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Warning: USD Is About To Kick Ass

CNBC Writes: De-crowning the dollar, and the ‘collapse’ ahead

 3D chrome Dollar symbol

The gradual erosion of the U.S. dollar’s status as the world’s reserve currency has been greatly hastened of late. This is due not only to the perpetual gridlock in D.C., but also our government’s inability to articulate a strategy to deal with the $126 trillion of unfunded liabilities.

Our addictions to debt and cheap money have finally caused our major international creditors to call for an end to dollar hegemony and to push for a “de-Americanized” world.

China, the largest U.S. creditor with $1.28 trillion in Treasury bonds, recently put out a commentary through the state-run Xinhua news agency stating that, “Such alarming days when the destinies of others are in the hands of a hypocritical nation have to be terminated.”

In addition, Japan (our second largest creditor holding $1.14 trillion of U.S. debt) put out a statement through its Finance Minister last week saying, “The U.S. must avoid a situation where it cannot pay, and its triple-A ranking plunges all of a sudden.”

Read The Rest Of The Article Here

I disrespectfully disagree with CNBC once again (no surprise there) for a couple of reasons.   

1.  As of  right now there is no alternative to the US Dollar to even attempt any kind of a shift. Chinese Yuan is not a freely traded currency yet and if anything it is still decades away from any sort of an attempt. Plus, China is in the midst of its own Economic Bubble that is surely to blow up soon.  Euro? Not a chance. Europe is a basket case and a one common sense politician away from breaking up.  Bottom line is, there is no currency out there to replace the USD. Yes, the US has its a share of problems, but so does everyone else.

2. USD Collapse?  What collapse?  Listen, we have to make a distinction between Credit Outstanding (which is a huge problem in the US) and the Actual Currency Dollars available. The former is a lot less than Credit Outstanding. That means the demand for USD needed to repay these huge balances will go up substantially over the next decade, pushing the dollar ever higher.

That is one of the reasons I am so bullish on the USD.  While it remains everyone’s favorite target, the USD fundamentals and technicals are looking very good. I would anticipate the USD to appreciate substantially over the next few years. 

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How China Lost Faith In The US Government

Bloomberg Writes: Foreigners Sold U.S. Assets as China Reduces Treasuries

 debt holders investwithalex

Foreign investors were net sellers of U.S. long-term portfolio assets in August as China reduced its holdings of Treasuries to a six-month low.

The net long-term portfolio investment outflow was $8.9 billion after a revised $31 billion inflow in July, the Treasury Department said in a statement today in Washington. Net sales of U.S. equities by official holders abroad were a record $3.1 billion, and China lowered its holdings of U.S. government debt for the second time in three months, the department said.

Today’s report showed China remained the biggest foreign owner of U.S. Treasuries in August even as its holdings dropped $11.2 billion to $1.27 trillion.

Read The Rest Of The Article Here

In my previous posts I have argued that the biggest impact of the US Government shutdown will not be any sort of a default, but a shaken confidence of foreign investors.

No one in their right mind, not the Chinese nor the Japanese, would trust the fiscal future of their nations to a government that acts like little children fighting over a toy.

As predicted, we are now beginning to see the consequences associated with shutting down the US Government with China cutting their US Treasuries buying.  While this outflow doesn’t make a trend, just yet, it is certainly something to watch over the next couple of years. I guarantee you that China and Japan both are discussing the issue at the highest levels. Their confidence has been shaken and they can no longer trust the US Government to the extent that they have in the past.  

The result? Very simple. Lower demand for the US Treasury, higher interest rates, slower growth,  a substantial decline in economic activity, much lower financial markets, a decline in real estate and auto sales. Not a good picture.  

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The Secret 5 Year Stock Market Cycle and What It Is Predicting For 2014

Dow Jones Long Term Chart 2

There is a prominent 5 Year stock market cycle that oscillates between the bull and the bear markets. While the cycle does show up as a bear cycle at various points, for the most part this cycle is more clearly identifiable during the bull stage. Let’s take a quick look. More importantly, let’s see what does this cycle can tell us about the future. (We are looking at the DOW)

  1. 1982-1987 From 1982 bear market bottom to pre crash 1987 the cycle lasted exactly 263 week and moved up 1977 points. That is exactly 5 Years + 10 trading days.
  2. 1994-2000 From 1994 bottom on 11/23/1994 to 01/14/2000 the market advanced 8296 points in exactly 1298 trading days. So, this cycle lasted 5 Years +32 trading days.
  3. 2002-2007 From 2002 bottom  on 10/10/2002 to 10/11/2007 top the market advanced 7209 points in exactly 1259 trading days or EXACTLY 5 years.
  4. 2009-2013/14  From 2009 bottom on 03/06/2009 to 9/18/2013 (or march 2014)  the market advanced 9241 points in 1144 days (so far).

AMAZING, isn’t it? I mean we are talking about exact hits. Bottom to top. If you go back and study the market before 1982 you will find the same cycle showing up again and again. The slight deviation by a few trading days at the end of each cycle is caused by other cycles arriving around the same time. Just by knowing this one 5 year cycle you can predict what the market will do and beat 95% of the pros.  

Now, let me warn you. This cycle is not as easy as just timing the 5 year period of time. There is something behind the scenes that causes this cycle to happen. As of right now, I cannot discuss what causes this in the public forum, but the chart above doesn’t lie. Just more prove that the market can be predicted to the day.

I confirm that another 5 year cycle has indeed started at March 2009 bottom. It is due to complete in March of 2014. However, my other work is showing that the DOW has probably already topped in September of 2013.  There is a lot of interference right now.  

As such, this leads me to believe that the DOW will oscillate here over the next few months until some sort of a top is set in March of 2014 (maybe a little bit higher or lower than September 2013 top). Thereafter, the market should resume its bear market and go down hard into the 2016/17 lows. 

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The Secret 5 Year Stock Market Cycle and What It Is Predicting For 2014

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Get Rid Of Bears Once and For All

CNBC Writes: Bull market’s got another 10 to 15 years left: Pro

bear attack investwithalex

The stock market is only in the second of three phases of a secular bull market, Altaira’s director of technical research, Ralph Acampora, said Monday.

“The first phase of a secular bull market is usually led by quality,” he said. “Second phase of a secular bull market, when people start to feel a little better about things, they buy secondary stocks,” Acampora said. “The third and final phase is totally greed and complacency, and we’re not even close to that. So, the secular bull market has a lot of life left.”

On CNBC’s “Fast Money,” Acampora said that his 1,800 year-end target for theS&P 500 could easily be 50 points higher.

“I’m being a little conservative. Longer term, oh, good god—much, much higher,” he said. “This is a secular bull that has at least another 10, 15 years to run.”

Umm…. CNBC you never disappoint me. I just have 1 question for your PRO.

What bull market?

Let’s take a look. Since the secular bull market top in 2000 (13-14 years ago) the

  • DOW: + 30% (sitting at a bear market top about to reverse and go below 10,000 by 2016)
  • S&P: +14% (sitting at a bear market top about to reverse and go below 1,200 by 2016)
  • NASDAQ: -20% (sitting at a bear market top about to reverse and go below 2,500 by 2016)

Once again, which bull market has another 10-15 years to go? We are not in the bull market. The markets barely moved since the 2000 secular top. Some remain in the negative territory. Perhaps they are talking about the bear market that started at 2009 bottom, but even if such is the case there is very little evidence that it was the start of a full on bull market.

The numbers and dates you see above are based on the precise mathematical work that I do. Not some arbitrary statement. If Mr. Acampora have studied the markets since its opening in 1790 he would soon realize that the bull and bear markets alternate in easy to see and understand 17 year cycles.

As such, we still have another 3-4 years of the bear left.  Don’t let the bear bite you. 

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The Secret To Margin Of Safety (Part 3)

Businessman falling

One of the first things we have to look at from the value investing perspective is the price/book value ratio(P/B Ratio). The book value is defined by total assets – total liabilities/divided by total number of shares outstanding or it could also be determined by dividing shareholder equity/total number of shares outstanding. There are other ways to calculate the book value, but that is the most basic form.

Now, without making this too complicated, book value per share basically means the value left over if you decide to liquidate the company, sell all inventory and assets,  pay off all liabilities and return all remaining capital to the shareholders.  For example, a P/B Ratio=1 means that if the company is liquidated at that time you will get $1 for every $1 invested.  The P/B ratio of 5 means that for every $5 dollars you have invested in the stock, if the company is liquidated now you will only get $1 back.  The P/B ratio of 0.5 means that for every $0.50 cents you have invested, you will get $1 back if the company is liquidated.

Value investors typically try to identify stocks with P/B ratio of 1 or less because it automatically gives them a margin of safety. As with the Radio Shack example above we can see that their P/B ratio stands at 0.67. This is a good start. Meaning that if you invest in Radio Shack today,  you are buying $1 in assets for just $0.67 cents. This gives you an automatic margin of safety to the tune of 33%. This also mean the company is undervalued, providing an investor with a possible gain of 33% or more. Not a bad start.

The next thing we try to do is determine the Intrinsic Value of the business. If you recall, the intrinsic value of the business is typically above book value. It includes its brand name, future growth projections and cash flow, interest rates, etc…. While figuring out Intrinsic Value could be a time consuming process I will show you how to do it fast in the next chapter.  No degree in finance is required.  We then look at the management team, business prospects, competition, products and a few other metrics to add into the calculation.

Once the Intrinsic Value number is estimated (it will never be 100%) we have a much better understanding of what the business is truly worth or we can see the true value of the company. Jumping ahead a little bit,  next chapters shows Intrinsic Value for Radio Shack at $10.  That means that the current stock price of $3.35 gives us a margin of safety of 66.5%.  This is indeed a significant margin of safety that allows us to protect our original capital.  In addition, the 66.5% margin of safety could be viewed as a potential profit margin which could be realized when the Radio Shack stock moves towards its intrinsic value.

Even thought it could be as simple as that, in the real world it is rarely so.  Depending on the future performance of the company both the book value and the intrinsic value calculated above can go up or down. Sometimes substantially so. That is why obtaining a significant margin of safety when purchasing any given investment is so important.  In the majority of the cases that lowers your risk profile and gives you an opportunity to get out without big losses if a mistake is made.

As such, value investors should always strive to minimize their risk by maximizing their margin of safety.

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The Secret To Predicting The Future Of The US Economy

Bloomberg Writes: The Enduring Mystery of Financial Markets

Future-Predicting-InvestWithAlex 

Unfortunately, decades after the three economists had their groundbreaking insights, the crucial question remains unanswered: Can policymakers know with any certainty when markets are dangerously out of line, and is there anything they can do about it?

Economists can’t be expected to predict the future. But they should be able to identify threatening trends and to better understand the conditions that can turn a change in prices into a financial tsunami.

Read The Rest Of The Article Here

Once again, I do not understand why everyone claims that it is so hard to do. The Economy and its bubbles are very easy to see and predict.  For example, you could have looked at 2002-2007 period and have easily determined or came to a conclusion that there was a huge real estate and mortgage finance bubble developing.  When it would collapse, it would take down the entire economy, multiple financial institutions and our financial markets.

No crazy or complicated economic models needed. This is fairly basic and common sense stuff. Same thing applies to today’s environment. While the majority of the economist do not see any present issue either in the economy or the financial markets, they are there.  The majority of economic growth and market recovery over the last couple of years has been driven by an insane amount of credit pumped into our economy by the Fed through a multitude of channels.

Now the economy and the financial markets will have to pay for such a mismanagement by dropping over the next few years (as my timing work indicates). As the Fed perpetuates this cycle of boom and bust by dumping a lot of credit into the economy I remain puzzled why it is so hard to see by most economist and others participating in the financial markets. If you take conflict of interest out of the picture, this becomes very basic. 

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What Everybody Ought To Know About The US Dollar

Daily Ticker Writes: Why the Dollar Will Always Be the Reserve Currency for the World

USD

On Friday morning the U.S. dollar came close to its lowest point of the year against the euro, according to The Wall Street Journal, on expectations that the Fed will have to continue its easy money policies for longer than first forecast thanks to the government shutdown.

“I’ve never been very worried about this,” he asserts. “The reason for that is there really is no alternative. The Chinese are not going to offer – and they cannot, given where they are in development, I think, for a decade or more – a genuine competitor for the dollar.”

Read The Rest Of The Article Here

I tend to agree with the premise of this article. As of right now there is no clear alternative to the US Dollar. The Chinese Yuan cannot be that alternative as it is technically not even a freely traded currency.  It will be decades before Chinese Yuan approaches the point of even being considered as an alternative to the US Dollar. The Euro? Well, there are too many structural issues in Europe.

There is a real possibility that Euro won’t even survive over the next decade. The majority of European economies (well, almost everyone except Germany) are in a big fiscal mess that is not getting any better. If anything, it is getting a lot worse. With the upcoming worldwide recession over the next few years (I discuss in my previous blogs posts) there is a real possibility that it might force some countries out of the EU and out of the Euro.  

That is one of the reasons of why I am so bullish on the US Dollar for the time being. No doubt that the US has some serious economic and structural problems. Yet, that in itself doesn’t determine the value of its currency.

It is quite possible for the currency to appreciate significantly even under dark economic circumstances and that is what I foresee for the US Dollar. Be aware of that.    

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Stock Market Update, October 18th, 2013

daily chart Oct 18, 2013

Summary: Continue to maintain a LONG/HOLD position

In my last weekly update I suggested that traders should set themselves up for a rally that was surely to come due to the US Government resolution. We did get that rally over the last couple of days and the DOW now sits close to the previously suggested range of 15,300-15,500.

Most importantly, we are approaching the moment of truth.

Ladies and gentleman, this is the moment we have all been waiting for. Over the next few weeks we will find out if the bear market has already started or will start in March of 2014. Should the market break below 14,600 over the next two weeks, the probability is high that we have already started the bear market leg into the final 2016 bottom.  The market is certainly going back into the 14,800 as it left a huge gap there, but a firm break below 14,600 will give us a confirmation that the bear is back.

What’s more, my timing work is giving me further confirmations that September 2013 was indeed the top. I will discuss these points over the next few weeks, but there are clear mathematical points of force that lead me to believe that a higher top on the DOW over the next couple of months is highly improbable.

At the same time we cannot yet ignore the technical picture. As such, I continue to advise you to maintain LONG/HOLD position while waiting for a confirmation that the bear market has indeed started.  

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The Secret To Margin Of Safety (Part 2)

Why?

Because the stock market is a much more complex discounting mechanism.  The stock market constantly discounts fundamental data, human psychology and future projections into any given stock price. During this process many errors are possible.  It could based on simple misunderstanding of the fundamental data or a negative psychological mood of the overall crowd or due to a market correction/surge.  As such, stocks end up being either…..

  • Significantly Undervalued $25
  • Undervalued $50
  • Properly Valued   $100
  • Overpriced  $150
  • Speculatively Overpriced $250

Obviously, as value investors we are interested in the first two categories because such stock give us the best margin of safety. Yet, that doesn’t necessarily mean that the margin of safety you are able to obtain will automatically become your profit margin.  For example,  if you have bought an “Undervalued” stock at $50 giving you a 50% Margin of safety,  it doesn’t mean that the stock will simply appreciate to $100 over a certain period of time so you can sell it at 100% profit. It should, but it doesn’t mean that it will.

Many outcomes are possible here.  Yes, if you have done your work right, this particular stock should appreciate to its true value of $100. However, the path it takes is unknown. It could decline even further to $25 before surging back to $100.  It can stay at $50 for a couple of years before surging all the way to $250.  Should you sell at a $100 or keep the stock in your portfolio due to improving company fundamentals?

As you can see there are way too many possible outcomes here to clearly define if your margin of safety is your profit margin. That is why it is best to look at the Margin of Safety as your insurance policy as opposed to your profit center. The profit or loss that will eventually come from your investment can realize itself in many different ways, yet there is only one Margin Of Safety and it is clearly defined. Now, let’s take a look at a real life margin of safety example and how to apply it to an individual stock.

(*I will keep the analysis very simple here without going into an in-depth analysis and/or valuation work).

 rsh

  • Date: 10/18/2013
  • Company Name: RadioShack Corp (RSH)
  • Stock Symbol:  RSH
  • Stock Price: $3.35
  • Market Value: $334 Million
  • Enterprise Value: $613 Million
  • Price/Book Ratio: 0.67
  • Revenue:$ 4.19 Billion
  • Net Loss: ($206 Million)
  • Total Cash: $432 Million
  • Total Debt: $712 Million

A stock that just 3 years ago was selling at close to $25, is now selling at $3.35. That is a about an 85% decline in value for a famous brand name we all know.  This type of a situation (significant decline and strong brand name) should definitely peak an interest of a value investor.  As mentioned earlier, there could be a million different reasons of why this stock has declined so much, but for the sake of simplicity and our margin of safety discussion lets simply look at how much (if any) margin of safety does this stock offer.  

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Bernanke Is Over-Stimulating Americans

Reuters Writes: Fed’s Fisher warns of potential U.S. housing bubble, MBS buys

property-market-crash-investwithalex

(Reuters) – A top Federal Reserve official said on Thursday he is seeing fresh signs of a U.S. “housing bubble” and warned about the central bank’s ongoing purchases of mortgage-based bonds.

“I’m beginning to see signs not just in my district but across the country that we are entering, once again, a housing bubble,” Dallas Fed President Richard Fisher told reporters after a speech in New York. “So that leads me … to be very cautious about our mortgage-backed securities purchase program.”

But citing rising year-on-year house prices in Texas cities, and elsewhere in the country, he warned that the central bank’s hyper-accommodative policies could be inflating dangerous asset price bubbles.

“We have to be watchful and realize there has historically been an era of the Fed over-stimulating” since the Great Depression, Fisher said.

“I worry we are following that tradition now,” he added on the sidelines of a meeting of the New York Economic Club. “No one knows when the bubble pops. But I would argue that … with each dollar we buy in Treasuries and mortgage-backed securities, we’re getting closer to the tipping point.”

Read The Rest Of The Article Here

I have a lot of respect for Fisher. Simply put, unlike most others at the Fed he doesn’t have his head stuck up his ass. He calls it as he sees it. He is absolutely correct by indicating that the Fed is over-stimulating (once again) and that causes all sorts of issues, including another housing bubble.

I do disagree with him on one issue. The fact that “No one knows when the bubble pops”.  There are ways and signs to figure it out. When it comes to the US Real Estate market there are multiple signs that the real estate market is completing its bounce from the 2010 bottom and is in process of rolling over. So much so that I went out on a limb a few weeks ago to call for a housing market top. My previous article “I Am Calling For  A Real Estate Top Here“ I have outlined a case of why I am making that decision. I highly encourage you to revisit that post.

While certain local markets might continue to surge upward for the time being, the overall market is reversing itself NOW. If you are speculating or investing in the real estate right now, it is not going to end well. 

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