Forget Dow 20,000… This Indicator Tells the Real Story

By Justin Spittler

It finally happened. For the last six weeks, the Dow Jones Industrial Average has been bumping against a ceiling. Yesterday, it broke through. The Dow topped 20,000 for the first time ever. Most investors are excited about this. After all, 20,000 is a big, round number. It feels like a psychological win for the bulls.

But it’s not an invitation to dive into stocks…not yet, at least. We need to see if the Dow can hold this level.
If it closes the week above 20,000, stocks could keep rallying. If it doesn’t, nothing has really changed. It could even be a warning sign. Until then, sit tight. Don’t chase stocks higher…stick to your stop losses…and hold on to your gold.

Don’t lose sight of the big picture, either.…

Remember, U.S. stocks are still very risky:

➢ They’re expensive. The S&P 500 is trading at a cyclically adjusted price-to-earnings ratio (CAPE) of 28.4. That means large U.S. stocks are 70% more expensive than their historical average.

➢ We’re still in a profits recession. Profits for companies in the S&P 500 stopped growing in 2014.

➢ And Donald Trump is president of the United States. Trump could do wonders for the economy and stock market. But he could also unleash a major financial crisis. It's still too early to tell.

As you can see, "Dow 2,000" isn't necessarily a reason to celebrate. In fact, as we told you two weeks ago, there's something much more important you should be watching right now.

The bond market is flashing danger.…
The bond market is where companies borrow money. It’s the cornerstone of the global financial system.
It’s also bigger and more liquid than the stock market. This is why the bond market often signals danger long before it shows up in stocks.

The bond market started to unravel last summer.…
Just look at U.S. Treasury bonds. In July, the 10-year U.S. Treasury hit a record low of 1.37%. Since then, it’s nearly doubled to 2.55%. This is a serious red flag. You see, a bond’s yield rises when its price falls. In this case, yields skyrocketed because bond prices tanked. The same thing has happened in long term Treasury, municipal, and corporate bonds.

Bill Gross thinks bonds are entering a long-term bear market.…
Gross is one of the world’s top bond experts. He founded PIMCO, one of the world’s largest asset managers. He now runs a giant bond fund at Janus Capital. Two weeks ago, Gross said the bull market in bonds would come to an end when the 10-year yield tops 2.6%. Keep in mind, bonds have technically been in a bull market since the 1980s.

According to Gross, this number is far more important than Dow 20,000. And we’re only 50 basis points (0.5%) from hitting it. In other words, the nearly four-decade bull market in bonds could end any day now.
When it does, Gross says bonds will enter a secular bear market... meaning bonds could fall for years, even decades. This is why Casey Research founder Doug Casey has urged you to “sell all your bonds.”

If you haven’t already taken Doug’s advice, we encourage you to do so now.…
You should also take a good look at your other holdings. After all, problems in the bond market could soon spill over into the stock market. If this happens, utility stocks could be in big trouble. Utility companies provide electricity, gas, and water to our homes and businesses. They sell things we can’t live without. Because of this, most utility companies generate steady revenues. This helps them pay dependable dividends.

Many investors own utility stocks just for their dividends.…
That’s why a lot of people call them “bond proxies.” Utility stocks don’t just pay generous income like bonds, either. They also trade with bonds. You can see this in the chart below. It compares the performance of the Utilities Select Sector SPDR ETF (XLU) with the iShares 20+ Year Treasury Bond ETF (TLT). XLU holds 28 utility stocks. TLT holds long-term Treasury bonds. XLU has traded with TLT for the better part of the last year. Both funds crashed after the election, too. But XLU has since rebounded.

You might find this odd. After all, the two funds basically moved in lockstep until a couple months ago.
But there’s a perfectly good explanation for this.…

Utility stocks pay more than Treasury bonds.…
Right now, XLU yields 3.4%. TLT yields 2.6%. That might not sound like big deal. But those extra 80 basis points (0.8%) provide a margin of safety. You see, the annual inflation rate is currently running at about 2.1%. That means the U.S. dollar is losing 2.1% of its value every year.

That’s bad news for everyday Americans. It’s also bad for bondholders. It means investors who own TLT are earning a “real” return (its dividend yield minus inflation) of 0.5%. Meanwhile, you’d be earning a real return of 1.3% if you owned XLU. Of course, utility stocks should pay more than government bonds. They’re riskier, after all. Unlike the government, utility companies can’t print money whenever they want. If they run into financial problems, they could go out of business.

Today, investors don’t seem to mind taking on extra risk for more income. But that could soon change…

Inflation could skyrocket under Donald Trump.…
If you’ve been reading the Dispatch, you know why. For one, Trump wants to spend $1 trillion on infrastructure projects. While this could help the economy in the short run, the U.S. government will have to borrow money to fix the country’s decrepit roads, bridges, and power lines. This would likely produce a lot more inflation. If that happens, real returns could shrink even more. And that could trigger a selloff in utility stocks and other "bond proxies," like telecom and real estate stocks. In short, if you own these types of stocks just for their dividends, you might want to consider selling them now.

We recommend sticking to dividend-paying stocks that meet the following criteria.…
The company should be growing. If it isn’t, you probably own the stock just for its dividend. That’s a bad strategy right now. It should have a low payout ratio. A payout ratio can tell us if a company’s dividend is sustainable or not. A payout ratio above 100% means a company is paying out more in dividends than it earns in income. Avoid these companies whenever possible.

It shouldn’t depend on cheap credit. After the 2008 financial crisis, a lot of companies borrowed money at rock-bottom rates to pay out dividends. If rates keep rising, these companies could have a tough time paying those dividends. If you own stocks that check these boxes, your income stream should be in good shape for now.

Chart of the Day

“Trump Years” stocks are on a tear. We all know U.S. stocks took off after the election. But some stocks did better than others. Bank stocks spiked on hopes that Trump would deregulate the financial sector. Oil and gas stocks rallied because Trump is pro-energy. Industrial stocks have also surged since Election Day.

Industrial companies manufacture and distribute goods. They include construction companies and equipment makers. E.B. Tucker, editor of The Casey Report, thinks these companies will stay very busy while Trump rebuilds America’s hollowed out economy.

He’s so sure of it that he recommended four “Trump Years” stocks last month. One of those stocks is up 11% in just six weeks. Yesterday, it spiked 8% after the company crushed its fourth quarter earnings report.
The company announced higher sales, fatter profits, and lower taxes. It raised its guidance for the year. In other words, it expects to make a lot more money this year…now that Trump’s in charge.

You can learn about this company and E.B.’s other “Trump Years” stocks by signing up for The Casey Report. Click here to begin your free trial.

The article Forget Dow 20,000… This Indicator Tells the Real Story was originally published at caseyresearch.com.

Not All Debt Is Created Equal

By Dennis Miller

Optimal diversification: We all want it. Diversification is, after all, the holy grail of portfolio management. Our senior research analyst Andrey Dashkov has said that many times before, and he echoes that refrain in his editorial guest spot below.

A brief note before I hand over the reins to Andrey. The last time the market tanked, many of my friends suffered huge losses. They all thought their portfolios were well diversified. Many held several mutual funds and thought their plans were foolproof. Sad to say, those funds dropped in tandem with the rapidly falling market. Our readers need not suffer a similar fate.

Enter Andrey, who’s here to explain what optimal diversification is and to share concrete tools for implementing it in your own portfolio.

Take it away, Andrey…

Floating-Rate Funds Bolster Diversification

By Andrey Dashkov
Floating rate funds as an investment class are a good diversifier for a portfolio that includes stocks, bonds, and other types of investments. Here’s a bit of data to back that claim.

The chart below shows the correlation of floating rate benchmark to various subsets of the debt universe.
As a reminder, correlation is a measure of how two assets move in relation to each other. This relationship is usually measured by a correlation coefficient that ranges from -1 to +1. A coefficient of +1 says the two securities or asset types move in lockstep. A coefficient of -1 means they move in opposite directions. When one goes up, the other goes down. A correlation coefficient of 0 means they aren’t related at all and move independently.

Why Correlation Matters

 

Correlation matters because it helps to diversify your portfolio. If all securities in a portfolio are perfectly correlated and move in the same direction, we are, strictly speaking, screwed or elated. They’ll all move up or down together. When they win, they win big; and when they fall, they fall spectacularly. The risk is enormous.

Our goal is to create a portfolio where securities are not totally correlated. If one goes up or down, the others won’t do the same thing. This helps keep the whole portfolio afloat.

As Dennis mentioned, diversification is the holy grail of portfolio management. We based our Bulletproof strategy on it precisely because it provides safety under any economic scenario. If inflation hits, some stocks will go up, while others will go down or not react at all.

You want to hold stocks that behave differently. Our mantra is to avoid catastrophic losses in any investment under any scenario, and the Bulletproof strategy optimizes our odds of doing just that.

When “Weak” is Preferable

 

Now, a correlation coefficient may be calculated between stocks or whole investment classes. Stocks, various types of bonds, commodities—they all move in some relationship to one another. The relationship may be positive, negative, strong, weak, or nonexistent. To diversify successfully and make our portfolio robust, we need weak relationships. They make it more likely that if one group of investments moves, the others won’t, thereby keeping our whole portfolio afloat.

Now, back to our chart. It shows the correlation between investment types in relation to floating-rate funds of the sort we introduced into the Money Forever portfolio in January. For corporate high yield debt, for example, the correlation is +0.74. This means that in the past there was a strong likelihood that when the corporate high yield sector moved up or down, the floating rate sector moved in the same direction. You have to remember that correlation describes past events and can change over time. However, it’s a useful tool to look at how closely related investment types are.

I want to make three points with this chart:

• Floating-rate loans are closely connected to high-yield bonds. The debt itself is similar in nature: credit ratings of the companies issuing high-yield notes or borrowing at floating rates are close; both are risky (although floating-rate debt is less so, and recoveries in case of a default are higher).
  
  Floating-rate funds as an investment class are not as good a diversifier for a high-yield portfolio. They can, on the other hand, provide protection against rising interest rates. When they go up, the price of floating-rate instruments remains the same, while traditional debt instruments lose value to make up for the increase in yield.

• Notice that the correlation to the stock market is +0.44. If history is a guide, a falling market will have less effect on our floating-rate investment fund.
• The chart shows that floating-rate funds serve as an excellent diversifier for a portfolio that’s reasonably mixed and represents the overall US aggregate bond market. The correlation is close to zero: -0.03. This means that movements of the overall US bond market do not coincide with the movements of the floating rate universe.
  
  Imagine two people walking down a street, when one (the overall debt market) turns left, the other (floating rate funds) would stop, grab a quick pizza, get a message from his friend, catch a cab, and drive away. No relationship at all… at least, not in the observed time period. This is the diversification we’re looking for.

Floating rate funds provide a terrific diversification opportunity for our portfolio. This gives us safety, and that is the key takeaway.

Our Bulletproof income portfolio offers a number of options for diversification above and beyond what’s mentioned here. You can learn all about our Bulletproof Income – and the other reasons it’s such an important one for seniors and savers – here.

The article Not All Debt Is Created Equal was originally published at Millers Money


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Learn to Trust Your Own Financial Judgment

By Dennis Miller

Keep this goal in mind as you read on: solid income and growth with minimal risk and no catastrophic losses. Just tuck it in the back of your head.


Subscriber Brian A. wrote sharing a common concern:

"I subscribe to your newsletter for the purpose of diversifying my portfolio as well as taking more responsibility for my investment future. … I look at the soaring S&P and Dow and wonder if both are appreciating from strong fundamentals, or from the Fed's easy money policy. … I listen to my broker who spouts out information of a resurgence of manufacturing coming back to US soil and (says) equities are the place to be for the near future. The other side spouts banks are insolvent, businesses are closing, (and) if it wasn't for the Fed propping things up we would be in a recession. Some say we are in a recession. I would like to see you devote an article on the subject of the 'don't worry be happy' crowd verses the 'doom and gloom' crowd."

Well, Brian, ask and ye shall receive. My recommendation, as always, is to look at the data, decide for yourself which camp you fall in—if either—and invest accordingly.

Folks who think things are turning around generally point to statistics published by the Congressional Budget Office (CBO). These numbers—the unemployment and inflation rates and the Consumer Price Index in particular—are used by the Federal Reserve to make or change policy. Those decisions affect the economy and the stock market.

If you swallow these numbers, you can point to a trend line going up. You may not think "happy days are here again," but you could make a case that we are headed in the right direction.

In contrast, the "gloom and doom" crowd point to data from statisticians like John Williams at Shadow Government Statistics, who make a good case against the accuracy of official government data. Williams' alternatives to the CPI, official inflation rate, and unemployment rate paint a much different picture.

Unemployment offers an easy example. When a person stops looking for work, the CBO no longer considers him unemployed. I guess that means if everyone just stopped looking, the unemployment problem would be solved.

Many in the gloom-and-doom crowd distrust the government and believe its statistics are produced for the benefit of politicians.

The gap between these two camps is wide. We recently published a special report called Bond Basics, offering safe ways to find yield in the current economy. Shortly after releasing our report, I attended a workshop with one of the top bond experts at a major brokerage firm. As I listened to his excellent presentation, I realized we agreed on many points: interest rates seem to be going up, the value of laddering and diversification, etc. We also agreed that investors (not traders) should buy bonds for one purpose: safe retirement income.

This speaker, however, recommended that baby boomers and retirees buying individual bonds only buy investment grade bonds and ladder them over an eight year period. Each year some would mature, and retirees would then replace them with other eight-year bonds. In a rising rate environment, retirees would eventually catch up he claimed. This expert mentioned inflation only once, remarking that it is "under control" and should remain low.

I went to the company's website and discovered that five year AAA bonds were paying 1.92%, and ten year bonds were paying 3.41%.

Then I went to Shadow Government Statistics. The official inflation rate as indicated by the CPI is hovering around 1.8%. However, using the same method used for calculating the CPI in 1990 (the government has changed the formula many times), the current rate comes to approximately 5.5%.
Now, it only makes sense to invest in long-term, high-quality bonds if you truly believe the government's CPI statistics. If, however, you that suspect inflation isn't quite so under control—even if you don't believe it's 5.5%—why would you invest in an eight-year bond that's virtually certain to lose to inflation?

The same logic applies to unemployment numbers. The official number is around 6.7% and coming down. Alternative calculations show a double digit unemployment rate that is rising. Should you invest heavily in stocks now? It depends again on whom you believe.

How should this affect your approach? If you hold the majority of your nest egg in cash or low-yield investments, you are losing ground to inflation. On the other hand, going all in the market if you are uncertain that the economy is improving could be equally disastrous.

A word of caution: do not let fear of getting it wrong immobilize you! It can be a very costly mistake. Keep learning and researching until you find investments you are comfortable with.

Let's look at the best- and worst-case scenarios with long term bonds. If you follow the advice of a bond salesman, you'll buy long-term corporate bonds. Ten year, AAA rated bonds currently yield around 3.41%. Assuming the bond trader is correct and inflation is not an issue, the best you could earn is 3.41%. Is that enough to get excited about when you factor in taxes and the risk of inflation?

In a recent article, I shared an example of a hypothetical investor who bought a $100,000, five-year, 6% CD on January 1, 1977. If he'd been in the 25% tax bracket, his account balance after interest would have been $124,600 at the end of five years. That's a 25.9% reduction in buying power because of high inflation during that five year period.

In that light, 3.41% does not look quite so appealing. Yes, inflation was particularly high during the Carter era, so apply a bit of common sense to the example. Nevertheless, what has caused inflation in the past? In general terms, governments spending money they don't have and printing money to make up the difference. Argentina is a timely example of this folly.

These concerns are why our research team and I paired up to produce Bond Basics. We think there are better risk and reward opportunities than long-term bonds available in today's market.

Investing in stocks is a different story. We cannot keep up with inflation and provide enough income to supplement retirement needs with bonds alone (unless you have a huge portfolio and are willing to buy higher-risk bonds). That's why our team picks stocks with surgical precision. We run them through our Five Point Balancing Test, recommend strict position limits, diversify across many sectors, and use appropriate stop losses.

Our premium publication is named Miller's Money Forever for good reason. We want to help you grow your nest egg in the safest possible manner under any market conditions. Neither the happy days nor the doomsday crowd can predict the future, so we prepare for all possibilities.

You've likely heard the refrain, "Inflation or deflation? Yes." It's a favorite of our friend John Mauldin. With that, baby boomers and retirees are forced to become kitchen-table economists and to sift through statistics that may or may not be accurate.

I haven't been shy about my opinion: I don't think the economy is improving, so retirees need to risk more than they would like in the market. That's why our Bulletproof Income strategy prepares for all market possibilities as safely as possible.

Whom should you believe? Well, is the person speaking trying to sell you something? Stockbrokers trying to garner your business tend to be optimistic about the economy. If someone is trying to sell gold or foreign currency investments, they are likely to cite a history of rising inflation and explain how their product can protect you. It doesn't mean either is wrong. And yes, the same point applies to the humble authors of investment newsletters.

At Miller's Money we share the reasoning behind every recommendation we make. We want our subscribers to know as much as we do about every pick—pros and cons. If you agree with our reasoning, act on our advice. If not, or if you have additional questions, ask us or sit tight for another pick. Never invest in something you don't understand or are uncomfortable with no matter who recommends it.

The bottom line is you have to read, learn, do your own research, and make your own judgments. Listen to all sides of any argument, and then do what you think is best.

What could be more important to baby boomers and retirees than protecting their money? Take the time necessary to teach yourself. In time you will become more comfortable trusting your own judgment. If you were savvy enough to make money, you are savvy enough to learn how to invest and protect it. Give yourself credit where it's due.


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The article Learn to Trust Your Own Financial Judgment was originally published at Millers Money.

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The Ty Cobb Approach to Retirement Investing

By Dennis Miller

When baseball fans talk about players from the early 1900s, Babe Ruth is normally the first person mentioned. He was a great home run hitter with 714 career home runs, a record that stood for almost 40 years. Only two men have surpassed it. Ruth struck out 1,330 times, a record that also stood for several decades.


Most people think of Ty Cobb as a gritty player who held the career stolen base record for many years. But let’s look a bit deeper. Ty Cobb broke into major league baseball in 1905 at the age of 19 and hit .240 his first season. For the next 23 seasons, he hit over .300.

Cobb holds a lifetime batting average of .367, a record that still stands today: 85 years and counting. His career strikeout total is 357. He averaged 14.9 strikeouts per season, striking out 3.1% of the time, a remarkably low average.

Young people love to swing for the fences and hit those huge gains. With retirement money, an occasional home run is nice; however, our overriding goal is to preserve capital and avoid catastrophic losses. Ty Cobb didn’t hit as many home runs as Babe Ruth, but he was a model of consistency.

Once you’ve built your nest egg, you’re not trying to run up the score; you’re trying to stay ahead.
Anyone who has tried to play catch-up with his portfolio can tell you there’s no such thing as a five run homer. Newsletters touting the chance to double or triple your money can grab our attention, but experienced investors realize that those gains are only possible if you’re willing to take on the commensurate risk.

Swinging for the fences with retirement money won’t get the job done. With money that must last forever, putting your emotions aside and focusing on safety and consistency is paramount.

Safety First

 

Have you ever watched a thin-ice rescue scene? A person standing with all of his weight on thin ice can easily fall through as all his weight is concentrated. The rescuer trying to reach this person normally lies flat across the ice, spreading out his weight.

The same approach works for today’s retirement investor. Step one is to spread risk through diversification among (and within) asset classes, selective investments, position limits, and real-time monitoring of your portfolio via stop losses. While we like the income, avoiding catastrophic losses is our mantra.

It’s also worthwhile to reassess just what “safe” means. We can’t count on inflation remaining at historical 2% levels. FDIC insured CDs and US Treasuries are now guaranteed money losers when you factor in inflation. (“FDIC insured” does not shield us from inflation.)

This brings us to the Step two in the Ty Cobb approach: inflation protection. Investing in long-term, fixed-income investments during times of high inflation can result in catastrophic losses, precisely what we need to avoid.

Step three: find investments with low interest-rate sensitivity. Ross Perot coined the phrase “giant sucking sound” to describe jobs leaving the US. That will pale in comparison to the giant sucking sound when interest rates start to rise and everyone tries to exit the market at once. The scene after Bernanke’s tapering remark was a small preview. Interest-rate-sensitive investments will be hit hard and fast.

The long-term bond market offers a good example of interest rate sensitivity. Take an A rated, ten year corporate bond paying 3.68%, for example. Now imagine you bought $10,000 worth; you’d receive $368 per year in interest until maturity. If, however, market interest rates rise during that time, you’d have to discount your selling price to resell that bond in the aftermarket to compensate for its below market interest rate.

“Duration” is the term for calculating that discount. The duration for this bond is 8.41. For every 1% rise in market interest rates, the resale value of your bond will drop 8.41%, or $841.00—more than two years’ accumulated interest. Should this happen, you’d have two lousy choices: You could hold on to the bond at a lower than current market value interest rate until it matures; or you could sell your bond for less than you paid for it.

If inflation is the reason interest rates are rising, that decreases your buying power even further, particularly if you choose to hold on to the bond.

While top quality bonds are considered safe, that safety stops at the borrower’s ability to repay you. It does not protect your investment from a reduced resale value in the aftermarket, nor does it protect you from inflation. At the risk of sounding like a broken record, let me repeat myself: holding long term, low interest paying bonds at the wrong time can produce catastrophic results.

Interest-rate sensitivity isn’t limited to bonds. The stock market now has a similar problem. Many companies paying high dividends are so flooded with cash that they’ve become interest-rate sensitive. Utility stocks, for one, come to mind. When Bernanke said “taper,” the prices of utility stocks tumbled.

It is important to understand that this is a distinct type of risk. Should the market rise dramatically, stocks and bonds with high interest-rate sensitivity will be extremely vulnerable.

The final step in the Ty Cobb approach is finding a way to maintain your quality of life while managing your portfolio. While “set it and forget it” isn’t an option, no one wants to spend all of his or her time fretting about money. Finding ways to accomplish your investment goals and to sleep comfortably at night is what it’s all about.

So, to recap, your overriding objectives are to:

• avoid catastrophic losses;
• protect ourselves from inflation;
• minimize interest rate sensitivity; and
• free up time to enjoy life.

Your Investment Pyramid

 

Core holdings should make up the base your investment pyramid. Core holdings—precious metals, farmland, foreign currencies—are about survival. Hopefully you never have to touch them. No, I’m not suggesting that you prepare for the apocalypse, but we all need survival insurance. Mentally and practically, it should be separate from your active portfolio.

On the other hand, the investments recommended in the Money Forever portfolio are for income and profit. These investments are meant to keep you going for the rest of your life.

Here are the allocations you should use in today’s market. As conditions change, you may have to make adjustments, but we’ll help you do just that as events unfold.

The Ty Cobb approach uses three investment asset classes:

1. Equities providing growth and income and a high margin of safety;
2. Investments made for higher yield coupled with appropriate safety measures; and
3. Conservative, stable income vehicles.

50-20-30 Equals Bulletproof

 

You can balance yield and safety in today’s market. How safe is the Miller’s Money Forever approach? Bulletproof, in my opinion. And that comes from a former Marine who understands that bulletproof is doggone safe—but nuclear trumps all. There are some cataclysmic events that are effectively impossible for individual investors to predict or protect against. So, unless you’re the “build a nuclear bunker” type, our approach should let you sleep well at night and enjoy retirement with minimal financial stress.

We currently recommend holding 50% of your portfolio in solid, diversified stocks. These stocks should provide dividend income and growth through appreciation. Invest no more than 5% in any single pick, and use a 20% trailing stop loss. This way, the most you can lose on any single pick is 1% of your portfolio. Sometimes we recommend tightening our stop losses on specific stocks—we’ll notify you of those circumstances in a timely fashion.

If you follow the 5% rule, you should have no more than 10 stock positions in this 50% slice of your portfolio.

You might be wondering: Why not just invest in an S&P 500 fund? When the market swings, S&P 500 fund investors will be the first ones headed for the door, with the program traders that short the S&P chasing them out. We got our clue with the “taper caper,” and we want to mitigate that risk.

For the Money Forever portfolio, we searched for solid companies that are not so flooded with investor money that they’ve become interest-rate sensitive. Dealing with our picks individually allows us to limit our positions and set stop losses. We’re better off trading a little bit of yield for the safety of investing in solid companies that are less volatile than the market as a whole.

Catching a peek our Bulletproof portfolio is risk free if you try today. Access it now by subscribing to Miller's Money Forever, with a 90 day money back guarantee. If you don't like it, simply return the subscription within those first three months and we'll refund your payment, no questions asked. And the knowledge you gain in those months will be yours to keep forever.

The article The Ty Cobb Approach to Retirement Investing was originally published at Millers Money.

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How Fed Policy Has Devastated Three Generations of Retirees

By Dennis Miller

One aspect of the American Dream has always been the prospect of enjoying one's golden years in retired bliss. And while everyone knows that the rules of the game have been subject to change over the years, the recent, unprecedented changes in fiscal policy have proved to be a virtual wrecking ball to Americans' retirement dreams.

Over the past few years, the Federal Reserve has moved from simple interest rate manipulation to wholesale market interference with the goal of maintaining bank solvency and equity prices. This steamroller style interference in the markets has had massive consequences. And not just for the Baby Boomers who are now hitting retirement age, but also for their children and children's children—three American generations whose retirement hopes have been left to swing in the wind on a string of broken promises.

Baby Boomers Get Their Risk On

 

The Baby Boomer generation (born 1946 – 1964) is quite used to adjusting to ever-changing conditions when it comes to retirement.

For decades, receiving a pension was what one looked forward to for their old age. But as you can see in the chart below, at least in the private sector that idea has become as extinct as a T-rex.



Its replacement became the 401(k) and the IRA—tax-deferred vehicles that let savers take control of their own retirement, for better or worse.

Granted, Americans have built up a sizable nest egg in these defined-contribution retirement accounts—more than $5.4 trillion in IRAs alone—but the cumulative savings fail to tell the larger story. The dire truth is that Baby Boomers are caught in a trap, simultaneously trying to preserve capital and generate yield through wild market swings like 2000's massive crash, 2008's 30% correction, and 2010's flash crash.

The market's frequent large "corrections" have had a sobering effect on Boomers' investment behavior. In an attempt to avoid the swings while still making money to live off, Boomers have flooded the bond market with money and significantly reduced their stock market exposure.

As you can see in the right-most bars on the graph above, Boomers who are in their sixties today have significantly reduced the weighting of equities in their portfolios over the last decade—much more so than their peers of just 10 years earlier.

It's true that since the bursting of the housing bubble in 2007, major indexes have recovered to a point where anyone who stayed put after the crash should have been made whole again. Yet the actual market participation by the Boomers has been considerably lower—thrice bitten, twice shy—meaning many missed out on the equity market's recovery.

Instead, hundreds of billions of dollars flowed into the bond markets over the past five years, as evidenced by the $50 billion upswing in bond ETF assets in 2012, and the $125 billion in bond-based mutual fund net inflows over the same period.



Following a protective instinct, conservative investors shifted their money from stocks to bonds… at exactly the time interest rates were rapidly falling for most classes of income investments.

Boomers have suffered more losses and settled for lower income than ever before. The double whammy took a serious toll on the retirement dreams of many. But that was OK, because there was always Social Security as a backstop.

It's become increasingly obvious, though, that Social Security is not keeping up with the times.

By tying its payouts to the Consumer Price Index (CPI)—a measure as flawed at predicting actual consumer prices as a groundhog at predicting the weather (a consumer price that doesn't include fuel or food?)—as a net effect, the real value of Social Security payouts has shrunk dramatically.

Here's a chart of official consumer inflation vs. the real numbers calculated by economist John Williams of ShadowStats (he uses the US government's unadulterated accounting methods of the 1980s). While the official number is 2%, real inflation is in the 9% range.



Washington has been cutting Social Security payments for years, just in a way that wasn't obvious to most newscasters and taxpayers—at least not until it was time to collect, as increasing numbers of Boomers now are.

Between the downfall of the pension, Boomers' eschewing of the stock market, and the government's zero interest rate policy, for many Americans retiring in their sixties has become little more than wishful thinking—and a financially comfortable retirement now requires taking significantly more risk than most are willing or able to handle.

Generation X Strikes Out

 

Traditionally, the 45-55 age group has been the most fervent retirement savers, but that has changed drastically in the last 25 years. As you can see in this chart, the most rapid declines in participation rate for the black line (age 45-54) coincide with major dips in the market, such as in 2001 and 2007.



To make matters worse, Gen-Xers (born 1965 – 1980) are also the most debt-ridden generation of the past century.

According to the Pew Research Center, Gen-Xers and Baby Boomers alike have much lower asset-to-debt ratios than older groups. Whereas War and Depression babies got rid of debt over the past 20 years, Boomers and Gen-Xers were adding to their load:

• War babies: 27x more assets than debt
• Late Boomers: 4x more assets than debt
• Gen-Xers: 2x more assets than debt

That situation deteriorated further in the last six years; while all groups lost money in the Great Recession, the Gen-Xers were the hardest-hit.

As Early and Late Boomers struggled with asset depreciation of 28% and 25%, respectively, Gen-Xers lost almost half (45%) of their already smaller wealth. They also lost 27% of home equity during the crisis, the largest percentage loss of the groups studied by Pew.

 

Millennials: Down a Well and Refusing the Rope

 

The effects of a prolonged period of low interest rates on current and near-term retirees are obvious. But the long-term effects on those now in their early years of working and saving may be much greater.

We've all been taught about the power of compound interest. Put away $10,000 today, compounding at 7%, and in 20 years you have about $40,000 and in 30 years nearly $80,000.

As powerful a tool as long-term compounding is, though, nothing can cut the legs out from under it more than saving less early on or earning less in the first few years. Any small change to the input has a drastic effect on what comes out the far end.

The Millennials—those born between 1981 and 2000—are suffering from both right now. It's no secret that interest rates are low, and there is little that their generation, whose oldest members are now in their early thirties, can do about it.

Shrinking interest rates are wreaking real havoc on the Boomers' children, extending the time to retirement for that generation by nearly a decade.

Why would any politician pass legislation to change Social Security eligibility, a measure that usually doesn't bode well for reelection, if they can simply rely on fiscal policy to accomplish the same net effect?
To make matters worse, the years of financial turmoil, a tough post-college job market, high levels of student loans, and numerous other factors have kept most Millennials out of the stock markets.

Millennials are far less likely to open a retirement savings account than previous generations.  According to a recent Wells Fargo survey, "In companies that do not automatically enroll eligible employees, just 13.4% of Millennials participate in the plan."

This is worse even than the number EBRI collected in the graph presented earlier, which still pegged retirement plan participation rates at all-time lows for the 20-something set. Only a small percentage of Millennials are taking even the most basic step toward taking charge of their own retirement.

With their parents and grandparents showing them the failure of the pension system and Social Security first-hand, one would think the opposite might be true. But the numbers clearly show that Millennials are less interested in saving for their future retirement than their parents were.
Having seen it happen to their own grandparents, maybe they are just resigned to the idea that they'll have to work well into their golden years anyway. And who could blame their generation for not trusting the stock markets with their capital after seeing what happened to their parents’ nest eggs so many times during their own childhoods?

The youngest working generation is eschewing investment, at what might be a great cost down the road.

Adapt to Survive

 

Multiple years of shrinking interest rates, thanks to heavy bond buying by the Federal Reserve in its Quantitative Easing program, have taken an immense toll on generations of savers. The increased risk that current and future retirees have to take on to meet their income needs has left many shaken and financially insecure.

As a result, many are now looking to new strategies to make up for the shortfall the Fed's zero interest rate policy has created—shifting their focus from bonds to dividend-paying stocks and adapting as they go along.
Dennis Miller is a noted financial author and “retirement mentor,” a columnist for CBS Market Watch, and editor of Miller’s Money Forever (www.millersmoney.com), an independent guide for investors of all ages on the ins and outs of retirement finance—from building an income portfolio to evaluating financial advisors, annuities, insurance options, and more.  He also recently participated alongside John Stossel and David Walker in America’s Broken Promise, an online video event that premieres Thursday, September 5^th.
 
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6 Successful Trader Things In Common

Welcome aboard Michelle "Mish" Schnieder

We here at the Crude Oil Trader are proud to introduce our newest contributor, Michelle "Mish" Schneider. Mish is well known from her 30 years as an oil/commodities trader as well as being an active hedge fund manager.

And we are lucky enough to have her on board to bring her daily calls to our readers. Make sure you click here to sign up for her "Mish's Market Minute". She will include trade alerts, watch lists, tools, training videos and so much more. Mish's Daily is a concise daily email which gives you insight into what to expect for upcoming short and long term trading opportunities in ETFs that cover the major markets and industry trends.

She is also making her new eBook on swing trading methods available to us.....free of charge.

Just some of the topics she covers in this great eBook are.....

*    Identify (And Trade) Current Market Phases
*    Pinpoint The Most Profitable Time to Trade a Trend
*    Overcome Big Losses And Create Consistent Returns
*    Define Enter And Exit Rules For Maximum Profit
*    Avoid The Common Trader Mistakes That Kill Profits
*     Identify "Super Trends" That Lead to Home Run Trade

And Much More!

So click here and download your copy and welcome Mish aboard!

See you in the markets,
Ray @ The Crude oil Trader

Are you trading with "Only 7 In Your Clip"

Ever watch those cop shows where they run low on bullets? In the middle of a firefight, one of them is down to a clip of slugs. It happens in war movies as well. What is the advice given? Pick your shots and skip the rest. This simply means don’t shoot aimlessly but have your eye firmly on what is probably a sure shot.

Over trading in trading is the problem many people have. Wanting to stack up the wins or recover from some losses is something we have all done or at least want to do. I am sure that many who have their rules down tight still have the urge but don’t follow through.

Obviously, constantly being in the market is a risk. Trade after trade, you never know which is going to be the winner as wins/losses are a random distribution. Having a few trades go in your direction is a good thing but they more you play, the more you may pay. I am not talking commissions only as paying the losses can add up to some hefty account percentage. Taking loss after loss? Unless the dynamics of the market have changed during your losing streak, expect more.

The simple thing to do ( I say simple, not easy ) is trade less and only trade the golden ones. What does that mean? Only take the trades that adhere 100% to your current setup definition.

Think of it this way. I am giving you 7 bullets in a clip. You only have 7 shots to define your week as successful or not. When those 7 slugs are gone, you are out of the action. How are you going to fire these shots to make them count?

If your plan calls for tests of support/resistance plus selling the high/low break of the reversal candle when exceeding 2 pips/ticks/points, do exactly that. Nothing marginal. No guesswork. Either the setup is there precisely as your plan states or it is not.

|Many people go into the heavy psychological reasons behind over trading. The “whys and what” may be great for an academic but solving it is much easier than laying out on a psychologists couch talking about your past. Just don’t do it. Have a rule of 7 bullets in the clip for the week. Walk away when you are empty. Many of you will fight the internal battle…sometimes even physical discomfort but look, we are all adults here. You DO have the power to choose WHAT you DO.

Let’s sum up the exercise. For the next few weeks, limit yourself to 7 trades per week. Pick the shots that fit your criteria exactly, without a shred of difference. This builds a solid habit of following rules and being in control of yourself. Without those, trading will not be something you will succeed at. That is not being dramatic, that is truth.

What some people need is accountability. When you are a member of the Premier Trader University trading program, there are trading coaches there that can assist you with staying true to a plan. With systems that plot out exactly where to enter and exit (even trail your stop), the only true battle you will face is with yourself trying to out think the market.

In the end, you want to be accountable to yourself. That takes time and this exercise can help you do just that.

Posted courtesy of our trading partners at NetPicks.com


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Beating the market with Trend Jumper....from Premier Trader University

Tax Treatment of PFGBest Losses

Our friends at DeCarley Trading are reminding Ex-PFG clients to be sure to properly claim the fraudulent losses on your tax return......


Many of you have been asking about the tax treatment of losses sustained at the hands of PFGBEST. Please see below statement from the CCC:

The IRS has confirmed that victims of the PFGBest fraud can access the optional safe harbor mechanism set forth in Revenue Procedure 2009-20 so that victims can claim their losses as theft losses. Responding to the CCC’s request for guidance, the IRS stated in a letter:

…the PFGBest scheme qualifies as a “specified fraudulent arrangement” within the meaning of Revenue Procedure 2009-20. Thus, investors who otherwise meet the requirements of Revenue Procedure 2009-20 may use the safe harbor, following the procedures as set forth in that revenue procedure.

The full response is posted below, along with the documents necessary to utilize this mechanism. Please note: it is not required that PFGBest victims use this procedure. It may not provide the best solution for your particular tax situation. Claimants in the PFGBest case are urged to consult their tax professionals as soon as practicable to determine if it is appropriate and wise to seek relief under the safe harbor deduction for theft losses. You may need to provide the following documents to your tax advisor:

IRS Response to CCC
Revenue Ruling 2009-09: PDF Version
Revenue Procedure 2009-20:PDF Version
CCC Request to IRS CCC Request to IRS
Wasendorf Plea Agreement Wassendorf Plea Agreement
Wassendorf Judgement Wassendorf Judgement

DeCarley Trading

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1-702-947-0701

www.decarleytrading.com

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