, unlike spousal benefits, are 100 percent of what a spouse was collecting when he or she died. The surviving spouse can collect those benefits or collect his or her own benefits, whichever is greatest. They can potentially maximize benefits by first collecting their survivor benefits and then deferring their own until age 70.

7. Divorced spousal benefits

Even divorced spouses can collect spousal benefits so long as the marriage lasted at least 10 years, the divorce was finalized at least two years earlier and the collecting spouse is 62 or older and has not remarried. The benefit is 50 percent for a divorced spouse and 100 percent for a divorced widowed spouse.

6 Reasons The US Stock Market Is Doomed

My Comments: My type A personality is having a hard time not knowing just when the next market correction is going to happen. The six reasons expressed in this article are, in my opinion, very credible.

Some clients have recently abandoned me because I’ve been preaching patience. We’re rapidly approaching the point where the only people buying and moving into the market are the amateurs. They are almost always the last to get in when it’s going up and the last to get out when it’s going down. It has always been thus.

by Tony Sagami | Mauldin Economics | September 18, 2016

The Dow Jones Industrial Average has been going sideways ever since the Commerce Department reported that retail sales in July came to a grinding halt (0.0%).

At the same time, companies including Starbucks, McDonald’s, Ford, Burberry, and Gap are reporting disappointing sales. That means trouble in shopping paradise.

Target just reported a Q2 drop of 1.1% in same-store sales. It expects a “challenging environment in the back half of the year.”

There are many reasons why Americans have become reluctant shoppers. I talked about this in my recent article “The Stressed-Out, Tapped-Out American Consumer.” Stagnant incomes and rising debt loads are part of the problem.

But another big factor is a change in spending psychology.

The World Leans Ever More On America

USA EconomyMy Comments: I’m really conflicted about what to tell my clients about their investments. On one hand I’m persuaded that a severe correction is coming soon, and on the other, there is something going on that suggests otherwise. Damn, I wish I had a crystal ball.

Stephanie Flanders | July 26, 2016 | The Financial Times

Financial markets are like small children. They find it hard to focus on more than two things at once. That is the conclusion drawn by one of my colleagues after a lifetime of professional investing.

Whether small children can focus on anything at all is a matter for debate. Chocolate, perhaps. But he has a point when it comes to global markets. Investors have been so focused on the Brexit vote and its aftermath that they have missed the big picture, which is that the global economy is still worryingly dependent on US growth and the extreme efforts of central banks.

There was a fear, in the days after the EU referendum, that Britain’s troubles would sink the global recovery. But investors have decided that for stocks and bonds this shock is actually a win-win. Why? Because growth will not be much affected outside the UK, but central banks will keep monetary policy looser than it would otherwise have been, just to be safe. That explains why stock markets are reaching new highs, even in the UK, and long-term interest rates are lower in most countries than they were on June 23.

This time last year, the obsession was China and the mood was rather different. Stock markets, you will remember, fell around the world when the Chinese authorities announced a surprise depreciation of the renminbi against the dollar. The fear was that a deflating Chinese economy would export its falling prices to the rest of the world via a lower exchange rate and take another bite out of growth in emerging markets.

Funnily enough, the Chinese currency has been falling again recently — by 3 per cent against the dollar in the past three months. That is bigger than the fall last summer but no one seems to care at all. It would be nice to believe that this was because the world is in a stronger position to cope with a deflationary China than a year ago. I fear it is because investors simply have not been paying attention.

It is true that this depreciation feels somewhat more controlled. What spooked investors about China last summer was the feeling of chaos — the mixed messages about the renminbi and the frantic moves to prop up the domestic stock market all had a whiff of panic. If the authorities could not achieve a smooth transition for the exchange rate, how were they going to deliver one for the broader economy?

It feels different this time because those in charge have a plan, and the currency is supposedly now linked not to the dollar but to a broader basket of currencies known as the China Foreign Exchange Trade System. But anyone who has been watching closely would have noticed that the authorities only follow the new system when it allows the renminbi to fall. When the CFETS was rising against the dollar in the first part of the year, the Chinese currency did not rise with it. The net result is that the renminbi is nearly 6 per cent weaker on a trade-weighted basis than it was at the start of the year.

On the surface, China’s economy does look less scary than it did a year ago. The authorities, though, are using the same tools to support growth that they used in the past — public investment and subsidised credit. Fixed asset investment by state-owned companies grew by more than 20 per cent, year on year, in the past three months.

Big picture: China might be more stable but is no closer to resolving its structural and financial imbalances than it was a year ago, and it is still exporting disinflation to the rest of the world via a weaker exchange rate. US import prices from China fell by 3 per cent in June, the largest monthly drop since 2013.

The US can probably shrug off this imported deflation because domestic prices — and, finally, wages — are picking up as the domestic consumer-led recovery continues. Globally, however, the picture is not nearly as strong. The International Monetary Fund’s forecasts, released last week, show global consumer inflation for advanced countries at just 0.7 per cent in 2016. The central banks in the US and the UK are the only ones in the developed world that are expected to achieve inflation at or above the targeted 2 per cent by 2017.

Those new IMF forecasts are helpful, not because they are likely to be right, but because they let us step back from the day-to-day stories to see how global growth expectations have changed over time. At 3.1 per cent, the new growth forecast for 2016 was only slightly lower than the April number. This was taken as more evidence that the negative effects of Brexit are likely to be centred on the UK. But a year ago the fund was expecting global growth this year to be 3.8 per cent, and growth for the advanced economies to be 2.4 per cent. Now its best guess is for growth of 1.8 per cent in those countries — not just in 2016 but in 2017 as well. The forecast for world trade has also been slashed, yet again. We have now had six consecutive years when world trade has been flat or falling as a share of global gross domestic product.

None of this suggests that the global recovery is about to grind to a halt. It does remind us that the world is expecting an awful lot of the US right now, and an awful lot of its central bank. The US has managed a respectable recovery, despite a deeply needy global economy and an unhelpful rise in the dollar. Investors are betting that this can continue, despite the dysfunctional cacophony coming out of the party conventions. We should all hope they are right. The world does not have a plan B.

The writer is chief market strategist for Europe at JPMorgan Asset Management