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The market roller coaster ride continues and will continue until we get to that FOMC meeting. The market, investors, the world needs certainty as to what the Fed will do and also set a tone of expectations going forward – rather than this we will see attitude that is “Data Dependent” which keeps us guessing from one FOMC meeting to the next. I wrote about the real problem with the Fed and it is NOT whether they will hike rates or not: Market Preview NORMALIZATION


Was this a buying opportunity or are we in a correction. The recent action has certainly made more investors gun-shy. Perhaps it has also woken-up more investors as to the how big a factor and market participant the Fed really is. They are the largest contributor to the boom in margin (debt) growth: Market Preview Margin Call

Investors face the investment dilemma of a life time because of massive interventionism.

Bonds = NO
Traditional conservative investments (Bonds) pay next to nothing, even going out to the 10 year doesn’t pay. If the 10-year bond is paying 2% and CPI is running at 1.8% you are not making money. I would argue that the real rate of inflation (including food and energy) is much higher than the CPI indicates, meaning buying even a 10 year bond means you are losing a real rate of return.

Cash = ?
Cash is King? When the dollar is strong it is king and recently the dollar has strengthen, but that means we should be (investing) spending it because it buys you more. I would also argue the strong dollar rally is going to peak out and revert. Dollars don’t work for you if you are not investing them. You also don’t want to be holding dollars when they start losing value (buying power).

Real Estate = Yes / No
Real Estate is in an interesting paradigm, with strong rental demand and high rents relative to mortgage interest, it remains a great investment (inflation protected). Rental income properties (based on rent/mortgage/value) are a still a great option. On the other hand flipping the higher-end housing market is starting to see cracks. The higher-end properties are starting to see longer listing times and even price cuts. There are two types of buyers for the higher-end property, those that have the cash and means to buy the home and those that don’t and are trying to flip. The higher-end flipping market is getting tough and risky (especially if you think the Fed is going to raise rates).

Commodities = Yes
Gold and silver are two the more common commodities for long-term inflation protected investments. With the strong dollar rally, I think it is a great time to add them more. Remember Gold/Silver doesn’t pay dividends and appreciation is always relative to the dollar. Don’t ever buy gold/silver as an investment, buy it as an alternative inflation hedge savings. One can also invest in other commodities, which include agriculture. I believe that commodities pricing as a whole relative to the dollar is at a long-term attractive level.

Equities = Yes, but Hedge
That leaves equities (stocks). Stocks are liquid, many pay dividends that beat bonds, and there are some real growth opportunities. It is the only asset class that offers an array of opportunities that can’t be found elsewhere.

Why does the stock market go up?

Stocks are a finite asset, there are only so many shares and unless a company offers a stock/split, issue more shares, or there is an IPO , the pool of stock shares is finite. The demand side of the equation if fueled by access to capital (margin) and with rates at zero, the cost to borrow is attractive.

Applying the laws of supply and demand means that with a finite supply and potential infinite demand (based on margin), the market can go higher.

Supply & Demand Curve courtesy of wikipedia

While it is certainly true that margin has fueled the stock market rally and increased the size of the bubble, the real question you must ask is whether there is more room to inflate it?

There is nothing wrong with investing in bubbles as long as you KNOW it is a bubble and are able to hedge your positions accordingly. You certainly can’t FIGHT the bubble – those that have (be it the, housing, and current Fed bubble) continue to lose and lose for a long time.

Don’t get me wrong, this is not an argument for supporting bubble formation policies, it is just taking an objective view.

You have three choices:

1. Don’t invest because you know it is a bubble.
2. Invest, but know it is a bubble – so all your positions are hedged.
3. Short the bubble – and continue to lose until it pops.

As much as I may disagree with Fed policy, it is immaterial because they are driving the train.


In the long-term this is going to end very badly and we will see, much like we did in the and Housing bubbles a massive downturn and implosion. There is NO escaping it, the math is simple. Just because it doesn’t happen tomorrow or the next day does NOT mean it won’t happen.

When I lived in San Francisco during the bubble, you couldn’t talk math or reality to those that BELIEVED. Each year the market would rally and new IPOs rocketed to the moon. Majority of companies didn’t make a profit and there were several that didn’t even have REVENUE.

The housing bubble was exactly the same thing and again when I talked to those that had drunk the Kool-Aid – they would ignore the math. No matter how many times you showed them the math, they would just point to another house that sold for a 20% profit in a month and said I was wrong.

The most important formula that rules success or not is:

Revenue – Costs = Profit or Loss.

When you replace Revenue with borrowed money (margin) to subsidize your costs, it may SEEM like everything is fine. When the ability to borrow ends and you are not able to cover your costs then the house of cards collapse.

In the bubble it was the Venture Capital firms and investment banks that stopped lending that ended the bubble. New companies needed to start making REAL revenue and when they couldn’t they folded quickly.

In the housing bubble it was banks and mortgage companies. When they ran out of money to lend and those that borrowed didn’t have the income/revenue to pay the costs, the bubble burst.

This time it is the Fed who has printed and bought TRILLIONS in bonds and mortgages, and continues to do so to this day.

The only question we must ask is how long can they continue to inflate the bubble and how can I participate in the bubble while making sure I am hedged and perhaps even profitable when it bursts.

The bubble inflated for a solid 4 years before it burst. The housing bubble was about 5-6 years in the making. The Fed bond bubble (which has inflated the dollar, bonds, and stocks) has been about 5 years.

I personally think the Fed still has room to continue to inflate the bubble. The U.S. equity markets has another advantage currently and that is we are the best of the Western debt nations, meaning that capital flows from Japan and the Europe will seek the U.S. as a safe haven that could continue to push new money (and margin) into the market.

I don’t know when the bubble will end (when the Fed can no longer push on the gas pedal), John Williams – economist – had initially estimated 2018 based on GDP growth, US debt, and Fed monetary policy. Based on the steady acceleration he predicts that we have 2-3 years before we implode from the next bubble.

It could certainly come sooner or perhaps like Japan we can continue for decades.

It all comes down to the word “sustainability” and that is the big unknown. It is not infinite, it will end and by the looks of it (based on objective math) badly.

How to INVEST?

We can’t sit on the sidelines and we can’t bet against the bubble, but at the same time we can’t blindly assume it is not a bubble.

My advice is to be informed, participate, and hedge your positions and lock in gains. What we just experienced – with really no provocation – is nothing if we are to face a real melt down.

A solid portfolio consists of:

Equities – fully hedged (use options)
Rental Income Properties
Gold/Silver – slow steady accumulation

Why is this a winner portfolio?

Equities on the way up participate in the bubble and are profitable. The hedge (rolling) insures those unrealized gains and you can always over-hedge.

Rental Income means you have cash flow coming in every month and you are building equity that is inflation protected. Everyone needs a place to live so low-to-mid income properties are strong in all market conditions.

Gold and Silver are just an alternative savings account, not an investment. Gold and silver, regardless of market conditions and where you are in the world can ALWAYS be converted into local currencies. If the dollar declines and we see strong inflation, these commodities will increase in value.

This is not about fear or about a coming collapse – it is simply the long and tested motto of the Scouts, “Be Prepared!”

Courtesy of Boy Scouts Of American (BSA)

Support & Resistance

INDU 16,500
If there was ever a “Straddle Strike” in the Dow Jones after all this volatility, this would be it. This index can head back down to 15,500 or up to 17,500 very quickly. Is 16,500 a resistance or support and that is the big unknown. I can bet with certainty that it will NOT stay at 16,500 for long and it will move radically away from this level.

NDX 4400
If we can get back to 4400 we need to ask if this is going to be a new resistance level where we see some heavy selling. It was once supported with lots of buying and that means today it can very easily become the big resistance level. Anything between the 3800 – 4400 level is unknown and a volatile range with no supports or resistance to look for.

SPX 1950
Much like the Dow Jones the “Straddle Strike” in the S&P 500 is 1950. This is where we will see either strong buying to push this index back up into the 2040 range or renewed selling pressure to send this index back to the 1880 level. The pre-market looks strong, can it hold up there or do we close below 1950?

RUT 1120
The Russell Index has some good and bad news. The good news is that it never broke down to the September 2014 lows and seems to have bounced. The bad news is the current bounce is not nearly as strong as the Dow Jones or other indices. That shows order flow trepidation and that broad base money is NOT rushing into the market seeing this as a buying opportunity, yet.

Jackson Hole
The Fed with other central bankers are at their annual Jackson Hole retreat this week, before the upcoming FOMC meeting in September. Historically we have had candid conversations and even some stark views compared to the official FOMC Fed statements. It has sometimes given us a glimpse of concern and appetite of the Fed’s willingness to change or adopt new policies. So far I have not heard anything surprising to suggest hints of a confirmed rate hike or QE4, but you never know.

Talk is already swirling about the possibility of QE4 or something similar, but these are all unconfirmed and conjecture. Remember it was then Chairman Bernanke that planted the seeds of QE2 at the 2010 Jackson Hole summit. The probability of a QE4 has gone from below 1% to 18%. That doesn’t mean it is going to happen, but market participants are now giving it a slight probability. Remember, it may be improbable, but not impossible.

Jackson Hole – courtesy of wikipedia

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