Swing Trading With The SPHB:SPLV Chart

The SPHB:SPLV ratio chart is showing a compelling setup for small cap stocks. The SPHB:SPLV ratio chart tracks high volatility (high beta with tendency to be small cap) stocks to low volatility (tendency to be large cap) stocks. This ratio chart is another barometer for the risk on versus risk off trade.

In a risk on market, higher growth and higher beta stocks are the name of the game. Investors go on the offense for maximum profits and their less concerned about the economy and a recession. In a risk off market, investors go on defense and move into safer and more stable (low volatility) large cap stocks.

SPHB:SPLV Ratio Chart

business sphb splv 1100x654 - Swing Trading With The SPHB:SPLV Chart

The market has consolidated a little over the last week and that was the swing long signal we were waiting for. Notice that SPHB:SPLV has broken through resistance at 0.8050 and now is pulling back to retest that level. This is a classic set up we can trade. If the 0.8050 level holds, it means previous resistance has become support and we can take a beautiful entry off that level (green arrow). Make sure to review this lesson on trading for beginners so that you know which stocks to screen for to take advantage of a turn in the SPHB:SPLV chart.

Jim Rogers Doom Predictions Are Nothing New

Jim Rogers recently claimed that he was expecting the worst market crash in modern times to hit within the next two years. Mainstream and alternative news sites are acting as if what Jim said is really alarming. It’s not.

Jim Rogers said the next time we have an economic problem in the US it’s going to be the worst of our lifetime.

Jim’s logic is that the world has been printing a lot of money and the whole world has a lot of debt. In 2008, we had a problem caused by too much debt, but now the debt is much larger than it was in 2008, so the next time we have a problem, it’s going to be even bigger than 2008.

The 74- year-old investor also repeatedly stressed that the crash was “going to be worst in your lifetime.”

Rogers said we’ve had financial problems in America every four to seven years, since the beginning of the republic. Well, it’s been over eight since the last one. This is the longest or second-longest in recorded history, so it’s coming.

According to the 2014 book Excess Returns, in Rogers’ years as a professional investor, he beat the market by an average of around 30% per year.

Jim Rogers Doom Predictions Are Nothing New

The mainstream media and even alternative news sites like to hype Jim Rogers’ predictions as something alarming but one graphic really destroys that logic:

Being early is the same thing as being wrong. Had you listened to Jim back in 2011, you would have gotten killed shorting the market and you would have missed out on one of the greatest bull-market runs in stock market history. As Rogers has aged, he’s really destroyed his reputation as a market forecaster with his perma-bear view that the world is going to hell in a hand-basket.

Black Friday Hits All-Time Record of $3.34 Billion

Black Friday sales hit an all-time high record of $3.34 billion or 21.6% growth year-over-year. Mobile accounted for $1.2 billion of those sales, a 33% increase from the previous year. TechCrunch writes

Combined with yesterday’s $1.93 in online sales on Thanksgiving, the two days are expected to close out at nearly $5 billion in sales. Top-selling toys included Lego Creator Sets, electric scooters from Razor, Nerf Guns, DJI Phantom Drones, and Barbie Dreamhouse.

The Doctor Of Common Sense says about the major indices hitting all-time highs, “Do you believe that this is a coincidence? I’ve been telling you everything that liberals do their whole policy with their communist and social policies, they never work. All you have to do is look at how bullish the market is.” The Doctor Of Common Sense also uses Black Friday’s record sales as proof of failed Democrat and liberal policies although he fails to logically back that claim up. Check out what Doctor Common Sense has to say in the video below.

Nothing against The Doctor Of Common Sense but this is what I was afraid of. When everyone is coming out declaring how great Trump is and how bad liberals have been and citing the spike up in the stock market as proof, that’s when the market is most likely to take a turn down IMO.

This Trump Rally is mostly nonsense and hype IMO. Trump hasn’t even taken office yet. The P/E on the S&P 500 has moved higher since the election and is not supported by anything fundamental.

On the chart above, the gold line is the P/E ratio of the S&P 500 which is at a troubling high of 25.46. The red line is earnings, and the blue line is the S&P 500.

If you thought the market was overvalued before the Trump election, you must be freaking out over this latest spike up.

The stock market going up is not proof of failure by Obama and Democrats. The stock market is going up because there are more buyers than sellers and from short covering. From a market psychology perspective, greed is prevailing over fear right now. That’s it. Assigning stock market direction as proof to justify your personal political bias will result in the rapid demise of your trading account.

Don’t get me wrong; I’m a Trump supporter as you already know. But let’s be real about market valuations. Chasing markets higher because of Trump mania is a dangerous game IMO. I think a lot of amateur traders and investors have the potential to get hurt from this Trump rally when it finally comes to an end.

Can I Just Say It, Autonomous Driving Is Stupid To Average Consumers

Autonomous driving is dumb. In my surveys of asking family members and friends, there’s a whole ZERO percent interest in autonomous self-driving cars.

Most Americans don’t even want a chip on a credit card let alone a car that drives itself.

Technology companies think they are smarter than consumers. Tech companies believe that once they wow us with the reality of self-driving cars, we’re all just going to go out and buy one like a bunch of sheep, sheep led to the slaughter like this guy.

Josh Brown, a Navy Seal who served on Seal Team 6 (the unit that killed Osama Bin Laden), died from autonomous driving technology.

The big news last week was that Intel announced that it would be joining the push to create fully autonomous vehicles, investing over $250 million in the next two years to facilitate this development.

Tech gone wrong is tech that develops without much concern for producing what the public wants. Reality check: the average person doesn’t care about autonomous driving and believes it’s downright dangerous.

How are autonomous cars going to respond to an ambulance racing through an intersection? What about an electrical component on a circuit board in the autonomous driving car going out? Are you going to have about 2 seconds to grab the wheel to take control before a crash occurs?

Capitalism sometimes gets out of whack where you have greedy geniuses running around trying to force the public on a ‘fantastic’ new technology. Remember the tech wearables market that was supposed to explode higher? The only thing it did was implode. Intel is laying off a major portion of its wearables group.

Technology bloggers like to write about new technologies like autonomous driving cars. Mainstream media groups like to report on autonomous driving cars because it’s something interesting that people like to read about in horror and fascination. But where the rubber meets the road is what consumers want. In all the self-driving car hype, I see little evidence that consumers are willing to spend thousands of more dollars on a self-driving car.

I see billions of dollars being spent on autonomous driving technology and I see tepid consumer interest at best. That’s a dangerous combination for investors, and I think we could see the autonomous driving car fad die out after tech companies finally realize that most of the public doesn’t trust or want self-driving cars.

Microeconomics and Taxation

Most government revenue comes from the taxation of transactions and labor. Taxes impact both the supply and demand curves. Taxes cause a buyer to pay more for something and suppliers to receive less. The loss of value for both buyers and sellers is called the deadweight loss of taxation. Taxation has an enormous impact on the economy and thus stock market. Traders and investors need to understand the effects that taxation has on the economy and thus stock market. We will examine deadweight loss from a microeconomics perspective, ending with a macroeconomics viewpoint.

In a market without taxation, we will say that a package of socks will sell at a fair market price of $14. This $14 equilibrium price is set where the supply and demand curves cross.

When taxes hit the package of socks, the buyer pays a higher price of $15.40, and the seller receives a lower price of $11. Taxation lowers demand to d1 because buyers have to pay a higher price for socks. The seller is also taxed, and so he receives less profit for his package of socks. If there’s less profit, the supplier will supply fewer socks at a level of s1.

The amount that the government receives in taxes is equal to the buyer’s price minus the seller’s price, multiplied by the quantity of the transaction, whether for goods or services. The area of the light red rectangle is the tax revenue collected by the government. The area of the dark red triangle is equal to the economic value that is lost to taxation.

This loss of economic value consists of buyers who will either buy less or not at all because the price is higher than what they can afford so they decide to do without. Likewise, some suppliers will not produce the product because they are not receiving a high enough price to cover their costs. The benefit that these buyers and sellers would have added to the economy if it were not for taxation is called the deadweight loss of taxation. Because these buyers and sellers do not participate in the market, they do not contribute to the tax. Instead, the taxes are paid by the buyers and sellers who continue to participate in the market. The tax burden falls on the fewer buyers and sellers who continue to participate in the market. A vicious taxation loop can start where a government raises taxes more to offset lower tax revenues caused by rising deadweight loss.

Demand and Supply Elasticity

Demand elasticity is the change in quantity demanded at a particular price. If a large change in price results in little change in the quantity demanded, then demand is considered inelastic. If a small change in price results in large changes in the quantity demanded, then demand is considered elastic.

Products that have good substitutes have a high elasticity of demand, since if the price of one substitute increases, buyers can switch to another substitute. For example, if the price of beef increases, then people will buy more chicken, ham, pork, or some other meat. Beef is considered an elastic product.

Products that have fewer or no substitutes have a high inelasticity of demand since if the price increases, there are no substitute products buyers can switch to. For example, if gasoline and oil prices increase, buyers have to pay the higher price because there are no close substitutes.

Supply elasticity is the change in supply costs at a particular price. If the supply changes little with a change in price, then supplies are considered inelastic. Supply is elastic if there are large changes in supply for a small change in price.

For example, the supply of land is inelastic because no one is making any more of it. By contrast, the supply of software is fairly elastic since it costs very little to make and distribute copies of software over the internet.

Deadweight Loss Varies with Elasticity

The amount of the deadweight loss varies with both demand elasticity and supply elasticity. When either demand or supply is inelastic, then the deadweight loss of taxation is small, because the quantity bought or sold does not vary much with the price.

Demand Inelasticity and Deadweight Loss

Buyers need to have the product and so changing the price through taxation is not going to change that. For example, buyers need gasoline to operate their automobile. Gasoline is inelastic as there are no substitutes. Raising taxes on gasoline will result in a lower deadweight loss.

Supply Inelasticity and Deadweight Loss

Sellers want to sell land, and so the tax rate is not going to heavily influence the supply of land for sale. The supply of land is inelastic because, as Will Rogers once said, they’re not making any more of the stuff. Raising taxes on land sales will result in a lower deadweight loss.

Deadweight loss increases proportionately to the elasticity of either supply or demand.

Higher Taxes and Deadweight Loss

Balancing the tax rate which gives the most tax revenue with the least amount of deadweight loss is impossible. The tax rate that worked during the Bill Clinton Administration did not work during the Obama Administration. An endless amount of factors come into play when determining a moderate tax rate with the most yield versus minimal deadweight loss. What we do know is that when the tax rate is small, there is less deadweight loss and conversely, when the tax rate is high, there is more deadweight loss as illustrated in the two graphs below.

As can be seen from the graph below, as taxes are increased, the deadweight loss of the tax also increases, gradually at first, then steeply as the size of the tax approaches the market price of the product without the tax. Likewise, tax revenue increases at first but then starts to decline as a decrease in quantity more than offsets the increase in the tax rate.

Macroeconomics and Taxes

The Federal Reserve has been unable to get the meaningful shift from aggregate demand outward that they wanted to increase GDP. It’s no coincidence that under the Obama Administration, the US has the third highest corporate income tax rate in the world, at 38.92 percent. The U.S. rate is exceeded only by the United Arab Emirates and Puerto Rico. Higher taxes shift the aggregate demand curve inward from AD1 to AD2.

Conversely, lower taxes shift the aggregate demand curve outward.

Higher taxes also negatively impact the number of people willing to work as illustrated by the Laffer Curve.

The marginal tax rate is measured on the vertical axis, and total tax revenues are measured on the horizontal axis. Note that the Laffer Curve is backward-bending, reflecting the behavioral notion that at some point, people will work less the more they are taxed. This backward bend means that above a certain tax rate, “m” in the figure, an increase in the tax rate will cause overall tax revenues to fall. Note also, for a supply-side tax cut to increase tax revenues, the existing tax rate before the tax cut must be above “m,” perhaps at a rate associated with point “n” on the curve. The tax rate being above “m” is an important point because, in the early 1980s, the Reagan Administration’s economists believed that the economy was on the backward-bending portion of the Laffer curve (above “m”) and that a tax cut would increase total tax revenues. Based on this assumption, it moved forward with one of the largest tax cuts in American history.

The Reagan Administration also took actions to shift the supply curve outward such as cutting back sharply on the regulation of everything from monopoly and oligopoly to pollution and product safety, critical elements that shift the aggregate supply curve outward.

Policies which can successfully shift the economy’s supply curve out, do so with the twin advantages of both lower unemployment and lower inflation.

Fed Puts Markets On Notice For Rate Hike

Fed’s Eric Rosengren was clear in his speech early Friday that rates need to be raised. Mr. Rosengren said that if we don’t raise rates soon, we could crash the economy. Mr. Rosengren said, “A failure to continue on the path of gradual removal of accommodation could shorten, rather than lengthen, the duration of this recovery.”

Fed’s Kaplan (Dallas Fed) spoke about the need to raise rates very slowly but said that the Fed “has put markets on notice.”

Atlanta Federal Reserve chief Dennis Lockhart said on Monday, September 12, 2016, that a “serious discussion” of a rate increase was needed. Lockhart said, “I believe the economy is sustaining sufficient momentum to substantially achieve monetary policy objectives in an acceptable medium-term time horizon.”

Not only do banks need rates to move up as they have suffered for years under low-interest rates, but inflation is also coming on strong.

Jeffrey Gundlach of DoubleLine said last week, “This is a big, big moment.” The bond investor warned his peers that interest rates are ready to rise from their historically low levels and asset managers need to be “defensive.” Quartz writes

Gundlach said investors should reduce duration in their portfolios, move money into cash and buy protection against volatility before rates rise and inflation picks up.

Gundlach uses the recent jump in the ECRI (index of leading indicators) to suggest that we are about to see more inflation in the US.

The ECRI US leading index continues to rise so the market should be pricing in higher inflation and therefore higher interest rates.

Consumer credit confirms an overheating market and the likelihood that inflation will explode higher. Consumer credit as a percentage of GDP is exploding higher to levels never seen before.

Shopping Center Carnage: $47.5 Billion In Loans Coming Due

The second-biggest US mall owner General Growth Properties defaulted last month when a $144 million loan on a property came due. The default by General Growth Properties could be a sign of troubles to come.

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A staggering $47.5 billion of loans backed by retail properties are set to mature over the next 18 months.

Fewer people are shopping in malls and instead chasing cheaper bargains online. Massive job cuts are planned across the retail sector as a result of slumping sales. We have poor earnings forecasts from retailers like Macy’s and Nordstrom, plus bankruptcy filings by chains such as Aeropostale and Sports Authority. With big retailers in a slump, how commercial property owners will have enough money to make their mortgage payments is a mystery.

The dire commercial property market will expand to stocks and could pull down the entire market. The Columbus Dispatch writes

Insurance companies and banks that are eager to issue loans on high-end shopping complexes aren’t as willing to take a chance on a shaky mall. That pushes borrowers toward Wall Street firms that underwrite loans to sell to investors as commercial-mortgage-backed securities.

Investors that hold mortgage-backed securities could be in for bad times ahead unless the Federal Reserve comes to the rescue and starts buying toxic commercial-mortgage-backed securities.

In a sign of how bad things are for commercial mortgages, the U.S. Small Business Administration (SBA) has recently announced the restart of the SBA “504” loan refinance program. The program expired in 2012 after refinancing more than $5 billion in small business commercial mortgages following the Great Recession. No, I’m not making this up. An emergency finance program that was last used during the Great Recession just started up again on June 24, 2016!

The way a 504 loan works is that the lender finances 50% of a transaction while an SBA-approved Certified Development Company finances 40%, and the borrower is required to pay a 10% down payment.

Starwood Capital Group is planning to dump $1.2 billion worth of properties while they still can.

Many commercial landlords are choosing to walk away and stick the lender with the property. The message is clear: lenders beware. If a mall is not accretive to the REIT, they just walk away from it.

REIT Investors Have No Clue That Something Wicked Is Coming

REIT investors have no clue that loan defaults are coming at them full speed ahead. Worse, REIT investors have no clue that a flat or inverted yield curve will crash REIT markets.

Below is a chart showing all time popularity of REITs as investors pile in. I overlayed the yield curve in early 2007. Notice how a flat or inverted yield curve crashed REITs because REITs borrow money short term, loan it out long term, and make profits off the spread.

The current yield curve is normal but it’s flattening quickly as REITs profit margins are squeezed.