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Published January 18, 2019

The Gold / Stock Model (GSM) has produced a return of about two and a half times that of the stock market since 1973 but its primary problem is that it can “whipsaw” back and forth before it captures a major trend change.

This is what has happened last week. As the price of gold softened slightly and since the stock market has been quite hot thus far in 2019, the GSM flip-flopped back to stocks this week. I hate these back-and-forth moves and am always hopeful that one trade will capture the beginning of a significant trend change but I can’t arbitrarily overrule the success of this objective model.

So, we’re back in stocks and though earnings projections are not as bullish as they were a few months ago, they are strong enough to have us be 95% in equities.

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Published January 11, 2019

Recall that last week we moved 40% of our short-term funds into gold-correlated investments and out of stocks based on the dictates of our Gold / Stock Model (GSM) . This model has produced returns of about two and a half times that of the S&P 500 Index over the last 40 years so it truly can’t be ignored.

We use an index of gold-correlated exchange traded funds to capture, hopefully, the increase in the price of gold.

[The index is weighted thusly: 20% – GLD, 20% – IAU, 20% – SGOL, 15% – PRPFX, 15% – FXF, 10% – TIP.]

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Published January 4, 2019

Last year the Model had its fourth negative or “losing” year so far in the 19 years of this century (including the year 2000). The Model had a loss of 4.7%, (compared to a loss of 4.4% for the S&P 500 total return index), its first loss in 10 years. Though we’re never at all pleased with a loss of any kind, we recognize that choosing to invest in the stock market will absolutely produce occasional losses.

Most of the year was quite good but a combination of aggressive Fed actions, on-going trade concerns and changes in political power in Washington literally destroyed Wall Street in the fourth quarter. Because both trailing and projected earnings continued to be strong throughout the period, our Model unfortunately rode the wave downward along with the market.

Now we find ourselves with continued strong earnings estimates from the analysts but the lower level of the S&P 500 combined with a recent surge in gold prices has triggered our Gold / Stock Model (GSM) to move into a 40% position in gold-related investments.

The GSM has been in effect in real-time since 2010 but prior to that had been “back-tested” to 1973. Even with the numerous “whip-saws,” this model would have taken a $1,000 investment to an astounding $81,000 as of last Friday. (To put this in perspective,  using the S&P 500 index, a $1,000 investment would have grown to nearly $30,000 and gold bullion to $8,900 over the same period.

Such a return is too difficult (and foolish) to ignore so as of today, we moving 40% of the portfolio into a gold “index.” This index is comprised entirely of six exchange-traded funds (ETFs) that have about a 97% correlation to actual gold bullion itself.

[The index is weighted thusly: 20% – GLD, 20% – IAU, 20% – SGOL, 15% – PRPFX, 15% – FXF, 10% – TIP.]

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Published November 26, 2018

The recent decline in the stock market has sent serious shockwaves into the hearts of many investors. The S&P 500 is now officially in “correction” territory having come down 10.2% from its all-time high made just two months ago.

This decline is unusual only when looking at the last few years. Historically, a 10% market correction has been deemed “healthy” as it cleanses the market of complacency and instills a more normal level of concern.

We have now grown to expect the market to come down a few percentage points but not double digits. For many older investors, the emotional shock and horror of 2008 still looms in the back of their minds. They may believe they can handle a 10% reduction but selling has been high among those who just can’t deal with the thought of a 20% or more move into bear market territory. So they’ve gotten out.

I don’t know why this correction has occurred now. Pundits claim they do but they really don’t.  Generally such rapid moves are due to  a number of factors like perhaps: political factors, rising interest rates, geopolitics, etc. Sometimes earnings are strong enough the market ignores these constant external influences. The so-called “bears” may say they predicted this correction but many of them have been doing so for years and missed this 9+ year bull market entirely. Eventually they have to get a prediction right.

Our LRI Model is down 10% from its peak as well. It has been at 95% invested in stocks during the entire decline. I’m not happy about that but recognize that the Model is a purely unemotional algorithm that tells us that earnings are good and forecasts are even better. The market is now cheaper (price/earnings ratio) than it has been for nearly 3 years.

I looked back to find the worst period for the Model. It wasn’t really a surprise to find that it was down 28% from its peak (October 2007) to early March 2009 or just before the dawn of the longest bull market in history.

So my advice to you is that if none of this talk of normalcy is reassuring, you likely need to have less money at risk in the stock market. It makes no sense to agonize or feel insecure about this situation today just to have more security later.

Don’t forget that even with this correction, our Model is 66% higher in the 5 1/2 years this website has been published. Without being in the stock market, I’d be interested in hearing about what alternative (non stock market related) investments equaled that return with no more than a 10% reduction at any point in time. Let me know.

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Published November 5, 2018

It seems to me that October’s crush was a political reaction to the prospect (likelihood?)  that the Democrats will capture the House of Representatives on Tuesday. Though rising interest rates by the Federal Reserve Board have certainly had a cumulative negative impact on the stock market, the recent pull back appears to be politically based.

Both current and forecasted corporate earnings remain strong though forecasted earnings are just slightly weaker than they were a few weeks ago. This is likely due to the recent stock market decline. Forecasters are human beings and subject to the emotions of the stock market as well. Historically, forecasters are usually correct in the general direction of earnings but sometimes the market itself leads and the forecasters follows with rapid adjustments.

The market clearly likes Trump / Republican policies of lower tax rates and reductions in economy-crushing regulations. The jury is still out on the trade push-backs: the market hates tariffs and trade wars but if this strong stand results in lower trade barriers in the near future, the market would likely love that outcome.

If the Democrats win the House and Republicans retain the Senate (I believe the market has already digested this), it is conceivable that Republicans would move rapidly to push through additional legislation that would be business/taxpayer friendly.

We’ll see shortly but in any event, earnings remain strong and we’ll stick with our Model.

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Published May 14, 2018

Today (Mon. 5/14) marks the fifth anniversary of the first publication of this website. And it has been a remarkable five years.

When I decided to place my then, 23 year-old stock investment (timing) model onto a publicly viewable website we were already over 4 years into a new bull market. Many of my friends were becoming increasingly concerned that the bull was perhaps getting tired and that a serious decline was just around the corner.

This concern was not unfounded. After all we were just a few years past one of the most serious bear market crashes in stock market history, a fall of nearly 58% (intraday).  The end result was the publication of this site.

I knew I couldn’t prove the Model’s results up until that time since it was used exclusively for my personal investments, but all subsequent results since are verifiable. I’ve posted the last 260 weekly updates prior to noon on the stock market’s Monday (or Tuesday during holiday weeks) opening.

The Model’s performance during this period is consistent with prior bull markets. Remember that it is designed to capture a major chunk of a bull market’s gains but really cannot match a roaring bull market’s performance since it doesn’t delve into specific investment vehicles, just the S&P 500 Index average itself.  So as soon as the Model reduces its allocation to stocks below 100%, the Model has to grow at a slower pace.

What this Model will do though, unlike nearly all other investment allocation models out there, is commit completely to stocks (like it has been for the last seven weeks) if conditions warrant.

Historically, the Model has beaten the market during corrections or especially during bear markets. This is how it has out-performed the market over time. Given its name,”Low-Risk-Investment Model,” it moves followers away from the stock market when “clouds” (lower earnings actuals or forecasts) show up on the horizon. It exists to avoid risk rather than maximize gain.

For the last five years the Model has averaged 72% in the stock market, ironically fairly close to some common asset allocation percentage recommendations. Below is a graph showing the performance of $1,000.00 invested in the stock market (S&P500 total return index) and bonds (Vanguard Total Bond Market Index VBMFX) with the same 72% allocation to stocks as averaged by the Model, along with 28% allocated to bonds.

With weekly re-balancing, a 72-28 mix would have grown a $1,000.00 investment to $1,602.05 over the last five years, a compound annual return of 9.9%. Most investors wouldn’t complain about nearly a 10% annual return over any five year period.

With the same 72% allocated to stocks, the LRI Model would have taken that $1,000 initial investment to $1,726.38 or an annual return of 11.5%!

To produce such a return, an asset allocation of 87% stocks and 13% bonds would have been required showing the Model’s stellar performance on a risk-adjusted basis.

The Model is still performing well for a simple reason: It is based strongly on corporate earnings (pre-tax) and earnings are currently through the roof. When analysts’ earnings forecasts slow down (financial clouds on the horizon), and they will at some point, the Model will likely adjust and begin to reduce its allocation to the stock market. It is after all, first and foremost, risk averse.

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Published April 9, 2018

The overwhelming consensus right now is that the president’s proposal for tariffs  is starting a trade war, especially with China. But this has been a one-sided war for decades that the president has decided to participate in.

As the price for doing business in China, both access to cheap labor and an enormous consumer market, the Communist government has imposed “tariffs” on these companies. They’ve eliminated any private, voluntary agreements that American and Chinese companies could have with each other and demanded that the American companies pay a price:  For many the long-term cost to them is often sharing their technological secrets.

The American taxpayer/consumer is, surprisingly, also subsidizing Chinese products through reduced prices charged by the United States Postal Service (USPS).  Though it is the number two economic power on earth, China continues to use its “developing nation” status to considerable advantage, whether it be in areas like international global climate treaties or in this case with lower shipping charges.

The International Postal Union, under the auspices of the United Nations, sets rates for international mail delivery including our USPS. These rates can be as low as 25% of what an American manufacture has to pay for delivery to a customer.  It is due to China being considered a group 3, developing nation (like Botswana or Cuba) that must be subsidized (and agreed to) by a group 2 or 1 country like the U.S.

My point is that if you’ve ever had to seriously negotiate anything major, you never start too close to where you’d like to finish. You have to thoroughly convince to the other side that you’re willing to take a very hard line (walk away) with any deal that doesn’t match your demands — though you’re also willing to listen (negotiate).

It appear Trump is willing to take the political heat and  send some shockwaves through Wall Street by selling everyone (especially the Chinese) he is serious about imposing strong tariffs on myriad Chinese manufactured produces sold  in the U.S.

I’m personally opposed to nearly all tariffs. (I also believe its a dangerous world and we must maintain important domestic defense manufacturing capabilities.) It is my guess that the president will be able to extract some Chinese concessions, perhaps like  although China maintains it never steals any intellectual property — it will now stop. But I think overall these tariffs will be quite minor and have little impact on American companies one way or the other.

If this is true, it also means that Wall Street has been overreacting to the threat. The stock market was so complacent, it was almost looking desperately for a reason to sell off. And so far, though the raw numbers of decline have been great, the percentages have been rather minor.

Nor do the analysts seem overly concerned. Earnings estimates are still through the roof for the S&P 500 companies for the remainder of this and into 2019.

Having said all that with our Model remaining at 100% in stocks this week, I’m still quite nervous.

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Published March 26, 2018

Well, it was obviously a miserable week for stock market. All of the gains for 2018 were essentially wiped out in just two days.

I know, everyone was citing the Trump administration’s recently imposed tariffs and the likelihood of Fed interest rate increases as the consensus culprits. Maybe even Mark Zuckerberg had something to do with it.

But I believe the primary reason was a political one. President Trump’s decision to sign the recently passed budget deal sent multiple shock-waves across the country with Wall Street not demonstrating any immunity.

If you are reading this, you already know that the core element to the investment model at this site is earnings – both current and projected. History has shown that in the United States nothing is more important to the direction of our domestic stock market.

But that is only because other key investor concerns have been mostly assuaged over the decades. Among the greatest concerns to international investors is the political stability of the country where they are investing their capital. This ultimately means confidence in the protection of private property and the anticipated future regulatory environment (government intrusion into free market capitalism).

I believe President Trump’s decision to sign the quintessential Deep State spending spree bodes poorly for this previously resolved D.C. outsider to have any further success in even slowing the freedom-eroding, quicksand-like spread of our bureaucratically controlled federal government let alone eliminating it.

In any event, our Model has upticked to 100% in stocks after last week’s debacle. I hate when it calls for a 100% allocation given my fear of losing money but last week took a ton of the “price” excess in the S&P 500’s price/earnings ratio out of the equation leaving the still extremely strong earnings forecasts intact. It means stocks are considerably cheaper so our Model has responded.

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Published February 12, 2018

Well. That was an interesting week. Whew!

The S&P 500 Index dropped 5.2% just last week alone and nearly 9% over the last ten trading days. Brutal is not an over-hyped description for February so far.

It is a reminder that investing in something other than U.S. Treasury notes is not just financially risky, it is at times extremely emotionally difficult. Though the last two weeks don’t even rank in the top 10 of 2-week losses over the last 20 years, this period does make the top five over the last 10 years.

I want to say the drop was surprising but for a market historian, it really was not unexpected. For me the greater surprise is how long this market has gone seemingly straight up without any serious correction (defined as a 10% drop from a market high). The S&P 500 Index just made an official correction at 10.2%  and the Dow Jones Industrial Average declined 10.4%, both on last Thursday.

The question is: Has the bottom been hit and will the 9-year-old bull market regain its momentum? No one knows the answer to that question though many will make their predictions knowing that their wrong ones will be shortly forgotten by the media and if they are lucky enough to guess correctly, they can trumpet how astute and prophetic their insights are.

Let me reinforce that this drop is not historically unusual with bull markets. Yes, rising interest rates are traditionally bad for the stock market but they’ve been so low for so long (mostly artificially) that the recent rise really isn’t much of a big deal. The earnings yield of the S&P 500 companies is still twice the yield on the 5-year Treasury note. And earnings forecasts by analysts are absolutely through the roof so the fundamentals of the market are as strong as they’ve been in two years.

I’ve put the 2017-2018 graph showing the S&P Total Return Index and the Model over the last 13 months normally found on the “Model Performance” page at the bottom of these comments. I’ve placed a trend line to show that even with the recent correction, the overall upward trend of the market remains intact.

Our Model has increased it allocation to stocks up to 90%  this week from 75% two weeks ago. We’ve mitigated some of the decline but still the Model is down 6.7% over these 10 trading days. Painful? Absolutely! But emotionally and/or financially manageable? Yes indeed.

Perhaps the more worrisome aspect to the Model is it wants us to be 90% in the market right now. Now THAT is more concerning to me (If I sound immune to these market declines its nothing more than false bluster). The Model is telling us that the decline means fundamentals are still strong and the market is cheaper (based on earnings’ projections) than it has been in two years.

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Published February 5, 2018

As I write this on Monday morning (2/5) the S&P 500 is about at 2750 or down roughly 4.3% from its all-time high set just last month. This rapid decline has caused the fear level of investors to conversely soar.  The lack of volatility of this stock market for years now has produced such a collective sense of complacency (almost entitlement) that just a mild set-back (not nearly a correction) has some investors suicidal for gosh sake.

Keep in mind that the S&P started the year at 2674 so even with this decline, we’re still up nearly 3% in just five weeks!

My point is though its human nature to show concern with such a nasty short-term decline, but in order to capture the gains the stock market has been providing for nearly nine years now, an investor must steel him or herself to mentally prepare to deal with these nasty situations. It truly is life in the stock market. If it is too disconcerting for you as an investor, then you really need to rethink your risk tolerance.  If the thought of losing 10-15% of your investment value is too painful, then stocks really aren’t where you should be.

For the rest of us who are concerned but understand volatility like this was long overdue (the 10 lowest weekly volatility readings over the last 20 years occurred within the last 6 months!), there are some situations to watch for over the next few days and weeks that could give us insight into if this market will continue the decline or if it will bounce back even stronger than before.

The battle seems to be over inflation concerns and hence, rising interest rates, against what are still extremely optimistic earnings forecasts.

With a new Fed chairman, very low unemployment and clearly a booming economy, inflation concerns are not unfounded. But interest rates are still historically low. The earnings yield of the S&P 500 companies at 5.1% is about twice the yield on the five year Treasury note at 2.6%. And this earnings yield is historical — trailing earnings, yesterday’s news — and not based on this year’s forecasts.

Analysts are very optimistic for 2018. They are forecasting operating earnings growth of over 20% which would be the strongest year-over-year growth rate since 2010! And this is pre-tax, not after the recent tax rate cut. I’m personally skeptical but for no other reason than perhaps these analysts’ forecasts are chasing the upsurge of the market rather than the market reacting to their positive earnings outlook.

Time will tell of course, but for now our Model has up-ticked from 75% to 85%, due to the recent decline making the market less “expensive” based frothy P/E ratios from a couple of weeks ago.

[Keeping score:  The Model gives anyone time to adjust portfolio levels during the day on the Monday a change is made (always before noon) but the Model waits until  Monday’s 4PM closing price as the basis or price-point for its performance. If there’s a fairer way to do this, I’m open to suggestions.]

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Published January 29, 2018

We are now just about 6 weeks from the nine year mark for the duration of this amazing bull market. I hope you haven’t missed it all because it has been one of those once-in-a-lifetime (at least in mine) events.

Since 1950 there have been 14 bull markets lasting, on average, about 3 years 10 months. So, in modern times, this bull market is clearly unprecedented.

Obviously the big question is: how and when will this bull market end? Of course no one knows for certain but we do know that at some point, it will end when nearly everyone least expects it.

This forecasting model is flawed — as are all other forecasting models in all disciplines in all of history.  Quite a statement.  But they’re all based on the primary assumption that history mostly repeats itself, but not always. Our goal is to flip the odds in our favor which this Model’s track record demonstrates that it does.

This Model has earnings’ forecasts by analysts as its core.  So truth be told, it is a forecasting model based on forecasts. Mostly these earnings’ forecasts lead the market. But sometimes the analysts (yes, they’re human) get caught up in either the euphoria of a runaway bull market or the pessimism of a deep bear crash and the market leads them in the opposite direction when the change occurs.

Maybe it’s just a flaw in my low-risk personality (it can’t be that!) but there are a number of circumstances that has my attention: bullishness for both the stock market and the economy is through the roof (much of it due to the recent tax rate cuts), the Fed has been quietly tightening for a number of months now and the aforementioned length of the bull market and analysts’ earnings’ forecasts are very optimistic. (For 2018, they expect operating earnings for the S&P 500 companies to collectively grow by over 22%. Keep in mind these grew by only 10% from 2011 to 2016 so there is also considerably optimism among these analysts.) It all means that too much optimism is unfortunately — bearish.

[Janet Yellen is in her last days as Chair of the Federal Reserve Board of Governors. She has been mostly “dovish”  during her tenure overseeing both a slow-growth Obama-era economy but also this bull market in stocks. Her departure means all the people I spoke with in 1996 when I, along with the other  respective chairs of the twelve member Federal Reserve Banks’ Small Business Councils, gave brief presentations to the Board of Governors in Washington. I sat next to Dr. Yellen and found her to be a pleasant, extraordinarily capable woman. I wish her well.]

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Published January 22, 2018

Our Model remains at 75% in stocks, 25% in cash (or short-term Treasuries) this week.

Interestingly given this is a nearly 9-year-old bull market, it seems like the public is just now climbing on board this high speed train. I’ve been following the American Association of Individual Investors’ (AAII) weekly Sentiment Survey for decades and the amount of public optimism is the highest its been in about, well, nine years.

Additionally, Bloomberg reports that the University of Michigan’s survey of bullishness among Americans just hit its all-time high of 66%.

Though it seems quite counterintuitive,  neither of these surveys is good news. Historically, markets peak around the time investors are most optimistic. And investors are most optimistic when they have decided to buy stocks rather than missing out on the well-publicized gains.  They can’t stand just sitting there watching the stock market train speed on with their friends and neighbors enjoying the ride leaving them further behind (as it seems like the the Dow hits another thousand point barrier every month).

Since our Model is essentially an emotion-less algorithm, it just looks at when such investors were this bullish in the past and how the markets reacted over the next few weeks or months. Generally, not always, but generally (remember any mathematical model used to predict the future is based on historical probabilities and is never foolproof) this has forecasted a bit of a market correction.

But earnings (current and forecasted) are still very strong (operating earnings for the S&P 500 companies grew about 20% last year and are anticipated to grow about the same this year) so obviously one of these now competing indicators eventually will win out.

This added risk has moved our Model down to 75% in stocks. Still quite bullish but not near the 98% in stocks that the Model had averaged from the beginning of October to the second week of January.

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Published January 16, 2018

You should be aware that the Model will drop its allocation to stocks by 20% from 95% to 75% this upcoming week. This will be the lowest allocation to the market since last September. We’ve ridden this amazingly strong bullish wave for the last four months averaging 98% in stocks.

Now though, with the market up 4.3% (S&P 500 Total Return Index) in just the first 9 trading days this year, it has gotten a “little ahead of itself,” not to coin a phrase. It flipped two of the valuation indicators to the bearish side, so we’re taking some money off the table and moving it to the sidelines.

This just means that though earnings and analysts’ earnings’ forecasts remain very strong, the market’s recent rapid rise has moved the P/E ratio too high for the moment.  So if the market continues to rise, the Model will begin to struggle to keep up but that’s okay. Remember that it’s designed to err on the safe side but with still 75% at risk in stocks, we are rooting for the market to continue its upswing.

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Published January 02, 2018

A year ago, these prestigious investment companies were predicting less than 5% growth for the S&P 500 in 2017: BMO and Deutsche Bank. Less than 4% were Citi and Jefferies. And those who believed the stock market would increase by less than 3: Bank of America Merrill Lynch, Credit Suisse, UBS, and Goldman.

These firms have thousands of intelligent, well-trained and educated analysts and advisors — but all were tremendously wrong.  Now at the beginning of 2018, last year’s forecasts will be long forgotten and millions of eager investors will seek these experts’ counsel for 2018 and willingly provide them with billions of investment dollars.

Of the ten market experts polled by Barron’s for their predictions for 2017, the average of the group called for a 6.3% increase. Not bad, but less than a third of the 19.4% gain for the S&P 500 Index. (John Praveen of Prudential Int’l Investment Advisors led the pack predicting a gain of 15%.)

My point is NO ONE knows what this year will bring. My guess is these people would be the first to admit it. They generally provide these prognostications to give some emotional comfort to clients knowing full well that all investors hate the uncertainty of putting their money at risk. We all love the high returns like we received last year but, well, that’s old news and now we have to worry about what this year will bring. We’re all emotional creatures, especially when it comes to losing our hard-earned money.

The beauty though of making long-range predictions, whether it be the stock market or the weather, is that in most cases, people tend to forget the original prediction. If by chance the predictor happens to be accurate, it will be publicized and trumpeted, and likely keep the fortunate ‘soothsayer’ on the media’s expert pedestal for years to come. So who wouldn’t want to make a public prediction when it could be a boon to your career with virtually no downside.

Our Low-Risk-Investment Model also makes predictions but no more than a week at a time. Investment conditions change too rapidly so we believe being nimble is paramount. Some say this is market timing and we believe it is simply adjusting to routinely changing economic or market conditions.

Last year this again proved to be a solid strategy. The Model had a gain of 21% compared to the stock market’s 22% increase (S&P 500 Total Return Index) making it a fantastic year. A very strong year for corporate earnings kept the Model in nearly entirely in stocks for the entire year (average for 2017 was 92% in equities, 8% cash).

To repeat, the goal of the Model is to avoid or minimize losses during major market downturns yet still capture a significant chunk of the gain during a bull market. So far at least, it is accomplishing these dual goals.

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Published October 17, 2016

As the Model inches up to an astounding 90% in stocks, MarketWatch came out with a list of seven conditions proclaiming the stock market is about to tank. From a contrarian point of view, the more the press publishes bearish articles, the greater the chance of a market upswing.  Additionally, the average investor (Association of Individual Investors weekly survey) has been extremely bearish, even more so than in early 2009 when the market was poised to triple.

To be clear, earnings are still not great. But they are moving upward and the indicators that make up the LRI Model readily respond to not just the absolute level of earnings but their recent direction. Currently this positive momentum has caused a number of these indicators to give ‘buy’ signals.

With the presidential election now just a few weeks away, it is hard for me to believe that this won’t have an impact on the financial markets. Right now it appears that the stock market is predicting a Clinton victory (as Democrats are the party favored by big business). So currently the stock market is dealing with factors beyond the routine items like interest rates and earnings. We’ll have to stay nimble especially at 90% invested in stocks, a level that always elevates my blood pressure.

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Published October 10, 2016

Huge changes in the Model this week. And it makes me very nervous.

The S&P 500 Index closed on Friday about 1% higher than it was 17 months ago so clearly the stock market has gone nowhere over this time period. This plateau is actually a significant positive for the market as earnings (“As Reported”) are about where they were four years ago so clearly other factors are driving/supporting this market. It could have had a major correction but it’s held its ground nicely.

Yes, interest rates remain stupidly low (insane at supposedly full employment, Ms. Yellen) and the rest of the world is a mess so the American market always looks more politically stable than almost anywhere else. But there has been some positive movement recently with earnings which has been the primary factor that has powered the Model upward. Combine that with the nosedive of gold last week and all of a sudden we’re 80% in stocks. Gulp.

The gold/stock model component uses a relative-strength yardstick that (unfortunately) can often move back-and-forth or whipsaw us. This last trade in gold produced a minor gain but here’s just a fair warning that we could move back into gold if it shows some rebound strength.

You can tell that the Model’s output routinely gives me angina. I’ll take some comfort in the fact that this time of year is historically strong for stocks and earnings are on the uptick. Other than that we’ll take one week at time.

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Published September 12, 2016

No changes in the Model this week but the markets took quite a hit with the S&P 500 down 2.5% just on Friday alone.

I’ve decided to leave up last week’s commentary (below) as it seems equally relevant this week.

Now I’m going to undercut this opinion.

Two of the problems with the use of models are: (1) the recent past does not account for infinite variables nor for ever-changing influential factors and (2) model inventors generally fall in love with their inventions, potentially an expensive form of hubris.

The indicators that make up the L-R-I Model, like all models, are based on past data. Using this past data has resulted in a greater likelihood of beating market averages. So far so good. But rather than falling in love with my models I’m always wondering what the influences are that I can’t see now but will be easily visible in hindsight. There are new events and factors happening now that will be the considered quite routine later on.

Here’s one possibility. People are always looking to invest newly earned assets. For at least the last century, the American stock market has been the safest (politically, not necessarily economically) place in the world to invest. So our domestic stock market then likely contains a premium above the pure or intrinsic value of the underlying assets.

In my opinion, the mess in the rest of the world has elevated this relative “premium” added on to the price of American stocks. It’s like paying more for a steak at a proven safe and secure restaurant rather than a cheaper filet at a place down street that routinely has drive-by shootings. Less uncertainty commands a higher price. For nearly 20 years the stock market’s price/earnings ratio has averaged considerably higher than it had for the previous century. It all means that stocks may not be as “over-priced” as I (and the Model) think they are.

Granted rates are (Fed-induced) artificially low but stocks are even higher than they would be if the Fed were the only reason here. I don’t know what the new normal is but it could be considerably higher than we’ve experienced in past.  At least last week’s sell-off punched a hole in the complacency balloon.

In any event, the Model remains at 30% in stocks this week.

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Published September 6, 2016

So far this year, the Model is lagging behind the performance of being 100% invested in the S&P 500 Total Return Index (which includes dividends) by about 3.7%. The reason is the Model’s allocation to stocks has averaged just 34% YTD.

For those of you not pleased about this lag (I included myself in this group by the way) let me explain why the Model has been, arguably, under-invested in stocks.

It is all about the cumulative earnings of the 500 companies in the Standard & Poor’s Index. In many of these past commentaries, I’ve stated that this stock market remains quite “expensive.” Here’s the key observation: S&P 500 earnings were slightly lower last quarter (Q2, ‘16) than they were four years ago in the Q2, ‘12 yet the stock market is 50% higher. How often do you hear the press comment on company earnings going nowhere for the last four years? Obviously very rarely, if at all. And consider that only 6% of all the companies in the Index account for about 50% of those earnings.*

In 2012, the price/earnings ratio was about 15 when the S&P Index was 1400. Today, with the Index at 2180? Nearly 25. This PE level is about what it was in mid-2008. Uh-oh.

My goal here is not to scare anyone, just remind you that as a group, stocks are “expensive” and the Model doesn’t like a historically pricey market. Clearly the risk is high and the Model really hates high risk.

But it also responds to directional momentum. And this week the Model upticked slightly from 25% to 30% allocated to stocks based on a minor positive uptick in the S&P’s operating income. We’ve had a number of these small changes (5%) for most of the year. The Model has moved between 20% and 30% in stocks since February (other than one week at 35%).

Most investment advisors would consider just 30% allocated to stocks extremely low. But to ignore the underlying fundamentals of the stock market and just march into a decades-old strategy of blind asset allocation makes no sense to me.

One additional point is that September is historically (since 1945) the worst calendar month for stocks. The only other month with negative performance is August but that bucked the averages so perhaps September will as well. After all, we still have 30% of our hard earned assets in the stock market so we want it to continue to rise.

*  –  For the full year 2015.

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Published August 29, 2016

Other than a week in early June, we’ve now been in the gold index (defined below) since mid-February, a period of about 27 weeks. This exceeds the average trade length of about 20 weeks for the gold/stock model (GSM) since it has been tracked back to 1974.

All predictive models use past data or results to forecast the future. Like weather forecasting models, these devices are intended to predict future outcomes with (hopefully significantly) greater than a 50/50 chance.  Modeling has exploded in the computer age.

The GSM was developed nearly 10 years ago and put into real-time use in the broader L-R-I Model (Model) back in 2010. This past February was the first time since this website’s publication date (May 10, 2013) that the GSM moved us into the gold index and mostly out of stocks.

There are some elements of the GSM that I abhor. It averages about a trade every year and the majority of these (nearly 60%) have been losing trades. Many of these trades have also proved to be “whipsaws,” lasting just a week or two. And shockingly, only 3 trades over this 47-year-period resulted in gains over 20%.

So the legitimate question is: Why even use this GSM?

The reason is that there have been distinct periods when gold did great and stocks did very poorly. The excess number of trades or “whipsaws” are the price I’m willing to pay for the amazing gains this GSM has produced over this 40+ year period — over 3 times what the stock market has gained!

To ignore these periods when gold has destroyed the stock market is irresponsible for any investment advisor. The late 1970s and twice already this century have produced huge gains for gold and major declines for stocks. The 20+ year chunk in the middle produced one of the greatest bull markets for stocks ever and was a period when gold actually declined in price. And not just relatively, but absolutely from a high of about $830/oz. in early 1980 to under $300/oz. by 2001.

So these are some of the reasons why I can’t ignore the GSM. It is nowhere near a perfect predictor (nothing is and this isn’t even close), but it is still better than nothing and considerably better than just being married to one of these investment vehicles and having disdain for the other. There are many advisors who really hate gold.

So far this year, gold and stocks have moved mostly together which is somewhat rare but so long as they’re both heading north, we’ll take it.

The GSM is comprised of the following investment vehicles with their accompanying weights in the index:

  • Permanent Portfolio (mutual fund) – PRPFX – 50%
  • SPDR Gold Shares (ETF) – GLD – 10%
  • iShares TIPS (ETF) – TIP – 10%
  • iShares Gold Trust (ETF) – 10%
  • CurrencyShares Swiss Franc (ETF) – FXF – 10%
  • Physical Swiss Gold (ETF) – SGOL – 10%

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Published August 22, 2016

The markets have been eerily quiet the last few weeks with volume and volatility extremely low. A summer slowdown for sure but there is also considerable complacency. This is not all that unusual for markets making new all-time highs (with no media hoopla) but lack of investor concern is always, well, a concern.

I don’t believe there will be much of a change other than a soft march upward until Ms. Yellen renders her decision about whether they’ll be a hike this year, especially in September. The consensus belief is that the Fed will talk somewhat tough about a possible hike but won’t do so as it doesn’t want to be any determining factor in the presidential election. So unless there’s some shock to the markets, they likely won’t do much until then. (Uh-oh, now my complacency is making me worried!)

Our Model continues to be mostly out of stocks as they’re just too historically expensive. This week, earnings estimates ticked upward slightly for the first time in months so maybe they’ll “catch” up to the market and if so, the Model will call for a move back into stocks. It doesn’t care that I have to explain what it does, it just makes its call with algorithm-driven coldness. I try to not agonize over its recommendations but I don’t believe one can ever truly separate all emotion from investment decisions. This Model is my life-long, best shot to do so.

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Published August 15, 2016

Last week earnings’ forecasts took quite a hit driving our Model down to 20% in stocks. So earnings continue to head south but more importantly, the market is still moving north to new highs.

The theme over the last few years is this: analysts predict rosy earnings, the stock market responds optimistically, when actual earnings results come in, they are not nearly as high as the original forecast but the market doesn’t really care that much and holds not only holds its own but soars to new all-time highs.

[Consider that over the last eight quarters, the forecast for operating earnings entering a calendar quarter averaged about 6% too optimistic when the actual results were finalized. And not just the average, but in every quarter, without exception, the forecast proved higher than the eventual actuals. How could your local weather forecaster retain credibility by always calling for sunny skies out a couple of days and then every time find the day proved cloudy and drizzly?
As the Model relies significantly on forecasts, I’ve been forced to moderate (lower) these over the last few years. It is conceivable that, not shockingly, politics has entered this process. By “politics” I mean that a rising stock market is obviously better for Wall Street’s fortunes than a falling one. This means that there could be significant pressure on analysts not to publicly issue any forecast even remotely pessimistic. I hope this isn’t the case but after such a string of quarters, the possibility is certainly plausible. And if true, then their credibility could be irreparably harmed so I hope it isn’t the case.]

Now of course much of this stock market buoyancy is due to the lack of alternative safe, decent income options currently available to investors. New money is blindly “asset-allocated” regardless of how expensive the stock market is. The (desperate) quest for income now makes many S&P 500 stocks really look attractive. According to Bank of America Merrill Lynch, 64% of the S&P 500 companies now have dividend yields higher than the yield on the 10-year U.S. Treasury note. Remarkable.

So, though we have to fight the emotional pain of lost opportunity by not having much of our portfolios invested in the stock market and then seeing the market surge to what seems like a new all-time high on a daily basis, it is still far better than having even minimal stock exposure while experiencing a market fall.

And this point must be made: eventually earnings always matter.

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Published August 8, 2016

The stock market (as measured by the S&P 500, not the Dow Jones Industrial Average) closed Friday at another new all-time high. Notice the ho-hum nature of that statement. Not euphoric but kind of “yeah, so what’s the big deal?” Like this is all complacently expected.

Competing emotions are quite prevalent now.

Bullish: For many investors disbelief about the upside potential continues as indicated by the low number of “bulls” in the Association of Individual Investors weekly poll. This is historically a (contrarian) bullish indicator. There appears to be zero euphoria. When such historical stock market achievements are ignored by the media, (erased by non-stop election coverage) the market usually goes higher as powerful bull markets like this usually end in a euphoric climax.

Bearish: Earnings, both historical and projected, are just too low to be driving this market surge. Additionally, the length of this bull market cannot be ignored with it now being just a few months short of the longest in the modern era. Yes, the bull is still running — but the bull is also quite old.

Perhaps the biggest factor influencing this stock market is new funds going into it. New money has to go somewhere and with political turmoil throughout the world and interest rates sooo low, other than the American stock market, where can money safely go? So though some believe that global economic unrest is a problem for stocks, for many investors, Wall Street here in the good old USA is the safest “haven” found anywhere in the world.

It means that this could be one of those periods when extraneous factors outweigh financial value as the primary driver of an investment vehicle. It also means this market could go considerably higher. We shall see but I wanted you to be prepared for this possibility. Just as it’s chilling to watch the market go down when you have a chunk of money in it, it can be equally emotionally challenging to watch the market soar when you’re under-invested. We need to be prepared for the latter.

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Published July 25, 2016

Another week, another new all-time market high. It sounds so mundane but this is truly a big deal.

An ALL-TIME high!  Never before in the history of the stock market has it been at this level. It should be a time of great (financially, at least) celebration.

But somehow, instinctively, it just doesn’t feel like it.

The world is a mess. People, especially young people, are routinely under-employed and over-indebted. Americans have seemingly never been more divided.

This isn’t unprecedented for the stock market. It has done its thing often in the face of miserable surrounding conditions. This recent market surge is likely not in spite of, but because of this messy world. There is virtually no where else to go “safely” with invest-able cash.

The Low-Risk-Investment Model (the Model), like all such models used for predicting the future, is based on the past. It is based on how the stock market has behaved historically using key drivers like corporate earnings and interest rates.

Well, interest rates have been so low for so long that they have just marginal predictive capability. But earnings’ predictive capacity almost never fail. Eventually that is.

In general, bull markets last longer and go higher than nearly anyone ever expects. Our current bull market is one of history’s most powerful bulls.  It is already the second longest in the last seventy years (with a good shot at being #1) so it is likely it will end with a bang rather than a whimper.

With a price/earnings (P/E) ratio of 20.7 as of last Friday (based on the next 12 months’ earning projections), this market is historically expensive which is the reason for the Model’s low current exposure to stocks, but not tremendously expensive as earnings have shored up a bit.

For example, at the end of the tech bubble in 2000, the P/E based on future earnings projections actually exceeded 50! Hindsight should have told me to sell the farm and go short but of course we all love the visual clarity of hindsight.

In any event, this Model almost never captures a market top but then again, most investors rarely sell at peaks. So for those of you who desire to continue to stay strongly in the market just beware that any gains from here on will carry higher and substantial risk. Good luck.

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Published July 18, 2016

The bull market lives!

Not much publicity was given to this over the last year or so but until last week, we really didn’t know if the bull market that began in early March 2009 was still alive.

The intraday day high of 2134.72 in the S&P 500, achieved on May 20, 2015, proved to be a formidable ceiling for the stock market until last week when it was finally shattered. Friday’s intraday high of 2169.05 means that this bull market (now over seven years old) is the second longest in duration since World War II — more than 70 years. Quite impressive.

This is about twice as long as the average ( three and a half years) bull market over this period. If it makes it to early December, it’ll be the longest in the modern era.

An important note: I consider that a bull market ends at its intraday peak with a subsequent correction of 20% or more. This can only be determined in hindsight or historically. If the market makes a new (intraday) high like it did last Friday, then if it doesn’t exceed this level before it drops by 20% or more, then Friday will mark the end of this bull market. Each new market high only means the bull market continued to that point, not that it will continue from that point forward.

One might be upset with the Model only being 30% in the stock market at a new all-time high. Historically, the Model is rarely significantly invested in stocks at peaks due to it being primarily value-based.

Since the Model’s inception in 1985, it has been in place at the end of five bull markets over the last 31 years. The average percentage allocated to stocks at these market’s peaks has been just 40%. This is because it is designed to capture the chunk of returns in the middle of the bull advance, not necessarily at the peaks (though honestly I’d love to find a method or indicator which did give a ‘sell’ signal at market tops).

This bull market has been propelled over the last seven years by earnings growth to a ridiculously accommodating Fed (and the accompanying low interest rates) to an uncertain world (nowhere else to invest safely). No one knows if this bull market is near its end or if it goes another five years. No one.

What I do know is that this market is currently very expensive. The trailing (“As reported) price/earnings ratio of the S&P 500 companies is now over 24, its highest, and hence most expensive, level since 2009.

Can it get more expensive? Oh, absolutely.  Market peaks are notorious for investors jettisoning all rational financial thought and buying indiscriminately. The P/E ratio hit 30 at the end of the tech bubble back in 2000. Additionally, nearly all bull markets end with clear, sharp peaks, like the Rockies not the Poconos.

Though I have no idea where we are on the mountain so to speak, it won’t be any fun to be mostly on the sidelines if the market continues to surge to new highs. If it does, the euphoria will be hard to escape. We’re all human and not invulnerable to mob psychology. This is just a recommendation to temper the glee right now just as we always need to moderate the gloom near market bottoms.

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Published July 11, 2016

This morning the S&P 500 Index exceeded its all-time  intraday high of 2134.72 set nearly 14 months ago on May 20, 2015. If the index closes above 2130.82, it means the bull market that began in early March 2009 remains in force.

Assuming it does, this bull market — at 7 years and three months in duration — would be the second longest and 14th bull market since 1950. Quite remarkable.

What’s also interesting is that the stock market and gold have been marching in lockstep recently by both heading higher together. This positive correlation between the two is not unprecedented but it is quite rare.

I’ve attached a graph below which illustrates how the stock market (S&P500 Index) and gold have mostly moved opposite each other over the last 40-plus years. This is the graph which led me to develop a gold/stock model that I incorporated into the LRI Model beginning in 2010.

It shows that if, hypothetically for sure, an investor could have captured the major moves of both stocks and gold over the last 40 years, in just four trades, he or she could have tremendously out-performed the stock market alone.

Beginning in May 1973, when the S&P500 and spot gold were nearly identical in price at just over $100, capturing the gains in these four trades would have resulted in beating the stock market by more than 80 times!

Here’s the graph.

Perf chart GOLD from 1973 to June 2016

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Published June 27, 2016

Brexit (UK leaving the European Union) threw the stock market into a nosedive on Friday and the selling continues as I write this on Monday morning.

Our Model remains decently positioned at just 30% in stocks and 40% in the gold index (defined below). This balance helped the Model gain about 1% since the end of May while the stock market has lost about 3% over the same period.

The selling is mostly due to no one really knowing how serious the economic impact to both the UK and especially the EU will ultimately be, if at all. The sellers of stock simply want to reduce their risk with all this uncertainty and it’s hard to argue with that sentiment.

I suspect (as the majority of “experts” now believe which makes me think I’m wrong on this) that the market’s selling will shortly be overdone and we’ll experience a rebound.  But keep in mind that we still really don’t know if we remain in that bull market which began in March 2009 or if the bear market began when the market made its high (S&P 500 – 2130.82) over a year ago.

In any event, gold is strong so our index is not a bad place to be with 40% of the portfolio.

LRI Gold Index:

Permanent Portfolio (mutual fund) – PRPFX – 50%
SPDR Gold Shares (ETF) – GLD – 10%
iShares TIPS (ETF) – TIP – 10%
iShares Gold Trust (ETF) – 10%
CurrencyShares Swiss Franc (ETF) – FXF – 10%
Physical Swiss Gold (ETF) – SGOL – 10%

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Published June 6, 2016

We’ll flip back into the gold index this week as the Model has “whip-sawed” us again.

The gold component of our Model is acting like it has done 92 times since the beginning of 1975 or about twice a year. The high number of trades is why this model resides solely in the short-term portion of our broader LRI Model. Of these 92 total trades, about half of them have been these whip-saws or pesky, rapid back-and-forth, mostly negative trades.

Keep in mind that the goal of this model is to discern the longer-term trend of stocks versus gold (and gold-related investment vehicles). Over the last five decades since gold prices have been allowed to float with the market, this model has outperformed stocks by about three times.  I can’t ignore that so I’ve tried to live with these whip-saws that certainly do some damage in the short term: buying higher and selling lower is never fun. This, unfortunately, is the price to be paid for capturing the major moves.

Also remember that this particular model or indicator wasn’t formally added to the broader LRI Model until 2010. I knew of its tremendous track record but the unadjusted number of trades was originally far higher than the 92 number cited above and made the model functionally unusable.

I subjectively lowered the number of trades with defined whip-saw reducing rules. For example, we just had a back-and-forth trade out of the gold index and now back into it this week.  One of the six rules for dealing with whip-saws was put into place. It means that if the gold-stock indicator now calls for a move back to stocks next week, we’ll remain in our current investment position until the week of July 5.

When I tested these rules all the way back to 1975 about half the whip-saw-like trades were eliminated but the results (investment returns) stayed about the same. So these were officially added to the model itself prior to its inclusion in the Model in 2010.

For those of you who want no part of any gold-related investment, just the stock portion of the LRI Model would currently be 45% (20% short-term, 25% long-term) in stocks or a market-neutral position.

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Published May 16, 2016

This week is the three year anniversary of the first publication date of this website. I’ve attached the graph of this period below comparing the performance of the stock market (S&P 500 Total Return Index) and the Low-Risk-Investment Model (the Model). Though the last 12 months have been quite difficult for any investor, the Model has achieved its objectives over this challenging period.

The stock market has risen 33.5% since May 10, 2013 and the Model by 31.1%. This means that the Model has captured 93% of the stock market’s gains with just an average exposure in stocks of just 68%. This sums up the purpose of the Model and this website.

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Published April 4, 2016

I’ve been harping about the recent separation between stock prices and their underlying earnings which have certainly been sucky.

Companies in the S&P 500 apparently very aggressively decided on write-downs at year-end 2015 that destroyed their collective income. It was the poorest quarter since the economy was still climbing out of the Great Recession in early 2010.

Write-downs are defined as companies’ “taking” losses or cleaning up their books. What they’re really doing is just reflecting past financial reality at a time which, they believe, will have minimal impact on their stock prices. It means that certain non-operating assets had already lost their value when management finally decided to publicly formalize this loss on their books.

It also made the gap between 500 companies in Standard and Poor’s Index’s operating earnings and their “as reported” earnings the largest in Q4,’15 than it’s been since Q1,’09 when companies were cleaning house in a big way following the debacle culminating in the crash of 2008.

You might say, “That’s all great, but the market is still up 7 of the last 8 weeks while your model has been mostly out of stocks. What’s up with that?

Well, it is undeniable this is a good point. The Model can look bad at certain times. But remember that the goal of the Model has always been to participate in major up-moves and be mostly out of stocks, or lose less, when the market heads south, or even when it gets very expensive. And it truly is quite expensive right now being within 3% of its all time high with tanking earnings.

The Model does not — can not — predict major market turns: bottoms or tops. So it generally lightens up on stocks when the market approaches new highs and moves more heavily into securities as they get cheaper (lower prices).

Right now the Model is mostly on the sidelines. Yes, it has a bent toward gold-related investments but that’s less than half the portfolio and gold has been quietly holding its own recently after a surge at the beginning of the year. A pull-back was inevitable but the jury’s out whether this is a blip or major move higher.

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Published March 28, 2016

The two key aspects of the Model at work presently are these: (1) gold has jumped over stocks as the investment vehicle with the greater long-term momentum and (2) stocks by themselves (as measured by the S&P 500) are historically very expensive based on underlying earnings.

Gold has backed off significantly from its recent spike upward. It started the year at $1,060.00 an ounce and immediately moved strongly higher to $1,277.50 by early March. For it to back off, down to $1,217.60 last week, is not unexpected but of course no one knows if this 20% move in just two months was a fluke spike or the start of a longer-term trend.  The move triggered our gold/stock model but the jury is out whether it will be sustained.

I’ve been harping for months now about the poor performance of corporate earnings and the divergence of the  stock market.  Earnings have been dropping and stocks rising. Is the market looking at 2016 earnings projections and ignoring 2015 actuals?  Perhaps, but 2016 projections have been dropping for months as well.

Standard and Poor’s compilation of analysts’ projections have dropped from a high of $124.21 first published on February 27, 2015 to a current projection of $111.86. Keep in mind that though this is only a drop of 10% from the initial forecast, 2015 earnings were forecasted to be $111.26 back last February (2015) compared with current (near-actual earnings) $86.48 / share. This past delusional optimism is  the underlying fact supporting my skepticism about the 2016 earnings forecast and the current level of the stock market.

Here are links to two articles from last week supporting this viewpoint. The first is from the New York Times NYT dealing with corporate stock buy-backs and how they seem to be masking management’s lack of vision and confidence in business expansions.

This title of second article mostly speaks for itself: “The gloomy profits narrative underlying the economy and markets just isn’t getting better” YahooFinance

The Model remains at 20% in stocks, 40% in the gold index and 40% in cash.

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Published March 21, 2016

A key component of the Fed’s quantitative easing policies (QE’s) has been corporate share buy-backs. The Fed has flooded the system with cash by “buying” government debt, thereby keeping borrowing costs or interest rates artificially low. Businesses then borrow at these extraordinary low rates and are sorely tempted to use at least some of this cheap cash to buy back their shares. (It must be stated also that the last few years of earnings growth has significantly contributed to this hoard of cash.) These buybacks increase earnings per share of a company even though total sales and earnings amounts may have declined.

It is this kind of “smoke and mirrors” stock market that ought to worry investors. Bloomberg reports that the companies in the S&P 500 are on pace to buy back as much as $165 billion of their own stock this quarter and could eclipse the record set back in 2007.

The question is: How will this impact the stock market? Well, I wish I knew since a decent case can be made either way. On one hand if the buybacks continue, at least in the short run this will keep demand pressure on stocks and likely drive the market higher — everything else being equal. On the other hand, this method of earnings per share “growth” also says many company leaders aren’t comfortable committing their cash to expansion or productivity enhancements over the longer term. Unfortunately, few CEOs lose their jobs when their stock is strong even if their long-term vision is weak.

In any event, the current reality is the stock market is on a roll. It has advanced in the last five consecutive weeks now showing positive returns for the year. Undeniably impressive. Fortunately, our gold index has also done reasonably well over this period so the Model is holding its own.

As I’ve been mentioning recently, as the S&P 500 has been rising, each of the last five weeks has also seen a reduction in projected earnings for 2016. The combination has resulted in a forecasted P/E ratio for 2016 of nearly 20. This all means that the market is more “expensive” than it has been for roughly 7 years. And an expensive market is a risky market. This is the primary reason the LRI Model is currently bearish.

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Published March 14, 2016

Every since the Model moved strongly away from stocks (last four weeks), the stock market has performed extremely well. This is disconcerting at best. This lament has been at least somewhat mitigated by the positive performance of gold (our gold index really) during the same period. This is unusual as stocks and gold are historically negatively correlated. But we’ll take it if both continue to head north.

The experts (technical analysts) tell us that the stock market is at a very important point now (here). Its rapid rise has almost taken it into positive territory for 2016 but supposedly is approaching a difficult ceiling to penetrate.

Obviously no one truly knows if the stock market will continue to rise and break this technical barrier but what I do know is this market is quite expensive based on both trailing and projected earnings.

This stock market is more expensive than it has been at any point since 2009. The price/earnings ratio for trailing earnings is now over 23 and the PE ratio based on expected 2016 earnings is now over 18.

Virtually the only factor supporting the market at this level is the rise in oil prices and the anticipated positive impact to the energy sector. This was decimated last year and is considered by many analysts as the only impediment to record future earnings. If oil continues higher and if the other sectors in the S&P 500 hold their own, it is conceivable that the collective earnings of the S&P 500 companies could approach what the analysts are calling for but it still seems way too lofty to me: 2016 earnings are expected to rise nearly 30%. Really!?

Revenue growth is virtually nonexistent. Cost cutting has now been going on for a number of years.  Most companies have cut their fat but few desire to cut into “meat and bone” to keep earnings up. That truly borrows from any future growth potential.

A QE4 possibility? Perhaps. But each succeeding QE has a less powerful kick than the previous one. So by “over-managing,” the Fed is actually making itself increasingly less important. It’s not only removing most of the arrows in its quiver, it’s destroying the quiver itself. Many might celebrate the Fed’s micro-managing demise.

The Model is bearish at the moment for two primary reasons: (1) gold is strong which historically takes its toll on stocks (or more correctly on the factors that cause gold to rise) and (2) stocks are very expensive based on what companies are earning. Could the market soar to new highs again? Sure. But the Model is about likelihood and percentages. Right now it’s saying the percentages are that a major move higher for the stock market will face some tough going.

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No comments week of March 7, 2016

 

Published February 29, 2016

The stock market had a decent week and February will likely be the first “up” month since November. Gold was about flat last week as was our Gold Index.

This Gold Index is an arbitrary composite of six gold-correlated investment vehicles that trend with gold. The primary vehicle comprising 50% of this index is the Permanent Portfolio mutual fund (PRPFX). This fund has a stellar track record when our gold model is positive. The other five are each given a 10% weighting in the index. These are are exchange-traded funds or ETFs: SPDR Gold Shares (GLD), iShares (TIPS), iShares Gold Trust (IAU), CurrencyShares Swiss Franc (FXF), Physical Swiss Gold (SGOL).

So to put this in perspective, PRPFX currently comprises 20% of the entire LRI Model as it is half of the Gold Index’s current 40% allocation. The other five ETFs would each have a 4% total weighting.

It is interesting that given it’s been over nine months since the S&P 500 last made a new high, we still don’t know if the bull market — that began 7 years ago — is still intact. By definition, a bull market lasts until a new bear market proves itself by showing a 20% decline from a previous high. The S&P 500 closed at 2130.82 on May 21, 2015 and its maximum decline to date has been 14.2% which occurred just a few weeks ago.

Could we go from here to new all-time highs in the stock market? Of course. But if we do, it would make this bull market the second longest since 1950, only exceeded by the great bull market of the 1990s that was highlighted by the tech bubble and a stock-market-loving reduction in capital gains tax rates.

This market has been mostly supported by QE 1,2 and 3. Could there be a Q4? Certainly. But without it,  I’m not sure what will propel the stock market higher. Sales growth is non-existent. Q4’15 revenue of the 500 largest companies in America is the same as it was two years ago.

How about earnings? With just a handful of companies left to report their final 2015 earnings, it looks like Q4’15 “as reported” income will be less than $20.00/share. If that holds true, it would be the first quarter of less than $20.00/share since the third quarter of 2010!

Perhaps it is the very rosy earnings forecasts that are propping up this market. The analysts are still projecting phenomenal income growth both this year and next. For 2016, they want earnings to increase by 30%. Really? Don’t forget that last February they also projected that the companies in the S&P 500 Index would show fantastic earnings of $134.90/share for 2015 (versus an actual amount closer to $87.00).

In any event, we’ll continue to take one week at a time so for the moment, our Model is 40% in the Gold Index, 20% in stocks and 40% in cash.

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Published February 22, 2016

The Model has marched fairly closely with the S&P 500 Index over the last 33 months or since the first publication of this website (May 10, 2013). But all that is about to change with the Model moving 40% of its allocation into gold-related investments with only 20% remaining in the stock market. Separation, one way or the other, will occur.

What is absolutely stunning to me is the consistent march of earnings projections downward. About one year ago, the consensus forecast for 2015 “as reported” earnings for the 500 companies in the S&P Index was $134.90/share. The most recent estimate now for 2015 (about 89% of companies have reported for Q4,’15) is now down to $89.27.  This is a miss by a whopping 34%!  It also says that 2015 earnings will be less than 3% above what they were in 2011!

However the stock market is still 40% higher than it was at this time 4 years ago. That is more than a concerning disconnect.

I’ve left up last week’s commentary below as it explains our move into precious metals and away from stocks. Keep in mind that the jury is still out on the success of this move into gold. Over the last 40+ years, this particular model has produced many false starts — about half of all its trades have resulted in “whip-saws.”  And given that this previous trade (into stocks) lasted for about 4 years, well … we’ll see. Unfortunately this whip-saw risk is the price to be paid for capturing the major moves, which historically have been too powerful to ignore.

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Published February 16, 2016

This year the stock market has obviously been miserable. What is not getting as much attention recently has been the surge in precious metals, particularly gold. It means this is now time to discuss another key component of the Low-Risk-Investment Model, the periodic move into gold-correlated investment vehicles.

I’ve mentioned the very first investment conference I attended many years ago was near the peak of the gold/silver boom in the late 1970s culminated by gold topping out at over $800/oz. in January 1980. This strong precious metals period, which included my first purchase of gold and silver at the time, gave me early comfort to include these in my personal portfolio. What I also noticed at the time were the two rigid investment camps: those who had disdain for stocks or the so-called “gold bugs” who only embraced gold and silver and those who scoffed at the precious metal advocate “doomsayers” and only considered stocks and bonds in their portfolios.

Personally I didn’t really consider gold as a investment trading vehicle until the market crash of 2008 and after (graphically) proving to myself the dramatic inverse trend differences between stocks and gold. I then knew I had to consider the use of gold-related investments in the LRI Model.

At the end of October 2009, the S&P 500 Index and spot gold were nearly the same price (S&P 500 at 1036.19 and gold at $1040.00/oz.), just as they had been in 1973 when they were both about $100. These two had also crossed paths in 1976, 1990, 1991, 2009, 2010 and 2013.

But the divergent paths taken by each to these same points is what really got my attention and cannot be ignored, in my opinion, in investing decisions.

The graph below visually helps explain my point. The red circles show the two data points where stocks and gold were the same price in 2009 which is the final data period I used to develop this gold/stock model (G/S model).

Perf chart - Gold v Stocks from 1973

Here’s the mathematical reason for my inclusion of gold. A portfolio that invested $1,000 in stocks (dividends not included) back in mid-1974 would have been worth around $10,500 at the end of 2008. That same $1,000 invested only in spot gold would have been worth about $6,000. But if one could have captured the major trends in stocks or gold — in just 3 trades, that same $1,000 would have grown to over $400,000! Astounding.

The resultant gold/stock model is one I consider reasonably effective. I say ‘reasonably effective’ because of the high number of trades — a total of 80 between 1973 and 2008 (slightly more than 2 per year) needed to significantly participate in these major trends. This amount of trades is a huge negative for me. It makes the capture of long-term capital gains rates very difficult so I’ve relegated the G/S model to only the short-term portion of the LRI Model.

Why so many trades for this model? Well, the identification of long-term trends early an up-move is extremely difficult.  Such attempts generally result in what are called, “whip-saws” or rapid starts-and-stops (false trades). At this point in my research, I believe this negative is, unfortunately, the price to be paid to participate in these major moves. I’ve concluded that the positive elements of this gold/stock model are significant enough to justify its inclusion in larger Low-Risk-Investment Model.

Here’s why I think so. As I mentioned above, $1000 invested in the S&P 500 Index in mid-1974 would have been worth $10,500 at the end of 2008, gold about $6,000. But even with the high amount of false (mostly negative) trades, this model still would have taken that same $1,000 up to an impressive $38,600 by the end of 2009.

Since this performance, even with its whip-saw problems, is so much greater than either stocks or gold by themselves, I believed it had to become part of the main LRI Model and was included at the beginning of 2010. I haven’t commented on it since this website’s first publication date (May 10, 2013) because we’ve been in stocks for the entire nearly three year period so it wasn’t relevant. But it is now.

Since I’m really too much of a investment coward to sell all stocks and move 100% into gold-related investments, I’ve subjectively made some adjustments to this “all-or-nothing” approach.  When the G/S Model moves into gold as it will do this week (beginning 2/16), the primary LRI Model will immediately move 40% out of the short-term allocated portion of the entire portfolio into gold-correlated vehicles.

Hypothetically, if the short-term allocation to stocks is 40% or below, then our short-term allocation to stocks will drop to zero. If it is higher than 40%, say 55% for example, then just 15% would be allocated (short-term) to stocks.

The long-term allocation to stocks will not change. It will be adjusted weekly as normal.

So this week we will take our short-term stock holdings to zero. Our long-term allocation to stocks remains at 20%. The LRI Model portfolio for the week beginning February 16, 2016 will be: 40% – gold, 20% – stocks, 40% cash.

As usual I’m concerned given that the great chance of being “whip-sawed” (out of stocks this week, back in them next week, out again the following week, etc.) is quite real. You may say, “Okay McGinley, you’ve arbitrarily selected 40% as your magic number for gold but I’m not comfortable selling all my stocks then potentially having to go right back into them next week. That’s way too short-term trading-oriented for me. I may follow this to some extent but I’ll reduce that 40% to say 25%.”

Something like this may be more manageable or comfortable for most. Or, a dollar-cost averaging approach might be better for others, forcing the long-term trend to prove itself over a few months. I get this. I wish I could better identify these major trends early on but this is the best I’ve been able to come up with to this point.

In any event, here are the results for the entire 42+ year period for this Gold/Stocks model versus the S&P 500 and gold itself. A $1000 portfolio started in July 1974 would have produced these results by the end of 2015: Stocks – $23,800, Gold – $7,300, Gold/Stock Model – $82,600 (shown on an annual basis in the chart below).

Now the question is: How does one move substantial funds into gold or gold-like investment vehicles? Well, in my case I’m not about to go out and buy coins or bullion for this purpose though this is exactly what most should do with at least some percentage of their wealth as precious metals give chaos/civil unrest/economic-disruption protection. This move by the G/S model into gold-related investments is purely about taking advantage of the inverse relationship between gold and equities. As such, “paper” holdings ought to do the job for this specific purpose.

I’ve developed a LRI Gold Index comprised of the following vehicles with their accompanying weights in the index:

  • Permanent Portfolio (mutual fund) – PRPFX – 50%
  • SPDR Gold Shares (ETF) – GLD – 10%
  • iShares TIPS (ETF) – TIP – 10%
  • iShares Gold Trust (ETF) – IAU – 10%
  • CurrencyShares Swiss Franc (ETF) – FXF – 10%
  • Physical Swiss Gold (ETF) – SGOL – 10%

I’ll elaborate more about the choice of these investment vehicles next week.

Here is the aforementioned hypothetical chart showing the results IF the G/S model had been utilized back to 1974.

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Published February 1, 2016

Though the stock market(s) recovered slightly last week,  they still closed out the worst January since 2009, with the S&P 500 down 5%. With December’s loss of 1.6%, it also marked the first time in three and a half years that the stock market has had two consecutive losing months.

I don’t know if there’s some optimistic psychology that permeates the Wall Street community at the onset of each calendar year but it seems earnings forecasts are consistently too rosy. But then, as the reality of the year begins and especially if January is poor, the analysts routinely adjust them downward.  Such is the case in 2016: “As reported” or GAAP estimates are down 5% in just the last 2 weeks.

In my view, the more ominous trend continues to be sluggish top-line results or revenue “growth.” With 56% of the S&P 500 companies having already reported their financial results for Q4,’15, only 46.5% are beating sales estimates. Compare that to fully 73% beating operating earnings estimates and it becomes clear that cost reductions continue at a rapid clip.

If Q4,’15 predictions hold, sales in each quarter of 2015 will be lower than the same quarter in 2014. Not good. Cost-cutting is a constant effort of quality management but at some point, top-line or sales increases have to occur for any company to legitimately grow.

Perhaps because it’s Super Bowl week, I called an “audible” this (Monday) morning as Standard and Poor’s, which rarely updates its weekly earnings forecast compilation on a Monday, in fact did so today. Its forecast reductions were significant enough that I felt it necessary to plug in these most recent data into the Model and pass the results along on the website.

The result is a reduction in the Model’s recommendation from 85% in stocks, where its been the last few weeks, down to 70%.

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Published January 25, 2016

The stock market appeared to recover slightly on a week-to-week basis but the volatility within those four days was heart-stopping.

For the week, the S&P 500 Total Return Index was up 1.4% — certainly decent, but it masks an impressive rebound of 5% from Wednesday’s intraday low.  This could be just a simple so-called “dead cat bounce” (sorry PETA people), or a decent rally. At some point, either we’ll find out whether we’re in a new bear market (no one knows yet until the market declines 20% from its bull market high, which just hit a low of -15.1% last Wednesday) but we obviously don’t yet know.

Extraordinary earnings’ growth estimates for 2016 remain at lofty levels.  I keep harping on these earnings’ forecasts because they intuitively seem way too high to me, i.e., “As reported” 2016 expected to grow by 28.5% over 2015 ($121.88/sh vs. expected 2015 earnings of $94.86/sh) based on Standard and Poor’s compilation as of January 21st.  So it is still these projections along with the historic bearishness of individual investors (a contrarian indicator) driving the lofty recommendation of the L-R-I Model, currently at 85% in stocks.

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Published January 19, 2016

Ugh.

This has been just an ugly start to the new year for investors. Including those of us who are following the Model.

We still don’t know if the bull market that began in early 2009 is intact. The last new high in the S&P 500 was in May 2015, so we’ve now gone a considerable period of time with a stalled market, at best.

When the Federal Reserve embarked on its Quantitative Easing policy (QE1) in late 2008, the stage was set for the current bull market, one of history’s longest, to begin to roar. By February 2009 the Fed had already purchased $1 trillion of securities. These newly added funds (fuel) mostly went to power the stock market which responded fairly quickly by bottoming out the first week of March (intraday on 3/6).

QE2 and QE3 followed pushing interest rates to their lowest in American history and front-loading the equity markets. Play today but you’ll pay tomorrow. Certainly earnings drove the markets as well, but arguably Fed easing was the primary catalyst.

QE3 ceased in October 2014 and stock market essentially stopped growing. The S&P 500 is 7% lower now than it was at the end of October 2014 so since then, the market has essentially been on its own and sputtered with no artificial support from the Fed.

In the last couple of weeks, stocks have been beaten down considerably. Our Model is down 5.4% already this year; the S&P 500 Total Return Index down 7.9%. Frightening to be sure, but also par for life in the stock market. To make any money requires both hard work and a strong mindset to deal with the inevitable painful volatility. For me, if the market’s going up I always lament that I don’t have 100% of my money in stocks. If the market is tanking like it’s done this year, I hate that I’m not completely on the sidelines. So geez, this is terrifying currently with the Model at 85% in stocks.

This week Standard and Poor’s came out with its earnings forecasts for the companies in the S&P 500 for 2017. It appears that the optimism of the analysts mirrors that of the Fed governors. Both groups are quite bullish on the economy for 2016. S&P’s updated report (as of Jan. 14) is showing that (“as reported”) earnings are expected to grow an astonishing 28.5% in 2016!  And here I was complaining that S&P was too optimistic when it expected earnings to rise “just” 24% in its report on December 31st.

The Model is, of course, using these inputs and is primarily the reason for the lofty allocation to stocks.  Clearly the market is considerably cheaper than it was a few weeks ago based on price/earnings ratios.  And the sentiment survey (another Model input) as provided by the American Association of Individual Investors is showing the fewest number of bullish investors (cumulatively) in 25 years. From a contrarian viewpoint, this is actually quite positive for the market to move higher over the next few weeks.

Some of you (myself included) are considering selling all your stocks. You’re likely saying, “I can’t take the volatility any longer! I’m getting out of the market entirely will be 100% in 10-year Treasury notes. This will take away all of my investment risk.”

Well, not even considering the risk of holding a deflating currency — as even a 1% inflation rate will erode your principal’s value — the S&P 500 dividend rate of 2.4% is quite a bit greater than the 10-year T-note yield of 2.03%. So even if the market is exactly the same ten years from now as it is today, you’d still be 4% ahead with your funds in the stock market. There’s really no place to go. Fixed income? After a 30+ year bull market and with rates this low, who really believes this asset category doesn’t have considerable risk as well?

So, as usual, we’ll take one week at a time and right now the Model is quite bullish.

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Published January 11, 2016

There are similarities to the studies of science, economics and other areas like human history. One is to use such historical knowledge to discover the reasons for why it occurred or how it turned out that particular way. These efforts have arguably little current value unless they contain predictive elements to show how life can be improved in the future. E.g., exactly why did certain wars occur with their devastating human toll and what can be learned to avoid such tragic consequences in the future?

All the sciences, including economics, dwell mostly in history since this is where the data lie, the only inputs containing any predictive value for the future.

[A local meteorologist said on the radio that he doesn’t trust the heavily-relied on models for predicting weather out more than five days.

But climate “science” has changed from truly studying past climates and the natural reasons for their considerable changes to its seemingly only use of models to predict the future.

Climate doomsayers want us to so believe their predictions, decades out, that we significantly reduce our living standards and force millions in the third world to remain mired in poverty; many continuing to hand-make dung pancakes to heat their homes. To me this is an immoral demand by the elite and the comfortable that the rest of us embrace their climate models that haven’t even “predicted” the recent decades of actual weather.]

My point is that any model, economic or otherwise, used to predict the future that doesn’t accurately reflect history is worth less than that dung pancake.

Though this Model has a solid track record back to 1985, the current iteration of the Low-Risk-Investment Model has been in effect just since the beginning of 2015. I always evaluate the success/failure of the eleven individual components or “indicators” (mini-models themselves really) on an annual basis to determine if they should be continued or have their weights in the composite L-R-I Model adjusted or if I’ve discovered what appears to be a superior replacement. These indicators have changed considerably over the years as conditions have changed. (For example, back in the 80’s, interest rates were way more impactful than they have been in recent years.)

This year (2016) the indicators and their weights have remained the same  but to illustrate how the Model has changed (hopefully for the better) over the years, I calculated how well it would have performed if the current version had been in place over the last 16 years from the beginning of 2000.

This is a good test period. This century contains both two bear markets and two bull markets. (Since the current stock market peaked last May but hasn’t declined by 20% yet the jury is still out as to whether we’ve entered a third bear period.) The current version of the Model applied back to Jan. 1, 2000 destroys both the performance of the S&P 500 and the actual L-R-I Model used back then.

This is obviously an unfair comparison because this historical period’s data was used to construct the current version of the Model. In development, if any of these mini-models hadn’t outperformed the broad stock market (as many attempts didn’t), they were discarded. My point is that any models used for virtually anything had better successfully “predict” the past or they’re actually worse than useless, — they become dangerous to rely on.

Below is a fantasy graph of what could have been IF the current version of the Model had been used for the last 16 years. This is to perhaps convince some of you that although and obviously there are zero guarantees that this past success will continue into the future, it ought to have some predictive value since it is based on factors like earnings which influence the direction of stocks. Is it better than a coin flip about the direction of the market? Clearly so. Is it better to use than a blind, fixed, rarely changed asset-allocation system? I would give a passionate, yes! I just can’t imagine ignoring conditions which drive stocks up or down.

So, here we are now in 2016. It was reported that last week was the worst start by the stock market for any year in history. The S&P 500 Total Return Index was down 5.9%, the Model down 3.6%. Obviously not good. But also it is par for the course for life in the stock market. Since May 2013, the Model is up over 25%, if an “investor” had been entirely in bonds this period, he or she would be up slightly over 10%, which is still considerably better than the less-than 1% gain by being entirely in cash.

I’m still concerned (upset really) that Standard & Poor’s continues to publish what I consider way too optimistic earnings’ forecasts for 2016 (with no guidance yet for 2017). Though I’ve subjectively moderated these forecasts somewhat (to about 15% earnings growth in 2016 from S&P’s projection of 24%), I hate to do this but think it necessary. As such the Model still moved all the way up to 85% in stocks this week, a leap of 25%.

I don’t know if this bullishness will last but it’s where we are now. And don’t forget: this current Model version has outperformed the stock market by 5X this century, so for me, ignoring it carries more risk than following it.

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Published January 4, 2016

The stock market is tanking as I write this, the morning of the first trading day of 2016. The “expert” consensus is this sell-off is mostly internationally driven.

The situation in China is particularly worrisome. I’ve maintained that the Communist-controlled economic performance over the last decade or so has been greatly exaggerated. At some point this phantom-wealth generated bubble will not just burst but explode with considerable ripple effects. This morning the Shanghai Composite Index plummeted nearly 7% as trading was halted.

CNBC’s Art Cashin says that if the DJIA closes where it is presently (down 370), it would be the worst opening day for any year since 1932. That’s certainly not encouraging.

The extraordinary dichotomy is this: all the eco-geo-political problems countered by considerable optimism on the part of American analysts and many investment managers. The current estimates for (“as reported”) earnings for the S&P 500 companies in 2016 are forecasted to be 20% higher than 2015’s. Standard & Poor’s told me that the consensus optimism is due to the belief that energy-related companies will rebound in 2016 while all other sectors will continue to produce modest gains. But geez, 20%?!? And the median forecast for the stock market is about a 10% gain for 2016. The lowest estimates for the stock market are up 5%. Virtually no one is predicting a down year. That’s also not encouraging from a contrarian viewpoint.

My expectation is 2016 forecasted earnings reductions will occur fairly rapidly over the next couple of months. Consider this: last year at this this time in early January, the forecast for earnings for 2015 was $135/share. By February 27th this early forecast had been reduced to $111/share. But even this was way too optimistic as 2015 will likely finish around $95. This means their initial estimates were only 30% too optimistic. Stunning really.

The LRI Model is down to 60% in stocks but this still seems too high. Time will tell and I’ll keep you posted.

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Published December 28, 2015

Bloomberg reports that this year has been one of history’s worst for producing a decent return in at least one key investment class — stocks (S&P500TR Index), bonds (30y Treasuries), cash (90-day T-bills) or commodities (CRB Index). It says at least one of these four has done well nearly every year but that 2015 will be the worst for these as a group in nearly 80 years.

Such an analysis is certainly useful to hedge fund managers who routinely gravitate heavily toward, or chase, the so-called hot group. This will indeed be a very difficult year for many of them.  Most investors though stick within a narrow percentage range for their asset allocations and, if their portfolios are not professionally managed, seldom re-balance these amounts more than once a year. What the Bloomberg story does show, however, is since none of the four classes did very well most portfolios did not contain that one positive category that would offset the negative ones. (This is essentially the underlying premise of asset allocation theory.)

Thus far in 2015, the stock market (as measured by the S&P 500 Total Return Index which includes all dividends) is hanging on to a 2.2% gain with just four days left in the trading year. Given all the emotional trauma that accompanied that meager increase, it hardly seems worth it. But the stock market still did better than the other three and tremendously better than energy or other commodities as shown by the CRB Index — down over 23%. Bonds and cash were about flat.

Our Low-Risk-Investment Model will beat all of the above this year (unless stocks rise by over 4% this week which seems fairly unlikely). Though the Model is up just 3.6% through last week, we’ll take it as it’ll make 7 consecutive years with positive results — and 12 out of the last 13 years with gains and just the 14% decline in 2008 as the fly in the ointment. What may be the most important factor in assessing this performance is the Model accomplished this ‘victory’ with an asset allocation mix average for the year of just 45% in stocks and 55% in cash making the risk-adjusted comparisons not even close.

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Let me take this opportunity to wish you all a very happy, healthy and prosperous New Year! And please let me know if this website has helped you in reducing the risk-adjusted return of your portfolio. Email me at Tom@Low-Risk-Investor.com.  Thanks again and God bless you all.

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Published December 14, 2015

Last week was obviously quite painful for anyone invested in the stock market as the S&P 500 declined 3.8%, its largest drop since mid-August. Our Model, allocated to 65% in stocks, also took quite a hit, down about 2.4%.

This makes December thus far a negative month, down about 3.3%. Since new money usually flows into the stock market in December, this calendar month is easily the strongest of all, averaging a gain of slightly over 2% since WWII.  If the month is just flat from Friday’s close, it would mark the 3rd worst December in 70 years so the odds are with us that the market will recover at least slightly by year-end.

Now, back to some fundamentals. Standard & Poor’s is still calling for a whopping (“as reported”) earnings increase of the 500 largest companies on the exchange of 23.7% in 2016 (over 2015).  I’m not an analyst so I am reluctant to question this optimism but since the LRI Model is quite dependent on these data, it is my guess that the earnings estimate of $118.23 (again, from S&P) will come down significantly over the next few months.  If so, this will reduce the Model’s allocation to stocks in Q1,’16. We’ll see if this prediction actually comes to pass but I’m leaning that way, especially as we approach what could be the extraordinarily-long seven year bull market (as of March 9).

Oil is still in the tank, so to speak, and is clearly impacting the financial markets.  Crude (now about $35/barrel) is down nearly 50% just in the last 6 months and is starting to have a deleterious effect on many others as well. We’ll see where this ends up but it could have a tremendous/secular shift of wealth from energy producers to consumers that would have dramatic global political and financial implications.

Anyway, for now our Model remains at 65% in stocks, looking forward to the historical, Santa Clause rally.

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Published December 7, 2015

As I write this on Monday morning, the market is deep in the red trying to digest oil prices that have now dipped below $38 a barrel. It is interesting how the stock market has responded to the collapse of oil this year: The market was not only holding its own but making new highs into May even while oil was heading south in a big way. But when petroleum finally broke below $45 in mid-August, the stock market had had enough and took a nose dive. Oil then stabilized in the fall but now has broken down again to new lows.

For the United States, lower energy prices are generally good — too a point and if the decline is somewhat not too sudden but manageable. We’re both a major producer and consumer of energy so while many sectors and aspects of American life benefit, many others find themselves in considerable distress. Oil now below $40 will cut deeply into much of the energy industry and its recovery may take considerable time.

I’ve often discussed earnings (as compiled by Standard & Poor’s) on this page and their poor performance thus far this year. Operating earnings for the S&P500 this year are projected to decline by 5.7% from 2014 but all sectors other than energy are actually doing quite well. In fact, without energy in the mix, S&P500 operating earnings would likely be up about 6% this year. Not bad. In my opinion, it is this decent non-energy-sector performance that is keeping the stock market propped up at current lofty levels.

One of the positives to take out of this oil price collapse is the functional end of OPEC, the Organization of Petroleum Exporting Countries. The cartel was formed to remove or at least stabilize major market-based corrections in the price of oil to give these participating (oil price reliant) nations a measure of national fiscal stability. All that is now gone. Led by Saudi Arabia, most are now acting solely in the own political interests to the detriment or even the ultimate destruction of some of financially tenuous nation-states like Venezuela and Nigeria.

In any event, the Model remains unchanged this week at 65% in equities, about its historical average.

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Published November 30, 2015

Now at 65% in stocks, the Model has clearly moved into the bullish camp. This change is driven by what I consider an overly optimistic earnings forecast for 2016.

Consider that Standard & Poor’s calls for (or compiles) an “as reported” earnings gain of over 23% next year. (From a projected 2015 amount of $95.65 per share to $118.00 by Q4,’16). I’m hard pressed to believe that this forecast won’t be reduced over the next few months. I don’t quite know what they’re thinking but I generally defer to their expertise. Generally.

Most weather forecasters would hate if someone kept track of, say, their five-day forecasts and compared the actual weather on the fifth day to what they said it would be five days before. I do much the same for analysts’ earnings projections.

As an example, I compare the earnings forecast for the next four quarters with the actual results the following year when they are officially published. The analysts’ forecasts for the nearly four-year period from April 2011 to January 2015 were less than 20% incorrect (from their predictions 12 months prior). Such impressive accuracy by the forecasters during this time-frame coincided with the stock market’s strong, lengthy, minimally-volatile uptrend.

That all changed this year. Last year’s projections (for this year) have been consistently overly optimistic by greater than 20% ever since March. This hasn’t happened since the beginning of the bull market back in 2009. I believe it spells trouble in the months ahead but for now, we’ll ride along with what is historically a strong seasonal period for stocks.

And speaking of this amazing bull market, this now could be the second longest bull market since 1950 at nearly 6 years, 8 months in duration. (We’ll only know retrospectively when it’s over after the market declines by 20% from its peak). With our Model now at 65% in equities, we’ll hope this aging bull lasts for at least the next couple of weeks.

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Published November 23, 2015

Our Model held this week at 55% in stocks.

This is still below the Model’s historical average (68% in stocks) and perhaps a little light going into a traditionally strong season but it’s primarily based on earnings projections that, too me, are quite lofty. Will earnings grow by nearly 20% in 2016?  I don’t think so. It seems like a pipe-dream to me but I (almost) always defer to the expert analysts for economic forecasts. This is likely the single most important reason why, though we’re solidly in both a revenue and earnings recession, the stock market is within just a few percentage points of its all-time high.

But given that December and January are historically strong months, our allocation to stocks of 55%, just slightly bullish, almost seems a little light. But there are also serious geopolitical, i.e., military/terrorist/(gulp)climate-policy issues that can’t be ignored either so we’ll just have to be content this week with this reasonably comfortable position and focus on thanking God for our blessings on Thursday.

Happy Thanksgiving everyone.

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Published November 16, 2015

I’m always amazed at the coldness of the financial markets. The barbarity in Paris means little to them. They punish and reward indiscriminately. They have no feelings so its foolish of us try to apply our emotions to investing decisions. Who among us don’t believe that this the mass murder in France should impact the stock market? We’re simultaneously shocked, saddened and infuriated so how is it possible that this stock market can go up when so much blood has just been shed?

One of the reasons I developed the Low-Risk-Investment Model is to attempt to eliminate emotion from my investing decisions because after some significant losses, I painfully had to conclude that my gut feelings are routinely wrong.  A disciplined approach is so much more effective.

This Model is not all encompassing. No economic/investing model can be because inputs affecting the stock market are infinite and there are always unforeseen new ones. I’ve tried to capture some of the factors that have clearly impacted stocks in the past in an effort to reduce the odds of loss just one week at a time. Using the Model is not emotionally easy.  It forces us to override any strong (emotional) leanings and buy or sell based on what the Model is telling us though it may be counter-intuitive.

If there is one overwhelming consensus of financial experts it is this: “you can’t time the markets.” It’s the taboo phrase. I read it all the time. But this is also at odds with what the professionals actually do. They buy (or sell) individual securities based on criteria that tells them when it’s “time to buy.” It essentially says conditions (e.g., price drop of the stock, forecasted stronger earnings, good economic growth, etc., etc.) have changed which now dictate a stock’s purchase. Using such market-impacting “conditions” is absolutely a form of timing. This Model likely uses similar forecasts and just applies them to the collective stock market.

To use a weather metaphor: this Model looks at radar and the barometer to eliminate some of the uncertainty about the probability of rain this week. Weather forecasters aren’t perfect but we routinely watch them because we know they’re at least reasonably accurate.  I might ask if it’s professionally/ethically responsible to ignore available data and technology and tell clients to just ride out the storm after it has begun to pour if radar was available and clearly showed the storm on the horizon beforehand?  I think not.

To me what should be taboo is a fixed 70% stocks, 30% fixed income asset allocation mix come hell or high water. The LRI Model always looks for the clouds on the horizon — and as they ominously darken,  will recommend we reduce our stock holdings.

So yes, this particular disciplined investment approach — the Model — can accurately be characterized as a “conditions model.” But I also accept calling it a “timing model” as well because to me any semantical differences are absurd.  After holding up to public scrutiny for 30 months, the Model does prove the market can be reasonably well- “timed.” Those who unequivocally maintain you can’t time the market only say so because they can’t do it.

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Published November 9, 2015

Though Washington, in light of an official “unemployment” report of just 5%, continues to tout this ‘great’ economy, most of us know it’s not true. Other evidence contradicts such euphoria.

Consider that the 500 largest companies in the stock market — that make up the Standard & Poor’s 500 — have been reporting less sales revenue for the last three consecutive quarters. Some correctly call this a “sales recession.” Such a phenomenon hasn’t occurred since the end of the great recession that began in 2008. Even if Q4, `15 sales match last year’s number (a challenge), total sales for 2015 will be about 2.3% lower than in 2014. This is a big deal and it’s not good.

Earnings per share will be lower this year than in 2014 but won’t be quite as bad mostly because companies are using their (considerable) cash balances to buy back their own shares rather than expanding in new plant, equipment or stores.

This makes the stock market, which close Friday within 1.5% from its all-time high, seem all the more expensive.

Our Model moved slightly south this week to 45% in equities from 50%. Just slightly bearish. Admittedly very few of the individual “indicators” or mini-models that comprise the main Low-Risk-Investment Model are solid in their positions. It means that they could change rather quickly, one way or the other so we’ll have to stay vigilant.

*      *      *

Published November 2, 2015

Last week was a quiet one for the stock market but it closed out a stellar month.

October finished with a gain in the S&P 500 Total Return Index of 8.44%, the greatest monthly gain since late 2011.

Our Model participated in this big move by averaging 60% in stocks for the month. Though hindsight shows that this was below an optimal allocation level, it must be viewed with what occurred this summer.

The period from the beginning of June to the end of September was a frightening period for many of us in stocks. After having mostly smooth sailing for a number of years, the market had huge and unnerving swings. Overall it dropped about 8.2% but was down over 12% at the bottom in mid-August.

The Model did its job by keeping us mostly out of the market during this turbulent period. The average allocation for June through September was just 31% so the financial hit was softened considerably.

The Low-Risk-Investment Model also put us mostly back into stocks at the beginning of October with a monthly allocation double what it was for this summer. Again, meeting one of the key objectives of the Model: getting a significant chunk of market surges.

This week the Model has backed off a bit, down to 50% allocated to the stock market. Clearly the definition of a neutral position. But within the Model itself (remember that it is comprised of eleven separate or mini-models that I call “indicators”), there is considerable turbulence. These are at odds with each other with no clear consensus or direction. It does not mean we can be complacent here. Actually just the opposite. Vigilance is paramount.

The Model is always vigilant so it’ll adjust as the outlook becomes more clear.

*      *      *

Published October 26, 2015

Because of the strength of the stock market thus far this month our Model backed off slightly from 70% in stocks to 60%, a slightly bullish to neutral position.

The two indicators that measure how “expensive” the market is (using price/earnings ratios for both current earnings and future expectations) are showing some newly acquired weakness. Over the last few weeks, the market has risen while earnings estimates were continuing to come down. The two combined have made the market now nearly as expensive as it was in mid-August.

* * *

Given that this website has been published and updated weekly for nearly 30 months, it’s time to take a look at its performance compared with typical asset allocation measures.

The graph showing the performance of the Low-Risk-Investment Model (the Model) versus a 100% asset allocation to stocks (as measured by the S&P500 Total Return Index) appears on the “Model Performance” page and is routinely updated weekly. I’ve included it on this page as well because I want to make a point.

When this site was launched on May 10, 2013, I said that I finally made public an investment model that I had developed and used personally for 28 years. I said I thought it worked and would be a useful tool for anyone wishing to use it. I also said many might watch it with considerable skepticism until there was some legitimate, verifiable track record in “real time.” Until that occurred only the truly naive would actually put their capital at risk by following it. So when I published the Model’s performance going back to 1985, I did so knowing it was going to be viewed as, in effect, “pie-in-the-sky” or an unprovable fabrication.

Now the Model’s performance is provable. Its recommendations and results have been published for all to see for the last 130 weeks.

Since early May, 2013, the Model is up nearly 31%. Here’s the graph showing a comparison of both the S&P500 Total Return Index (SPTR means dividends are included) and the Model. It shows how the Model has kept pace with the stock market which has enjoyed a very nice 33% increase during this period. Few of us would be disappointed with a one percent gain per month in our portfolios.

(GRAPH)

his graph though doesn’t tell the real story. Yes, it shows how well the Model has done compared to being completely (100%) invested in the stock market but no investment manager would ever makes such a comparison to his or her clients. Benchmarks are developed based on asset allocations. Since the Model’s average allocation to stocks over this 29 month period is 73%, I calculated a sample portfolio using an asset allocation mix of 73% stocks and 27% bonds, rebalanced at the end of each month.

A 73% stocks, 27% fixed income allocation is reasonably typical and it produced a return of 25.6% over the last 29+ months. Certainly quite good.

But to match the nearly 31% return of the Model would have required 91% of the sample portfolio’s assets to be in the stock market with just 9% in fixed income investments.* My point is that now there is a track record of the Model equaling a portfolio of 91% allocated to stocks but with just 80% (73%/91%) of stock market risk over this period. This is illustrated on the graph below (daily basis).

* * *

Let me know your thoughts at Tom@Low-Risk-Investor.com.

* – Rebalanced monthly using SPTR for stocks and the exchange traded fund, AGG (iShares Core US Aggregate Bond), for bonds.

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Published October 19, 2015

Our Model shot up to 70% in equities this week, easily the highest allocation to stocks since January.

This increase was due to the two “operating income” indicators moving strongly into the bullish camp.

You must recognize that I’m always suspicious of the Model, particularly the indicators that rely completely on analysts’ forecasts. (After all, it is a forecasting model. It is a fallible tool.  Though it reduces odds, it sill deals in probability.)

As I’ve mentioned in the past, I’m the quintessential doubting “Thomas.” Consider that in January of this year, Standard & Poor’s published the consensus of analysts’ “as reported” earnings forecasts of $135 per share for this year. Now, even based on a very optimistic fourth quarter, the forecast has steadily declined to below $100 per share.  This is a stunning dose of reality.

The Model change is due mostly to a continued optimistic forecast in operating earnings of $30.09 for Q4, ‘15 that is over 12% higher than it was in the same quarter last year. By itself that doesn’t sound like that much of a big deal until the results of the last three quarters are examined. The first and second quarters this year are down from last year by 6% and 11% respectively. Early results indicate that Q3, ‘15 will be about 3% lower than last year so it seems to me that this is a continuation of a “too rosy” collective mindset that has been in effect for some time now.

[My marketing skills on display:  All I’ve done with my comments this week is to present a case as to why the Model should not be trusted. Ugh.]

In any event, the Model has surged into bullish territory so the model portfolio will move from 55% to 70% in stocks as of the closing prices on Monday, October 19.

* * *

Please continue to let me know your thoughts and if you who like or dislike the site. Please email me at Tom@Low-Risk-Investor.com

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Published October 12, 2015

Last week the stock markets were very strong. It was about time.

The S&P 500 Total Return Index was up 3.3% for the week and the Dow Jones Industrials up a whopping 3.7%. We’ll take it.

The LRI (Low Risk Investment) Model will remain mostly neutral at 55% in stocks for the upcoming week. This allocation to stocks last week was the highest in stocks since January so it was nice to significantly participate in the gains. It also allowed the Model to achieve its highest return for the year.

Here is the graph of the year’s comparison of the Model to the S&P 500. I’ve included it on this page to illustrate how the Model achieves good returns with less risk or exposure to the market. As earnings estimates, as compiled by Standard and Poor’s) were consistently coming down this year, the Model mostly followed to reductions by lowering its allocation to stocks.

(GRAPH)

The market was most expensive (highest average of trailing and forecasted earnings) between mid-July and mid-August. Notice how the S&P 500 (green line) dropped precipitously of its own weight in mid-August but though the Model (gold line) moved down too, it was far less due to the low allocation to stocks.

It was this lower market level that also (obviously) made it less expensive and caused the Model to take a stronger position in stocks now up about 8% from the lows hit on August 24th. So though the S&P Total Return Index is now down less than 1%, our Model is in positive territory, up nearly 2% for the year. Not much of a separation until one considers the risk difference between being 100% in the stock market and the Model which has averaged just 42% year to date.

* * *

Again, I’d truly appreciate hearing from those of you who like and/or use the site. Please email me at Tom@Low-Risk-Investor.com to let me know your thoughts.

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Published October 5, 2015

With the Model now up to 55% in stocks, my emotional angst level has now increased considerably. It always does when the Model calls for a significant move back into equities. Given that October is always such a “fun” month (historically the most volatile of all), we’ll see how this goes.

Immediately below is a graph of the Model compared with S&P 500 Total Return Index from June 1. It shows the performance of $1000 invested in each on the first of June. The graph visually illustrates how the Model has mitigated the turbulence of the stock market this summer. Keep in mind that from the beginning of the year until the end of May, the market was about 2 ½ percent higher than our Model which averaged about 50% in stocks for these first five months of the year. So with a rising market it had to somewhat lag behind.

And as the Model kept dipping in its allocation to stocks (to a low of 15%), it looked like it was going to be left at the station with the train moving out fast as the market was soaring in mid-July.

But the market as measured by both trailing and anticipated earnings was very expensive early this summer and the Model adjusted accordingly. Also, forecasted earnings, that have been reduced consistently for most of the year, took some of the indicators (mini-models really) that comprise the main model into bearish territory.

(GRAPH)

For those of you who have consistently followed this website, I’ve always maintained that showing all the performance graphs (going as far back as 1985) may be useful to some but had no credibility whatsoever because the performance of the Model back that far has never been independently verified.

So it was necessary to published this site for at least some reasonable period to illustrate its value. It had to be verifiable in “real time” and perform in both a bull and bear cycle.

Since the original publication date (May 10, 2013) of this website, the stock market has been in a bull market for all but the last three or so of the full 29 month period. Though we certainly haven’t experienced a bear market (yet), we now have gone through a legitimate correction at least for the first time since 2011.

Below is the graph of the entire publication period. It shows, in real and verifiable time, how the Model has accomplished its intended mission. It allowed us to grab a significant chunk of the market gains for two years and then, when the market got too expensive, to take most of our money out of stocks and move to the sidelines.

(GRAPH)

So almost 29 months later the Model has actually slightly outperformed a 100% position in the stock market (a gain over 26%) and has achieved this performance – most importantly – with considerably less risk of loss. Note on the graph that the average exposure to the market has been just 73%.

* * *

I’d like to hear from those of you who have diligently followed the Model over this period as I’ll be making a decision by the end of the year as to whether I’ll continue to publish this site weekly. It has never been my goal to publish this site as simply a public service but as a potential commercial effort. My altruistic nature goes just so far.

So I’d truly appreciate hearing from those of you who like and/or use the site. And also from any of you who might be interested in a reasonably-priced subscription service in 2016. Please email me at  Tom@low-risk-investor.com to let me know your thoughts.

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Published September 28, 2015

Stock markets are still under the gun as of the opening this Monday morning and the Model has backed off today to 35% in equities.

This week will also mark the end of the September and the third quarter. As I’ve explained a number of times previously, our “Seasonal” indicator, the least economically justifiable of all eleven indicators that comprise the entire Model, will move back into positive territory as of the close of the market this Wednesday. (This indicator is the only one of the eleven to produce a mid-week change in the Model.)

Having apologized somewhat for the economic flimsiness of this seasonal indicator, let me say that this year it was spot on. It gave a sell signal on May 31 with the Dow over 18,000 and the S&P 500 over 2100. It was one of the main reasons the Model passed a fully invested position in stocks for both this year and also measured from the first publication date in May 2013.

It’ll take the Model up to 55% in stocks this week (at the close on Wednesday, Sept. 30), still neutral but the highest percentage in equities since January.

*      *      *

Published September 21, 2015

The hype leading up to Thursday’s decision by the Fed to leave short-term interest rates alone was staggering. The overwhelming consensus of the media, market gurus and many economists appeared to be that the market was only focused on this decision.

To be sure any decision by Janet Yellen and the Fed impacts the stock market. And obviously the analysts that the Model relies on use similar economic projections to gauge their impact on corporate earnings. And clearly such interest rate decisions greatly influence the relative value of the dollar against other currencies. (About one-third of the S&P 500 revenue comes from international sales and a stronger dollar makes their products more expensive / less competitive.)

But now, without the Fed being the center of attention, the market will (never stopped really) focus on other influencing factors of which earnings growth is at the top of the list. And at the top of all factor that impact earnings is corporate revenue growth.

S&P 500 sales growth has been very sluggish in recent years and downright miserable this year. 2015 has produced lower sales in the first two quarters. This is the first time since 2009 we’ve had two consecutive quarters of reduced sales. Unless Q3 (only ten days left) shows an increase in sales growth above the first two quarters of greater than 90% of all Q3s this century, we’ll see revenue lower for a full year (or the last four consecutive quarters). This does not bode well for earnings going forward.

In any event, since Standard & Poor’s left earnings estimates unchanged this week, our Model ticked up slightly to 40% in stocks. Still in neutral/slightly bearish territory where it’s resided since for most of the year.

*      *      *

Published September 14, 2015

The Model backed off this week to 35% in stocks from 50%.

This is primarily the result of earnings estimates (and now two quarters of actuals) for the remainder of 2015 and all of 2016 being continually reduced since February.

In order to illustrate this point, I’ve made up a new graph that shows the correlation/relationship between this year’s stock market performance (S&P 500 Total Return Index) and the weekly 2015 earnings forecasts as compiled by Standard and Poor’s.

The graph begins on a seemingly odd date, February 10th, but this is because S&P pulled the earlier forecasts off their website in early January and for a number of weeks only reported that these were “under review.” They reappeared as of February 10, 2015 and have been updated mostly weekly since then. (The closer the forecast is to the present date, the more accurate it will be as we now have two full quarters on the books.)

The graph shows actual earnings (Y-axis) along with the proportional changes to the stock market given the same beginning point.

(GRAPH)

It clearly illustrates that although earnings forecasts were coming down rather consistently, the stock market actually rose into May, then flattened out through August. However by mid-August, the gap between earnings and stocks just got to wide to support the lofty level of the market. This is illustrated by the white line I’ve drawn to show the enormous gap that had developed by August 13th.

As of the end of last week the correction in stocks had narrowed the gap considerably but it still looks like it has a way to go. Either the analysts will up their forecasts for the remainder of the year or the market will continue to have a rough time going much higher.

*      *      *

Published September 8, 2015

There’s a very quiet situation occurring on Wall Street that I wanted to make you all aware of. It’s now been two full years since the analysts have accurately forecasted corporate earnings.

The last forecast compiled by Standard & Poors (the sum of analysts’ expectations) which showed a forecast for the next four quarters that met or beat the actual reported earnings of the companies that comprise the S&P 500 Index was in September 2013. And remember these are mostly updated on a weekly basis.

And they apparently are doubling down with their 2016 forecasts. Though earnings have been flat for two years now (2013 = $100.20, forecasted 2015 = $100.24) analysts expect 2016 to be an exceptional earnings year up over 20%. Really?!?

There is a “momentum” component to most of the 11 indicators (separate models really) which in their entirety comprise the main Model. Right now it appears to me that some are relatively close to turning positive over the next few weeks if, and it’s a big if, there is no downward adjustment in anticipated earnings over the next few quarters by the analysts.

Additionally, the so-called “Seasonal Rally Pattern” indicator (S-7) will go positive at the close of trading on September 30 which will add 20% to the Model’s allocation to stocks. So unless newfound pessimism (i.e., “reality” in my humble opinion) shows up in these earnings’ forecasts, our Model could head north in a big way.

***

Attached below is the graph of the comparison between a fully invested stock position (S&P 500 Total Return Index) and the Model from this website’s first publication date of May 10, 2013. It graphically illustrates the primary goal of this stock-market-conditions model.

The graph shows two sample portfolios, each starting with $1,000. The green line (S&P 500) tracks the performance of the stock market over the last 27 months. The gold line shows the performance of the Model over the same period.

For the two-year time-frame extending into this summer, the clear-cut winner between the two was easily a 100% position in stocks produced by the continuation of the lengthy bull market that began in 2009. Those who were fully invested during this period would have enjoyed a gain of over 35% as recently as July.

The graph also shows that the Model had zero chance to stay up with this (or any other) roaring bull market as it is rarely 100% invested in stocks. But as stated elsewhere on this website, its goal is to capture a major portion of bull market gains while being mostly out of the market when it heads south, or to at least “lose less.”

Notice that the Model started 2015 at about 90% in stocks (blue line shows allocation) but since then dropped fairly consistently bottoming out at 15% a few weeks ago. It did so not because of any “timing” element but because the key conditions which drive the market rapidly began to falter. It also shows how the Model finally “caught up” to the Total Return Index by being mostly out of the market when it tanked recently.

And here is one more fact that drives this point home: At the beginning of 2015, forecasts were for (“as reported”) earnings of $134.90/share this year. 2015 is now expected to show earnings of just $100.24. So though the stock market (S&P 500 Index) is down just 6.7%, forecasted 2015 earnings have tanked by over 25%.

The three months of August through October can produce some wild gyrations in the market (as we’ve seen recently) that can be frightening but also present some amazing buying opportunities (especially in October). But at least for this week, we’re still neutral at 50% in stocks and 50% in cash.

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Published August 31, 2015

I’ve attached a new graph showing the results of the Model along with the S&P 500 Total Return Index since June 1, 2015.

It effectively illustrates the primary objective of this Model: to capture a significant portion of stock market gains during a major up move and to be mostly out of the market or at least lose less during downturns.

And though this Model has a good track record it is not to be followed blindly. It is a tool to be incorporated with a host of other factors like age, non-investment income, risk tolerance, etc.

The professional investment community hates and disparages any type of so-called market “timing.” I get that, but to not consider at least some of the major factors that impact the stock market is, to me, irresponsible. In fact, I’ve yet to meet an investment advisor who didn’t “time” the market, at least occasionally. They routinely recommend their clients either take some money `off the table,’ when the market appears quite high or either sell more or start buying when the market has made a major move south. That is a form of “timing” based on the advisor’s experience.

Our Model is not all that different. But rather than a feeling, even one based on experience, it uses past data and mathematical algorithms to discern when key “conditions” that impact the stock market are good, bad or relatively neutral.

Between the date the Model first appeared on this website (May 10, 2013) and May 31, 2015 the average percentage allocated to the stock market was 80%. This allowed us to capture a great portion of the market’s gains over that period. Since June 1 however, while the market has declined by over 5%, the Model has averaged just 27% in stocks putting us mostly on the sidelines so it has done its job. Its goal is to avoid the financial (and emotional) trauma of the such precipitous declines like we’ve seen over the last two weeks.

(GRAPH)

Right now the Model is in neutral territory at 50% in stocks, 50% in cash. This historically means there is still a lot of risk in the market but there is also the potential for a significant rise.

Stock market investing can be extremely rewarding but it can also be very emotionally challenging. For it to not dominate one’s waking hours I believe it is important to find a mindset that keeps it all in perspective. No one knows which way this will turn out but in order to maintain sanity and stay positive I look at it all this way: If the market goes up, I’ll have share in the gains but if goes down from here, I’ll still have considerable cash available to buy at lower prices when conditions improve.

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Published August 24, 2015

I don’t know anything about the situation in China. I have no idea what Janet Yellen and the Federal Reserve will do with interest rates going forward. I don’t know what will happen with Greek or Puerto Rican debt. I don’t know what will happen with Iran and the Middle East or Hillary’s emails or Donald Trump’s popularity.

What I do know is this market has been propped up artificially for a number of years. What I do know is corporate America experienced a revenue recession (two quarters of lower collective sales). What I have known for at least two months is that this market has been very historically expensive and I have been trying to drive this point home. Consider these recent remarks that appeared on this page:

 … the Model is telling us that the weight of the evidence says there’s more risk than reward potential over the short term. So for the time being, we’ll run from this risk.
… Appeared June 8, 2015

Clearly now, the market has more risk concerns than reward potential. That’s why we’re mostly on the sidelines.
… Appeared June 15, 2015

…the stock market is still quite expensive and vulnerable to at least a correction (loss of at least 10%). As such the Model remains at 25% in stocks this week.
… Appeared June 29, 2015

With the recent market correction, stocks aren’t quite as expensive as they were a few weeks ago but the Model remains at 25% in equities, clearly a bearish position.
… Appeared July 6, 2015

The NASDAQ closed on Friday at a new all-time high. … As I’ve said repeatedly, no one knows where the market will be in the future. But we do know some things: We know the market is (historically, at least) expensive.
… Appeared July 20, 2015

The Model is telling us that the market remains quite high and/or earnings remain quite flat. A breakout will eventually have to occur – either up or down. Could the market take off to the upside before earnings (or analysts’ projections) move proportionately higher? Of course. The market often leads the analysts’ expectations and nearly always before actual earnings move higher.
But right now, as we approach August and September, the two worst calendar months for the stock market, the Model says the risk of stock ownership is very high.
… Appeared July 27, 2015

One perhaps surprising emotional “extreme” is complacency.
…In my opinion, it has been the Federal Reserve’s quantitative easing policy that has provided this stock market artificial but significant support making a new stock market high more likely than a 10% correction. (Note: CLEARLY WRONG)
But our LRI Model says that is not the case. And because the Model has saved my sorry butt and considerable capital over the years, I always listen to it.
It tells us that the market is quite expensive as evidenced by its 10% gain over the last 15 months with zero earnings growth. The Model says the market is more expensive (based on trailing reported earnings) than at any point since 2009. The Model is telling us that though the market could go higher from here, the risk is just too great to jump on the bandwagon.
… Appeared August 3, 2015

Our Model remains bearish at just 25% in stocks, a level it has mostly remained at since the beginning of June. It has not yet responded to the extraordinary optimism displayed by the analysts for the second half of this year and all of 2016.
… Appeared August 10, 2015

…this Model thus far has performed as designed, keeping its followers mostly out of the water when there is considerable turbulence. Its goal is not to (exurberantly to some) ride the crests of the waves but stay mostly close to shore waiting for the wind to subside and the seas to calm. When the situation appears brighter, we’ll set sail again.
… Appeared August 17, 2015

 This morning (Monday, August 24) the markets are dropping tremendously. The S&P 500 has now officially entered “correction” territory (at least a 10% drop from its high). It makes this decline essentially a “good” thing, meaning the stock market must wash out psychological euphoria before it can move forward. Has it done that, meaning fully cleansed away such rampant optimism? I don’t know. Time will tell.

Is the market in great shape? Of course not. Great damage has been done to our collective wealth. Even the Model, with just 25% in stocks last week, still — had 25% in stocks when one wishes it had been zero!

What I also know is two of our value indicators (S-4r, L-3r) that are focused on price/earnings ratios have jumped back in taking our Model from 25% in stocks to 50%. This is a much cheaper market than it was just a week ago. The changes in the Model move us from being considerably bearish now into neutral territory.

*      *      *

Published August 17, 2015

The domestic stock market upticked slightly last week, though in a continued roller-coaster-like manner.

So far this summer the old adage, “sell in May and go away,” seems to be wise advice. The S&P 500 index is down just slightly from its May 31 close but this minor change doesn’t come close to conveying the emotionally difficult volatility we’ve seen over the past two and a half months.

Many on Wall Street are saying this is a great market, the kind they are always looking for. Given that such sectors like energy (worst among all sectors, down 13.8% so far this year according to Dr. Edward Yardeni) have had very difficult years, others like healthcare have done quite well (up 11%). It is considered a stock picker’s market given the wide disparity in performance of individual equities. The Dow Jones Industrial Average is only down 2% this year but fully one-third of its 30 stocks are off over 10%!

This is the type of market that does some damage to a core premise of this website: that the tide lifts or lowers all boats accordingly. This market is more like a turbulent storm with waves lifting some boats but lowering others, yet keeping the overall water level about the same.

On the other hand, this Model thus far has performed as designed, keeping its followers mostly out of the water when there is considerable turbulence. Its goal is not to (exuberantly to some) ride the crests of the waves but stay mostly close to shore waiting for the wind to subside and the seas to calm. When the situation appears brighter, we’ll set sail again.

*      *      *

Published August 10, 2015

Today (Monday 8/10/15), the stock markets are having a strong day after last week’s decline. Whether it becomes a new upsurge or is just another in a long line of trading range bounces is unknown. This market has been essentially fenced in for months; a range no more than 5% from high to low for the S&P 500 since the beginning of February.

Our Model remains bearish at just 25% in stocks, a level it has mostly remained at since the beginning of June. It has not yet responded to the extraordinary optimism displayed by the analysts for the second half of this year and all of 2016.

Reported earnings for H2, ‘15 are forecasted to be 26% above the first half. And more incredibly, Q2, ‘16 earnings are projected to be 32% higher than Q2, ‘15. If this optimism comes to fruition, 2016 will be one amazingly strong economic year. Even perhaps ensuring the presidential election for the Democrats.

Forecasting is a difficult job. Ever notice that the (scientific) 5-day weather forecast often seems about as accurate as a coin flip? You’ll never hear a forecaster mention how wrong he or she was five days before.

Well, I actually keep track of forecasts but earnings forecasts not weather-related ones (though often I’m sorely tempted). Using the same comparison, it’s kind of like looking at today’s actual weather and having a screen shot of the forecast from five days ago with which to compare.

Our financial analysts initially forecasted a very “sunny” 2015 on New Year’s Day but have since backed off considerably. How much? Well, back then they projected the S&P 500 companies would earn about $135/share in 2015. Now they’ve backed that all the way down to $100/share for this year mostly because they were so very wrong about the first two quarters which they expected to show 50% higher earnings. It is essentially this negative change(s) or 2015 actuals which been the primary factor(s) in sending the Model south this year.

*      *      *

Published August 3, 2015

Last week was a good one for the American stock market as it closed up about 1.2%.

Our current problem is with this market is we closed out July at about the same level we were in February. It means we’ve essentially had a flat market for nearly six months. So the major question might be: Is this the correction, albeit a flat one, that market prognosticators have been waiting for?

Market “technicians,” or those who embrace so-called “technical analysis,” often seek the stock market to digest its gains or “build a base,” before it can go higher. This describes a market that doesn’t necessarily decline, it just doesn’t do anything for a substantial period.

Technical analysis is essentially the study of market psychology as represented by a chart. It provides visual evidence of the collective emotional sentiment of investors. Over the decades it has proved itself to be, I would say, reasonably effective especially at market extremes, e.g. panic or euphoria.

One perhaps surprising emotional “extreme” is complacency. When the market does nothing in the face of impactful global events or earnings changes and the collective investor sentiment is neutral, at some point the market will have a break out, mostly to the upside. Easily the highest sentiment as compiled by the American Association of Individual Investors over the last four months is neither bullish or bearish but neutral.

In my opinion, it has been the Federal Reserve’s quantitative easing policy that has provided this stock market artificial but significant support making a new stock market high more likely than a 10% correction.

But our LRI Model says that is not the case. And because the Model has saved my sorry butt and considerable capital over the years, I always listen to it.

It tells us that the market is quite expensive as evidenced by its 10% gain over the last 15 months with zero earnings growth. The Model says the market is more expensive (based on trailing reported earnings) than at any point since 2009. The Model is telling us that though the market could go higher from here, the risk is just too great to jump on the bandwagon.

The Model is reminding us that it is earnings that rule the stock market. Actual company earnings will always eventually reign in the psychological extremes of euphoria or panic. Or even complacency.

Time will tell. This week the Model jumped back to 25% in stocks where it has resided since the end of May.

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Published July 27, 2015

Our Model is taking a dive this week. Literally, all the way down to just 15% in stocks. This is the lowest allocation to equities in five and a half years.

It may be counter-intuitive to some followers of the Model but this (15%) level is not without risk.

We all are painfully aware of how the market can head south, like the 50%  crash from 2008 into early 2009.  But consider this: A typical asset allocation for many investors is something akin to 70% stocks, 30% fixed income. This is due mostly because the stock market generally goes up. Up more than virtually any other financial investment vehicle. Since WWII, the stock market has gone higher nearly two months for every month it declined. Measurable American exceptionalism.

This all means that it is risky to be both nearly fully invested in stocks or almost completely out of the market.  Loss of capital is always the worst outcome for an investor but loss of opportunity ain’t nothing.

Viewing the graphs on the “Model Performance” page, what becomes quite evident is that separation of the Model’s trendline with the S&P 500 only really occurs when the Model’s allocation to stocks is low. The Model’s only ability to outperform the S&P 500 over the years has been due to being mostly out of stocks when the market tanked. But occasionally the stock market has risen with the Model being on the sidelines thereby, at least temporarily, leaving us behind.

Unless the market simply treads water here there will be separation between the Model’s performance and a fully invested position in the stock market over the short term at least.

Today’s (Monday) decline has been blamed on China’s tanking stock market but this investment model reflects only how China’s softening economy could impact earnings for our domestic equities. The Model is telling us that the market remains quite high and/or earnings remain quite flat. A breakout will eventually have to occur — either up or down. Could the market take off to the upside before earnings (or analysts’ projections) move proportionately higher? Of course. The market often leads the analysts’ expectations and nearly always before actual earnings move higher.

But right now, as we approach August and September, the two worst calendar months for the stock market, the Model says the risk of stock ownership is very high.

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Published July 20, 2015

It was mentioned here last week that this market could go higher, potentially much higher in the short term. Well, last week’s performance demonstrated this may actually come to pass.

The S&P 500 shot up 2.4%, its best weekly performance in four months. The NASDAQ closed on Friday at a new all-time high. It means that the American stock market(s) remains strong. This year it hasn’t really gone up so much as it has just refused to go down. This has confounded both the outright bears (still a lot of them out there) and those who are certain a correction (10% or more) is just around the corner.

As I’ve said repeatedly, no one knows where the market will be in the future. But we do know some things: We know the market is (historically, at least) expensive. We also know that there is a considerable artificial element to this bull market. That’s the perpetual monetary stimulus which has propped it up and likely extended it well beyond what could not have occurred without it.

So this all just goes as a reminder that every market has similarities to the past but also new circumstances which have never been experienced before.

The Model inched up to 30% in stocks this week after seven weeks at 25%. We’re still in bearish territory but since operating earnings projections upticked slightly, our Model increased slightly as well.

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