U.S. Markets turned down sharply last Friday after the July nonfarm payroll revealed the highest unemployment rate since 2021, catching many by surprise.(If you had read my Monday, July 29 newsletter last week, you would have already known we were in a Wave 4 down period and would have been aware of the targets).Many stocks were absolutely battered, including Intel.No sector was left untouched.Yields fell, and the TLT rallied strongly.But you knew all this was about to happen – you had been forewarned.
The US dollar depreciated against all major currencies, with particularly steep declines against traditionally risk-off currencies like the Swiss franc (CHF) and the Japanese yen (JPY).In response to this data, markets are now pricing in steep rate cuts – as many as 150 basis points – from the Federal Reserve by year’s end.( I said earlier in the year that the slowdown in the economy would show up in the second half of the year and steamroll its way through the economy like a ball falling down a hill, gathering momentum as it fell, and this is exactly what is showing up in the data now – the economy is slowing faster than most realize, and the Fed is where it was when it went to raise rates -slow to the party - and will now be expected to act aggressively.)
All Aussies will be watching the Reserve Bank on Tuesday.No change is expected, but many are hoping for a rate cut.
Economic data points from China, including the trade balance and inflation figures, will give some insight into an economy that is still struggling post-pandemic.
I am not suggesting you buy any of the stocks listed above at this time.I am merely showing you what the bank is focused on.We hold three of these stocks in our portfolio:Caterpillar, Amazon and Microsoft.
Earnings: Costco Wholesale, Warner Bros, Discovery, Occidental Petroleum, Ralph Lauren, CVS Health, Hilton Worldwide Holdings, Walt Disney Company
Thursday, August 8
8:30 a.m. Continuing Jobless Claims (07/27)
8:30 a.m. Initial Claims (08/03)
10 a.m. Wholesale Inventories final (June)
9:30 p.m. China Inflation Rate
Previous: 0.2%
Forecast: 0.3%
Earnings:Gilead Sciences, Akamai Technologies, Take-Two Interactive Software, News Corp, Paramount Global, Expedia Group, Martin Marietta Materials, Eli Lilly
Friday, August 9
8:30 a.m. Canada Unemployment Rate
Previous: 6.4%
Forecast: 6.4%
MARKET UPDATE
S&P 500
Correction sell-off in progress.Support zone = between 5,265 – 4,950.Sustained break of 4,950 would probably see a much deeper sell-off toward the late 4,500’s.
GOLD
If gold can hold $2,350 area, the metal could advance to the mid $2,500’s.A break of the latter level would see gold rallying toward the $2,650 zone.However, if gold does fall below the $2,300 area, we could see a fall toward $2,260 or even $2,200.
BITCOIN
As I write this Post Sunday after/evening, I am watching the price action of Bitcoin, which is now sitting at $54,190.00. There is strong support at the $50k level, and at the $40k level.
PSYCHOLOGY CORNER
Herd Behaviour
This occurs when investors follow the actions of the majority, often leading to trends and bubbles.Herd behaviour can result in significant swings as large groups of investors buy or sell simultaneously.
Exploiting Herd Behaviour
By understanding how herd behaviour drives market movements, investors can position themselves to benefit from the irrational actions of the crowd.For example, contrarian investors often buy when others are selling and sell when others are buying.
QI CORNER
AUSTRALIAN CORNER
It’s the Olympics, so we must celebrate our athletes’ achievements.
Australian, Saya Sakakibara, wins the gold medal in BMX and dedicated it to her brother.
Is the economy slowing much faster than most realize?
Let’s check out the ISM data.
(ISM) Institute for Supply Management
The ISM manufacturing index, also known as the purchasing managers’ index (PMI) is a monthly indicator of economic activity based on a survey.The Purchasing Managers’ Index (PMI) is an indicator of economic health for manufacturing and service sectors.
The ISM release was weak overall, but it is the employment component that should be the talking point. If we cut the GFC and the pandemic from the picture – this is the weakest the series has been in over 20 years.The trend is very clear.
This is a sign of cooling domestic growth conditions.A recessionary breeze is starting to pick up, and if this is the case, one rate cut is not going to dent this trend.
Downbeat economic data is making gold upbeat
The metal has found support against a backdrop of slowing economic data, central bank buying, weakness in the dollar, and tensions in the Middle East.Going forward, expect a new range between $2,500 and $2,700 as the metal navigates a turbulent backdrop. Keep scaling into GLD on pullbacks and SLV.
Good news may not be far away for Aussies
Relief could be on the way for mortgage holders across the country as experts tip a rate cut might be on the table before Christmas.
Inflation figures released on Wednesday aren’t considered high enough to warrant a rate hike.
More than 80% of the surveyed economists predict the cash rate will be held at 4.35% when the board meets next week.
Australia’s core inflation rate, which excludes food and energy, has slowed enough to almost rule out another rate rise.
Some, however, are not ruling out a rate hike.University of Sydney economist, James Morley is among 19% of economists predicting an interest rate hike is likely to arrive in August.
While Mr Morley is anticipating a rate increase in August, he still believes that rate cuts will begin later in the year and well into the New Year.
Homeowners are waiting patiently for relief, as almost 50% of homeowners have struggled to pay their mortgage in July.
(EXAMINING THE TECHNICALS IN NVIDIA (NVDA) AS WE NAVIGATE THE MID-SUMMER STOCK SWOON)
July 31, 2024
Hello everyone,
The long-awaited summer vacation has arrived for the stock market. Stocks are at the mercy of investors who decided one day that they wanted to own something different rather than just technology stocks.So, the sell button was decidedly pushed en mass, and funds then poured into a variety of other sectors, most notably small caps, and interest-sensitive sectors, which include home builders, health, and energy stocks. Of course, this movement has a lot to do with rate cuts that are not too far away.
But also, the tech sector is taking a healthy break.This sector has run very hard at what seemed like 12-cylinder horsepower. Eventually, a rest is needed.We are witnessing a broadening of the market as we head into the final months before the U.S. election takes place.
One of the stock favorites in the tech sector is Nvidia (NVDA).It is one stock that has definitely been on a sprint to the stars and is now taking a much-needed rest. Using Inside Edge Capital charts, let’s take a deeper dive into how that stock looks from a technical perspective, and where we might see significant support levels.
Firstly, let’s look at the 200-day moving average, shown in the dotted blue line in the chart below. You will notice that it is trending higher, and the stock price is still well above the 200-day MA.The stock is still in a well-established up trend.Since it broke above the MA in January 2023 NVDA is still around 540% higher since that move even after the recent sell-off.
There is a possibility that NVDA falls into a consolidation pattern as we wait for earnings at the end of August, which would allow the moving average to trend higher closing the gap.
The uptrend support line (red-dashed) should intersect the stock price at around $96-$93 depending on the continued rate of share price decline.$96 is also this year’s break-out level, and it should now offer support.
Let’s not forget volume.This identifies the seller’s conviction in this sell-off.The 50-day MA of the daily volume totals is clearly in a decline since April.In other words, the urgency of selling is waning.
Based on the fundamental outlook of continued strong earnings growth and the technical outlook, the stock should not get too far below the mid-$90s before the low is found.
On this chart, I have drawn support and trend lines, showing where the stock price may find lows.I have also drawn the trend line showing declining volume since March 2024.
(INVESTORS WILL BE WATCHINGCLOSELY AS THE MARKET NAVIGATES AN EVENTFUL WEEK)
July 29, 2024
Hello everyone,
Week ahead calendar
Monday, July 29, 2024
10:30 a.m. Dallas Fed Index (July)
7:30 p.m. Japan Unemployment Rate
Previous: 2.6%
Forecast: 2.6%
Earnings:On Semiconductor, McDonalds
Tuesday, July 30, 2024
9:00 a.m. FHFA Home Price Index (May)
9:00 a.m. S&P/Case Shiller Home Price Indices (May)
10:00 a.m. Consumer Confidence (July)
10 a.m. JOLTS Job Openings (June)
9:30 p.m. Australia Inflation Rate
Previous: 3.6%
Forecast: 3.8%
Earnings:Advanced Micro Devices, Live Nation Entertainment, Public Storage, Electronic Arts, Starbucks, Match Group, Microsoft, First Solar, Extra Space Storage, Caesars Entertainment, Corning, Howmet Aerospace, Procter & Gamble, Pfizer, Merck & Co, Stanley Black & Decker, PayPal.
Wednesday, July 31, 2024
8:15 a.m. ADP Employment Survey (July)
8:30 a.m. Employment Cost Index (ECI) Civilian Workers (Q2)
9:45 a.m. Chicago PMI (July)
10:00 a.m. Pending Home Sales Index (June)
2:00 p.m. FOMC Meeting
Previous: 5.50%
Forecast: 5.50%
2:00 p.m. Fed Funds Target Upper Bound
Earnings:MGM Resorts International Allstate, Albemarle, Lam Research, eBay, Qualcomm, Western Digital, Meta Platforms, Etsy, Norwegian Cruise Line Holdings, Hess, Boeing, T-Mobile, Marriott International, GE Healthcare Technologies, Generac Holdings, Kraft Heinz, Mastercard, Ingersoll Rand.
Thursday, Aug 1, 2024
8:30 a.m. Continuing Jobless Claims (07/20)
8:30 a.m. Initial Claims (07/27)
8:30 a.m. Unit Labor Costs preliminary (Q2)
8:30 a.m. Productivity SAAR preliminary (Q2)
9:45 a.m. Markit PMI Manufacturing (July)
10 a.m. Construction Spending (June)
10 a.m. ISM Manufacturing (July)
7:00 a.m. UK Rate Decision
Previous: 5.25%
Forecast: 5.00%
Earnings:Apple, Clorox, Intel, Amazon.com, Booking Holdings, Motorola Solutions, Microchip Technology, Kellanova, Hershey, Moderna, Air Products and Chemicals.
Friday, Aug 2, 2024
8:30 a.m. Jobs Report (July)
Previous: 206k
Forecast 185k
10:00 a.m. Durable Orders (June)
10:00 a.m. Factory Orders (June)
Earnings:Exxon Mobil, Chevron
This week the global interest rate landscape could shift significantly as the Bank of Japan, FOMC, and Bank of England convene to determine their respective rates.The BoE is anticipated to reduce rates by 25 basis points, marking its first rate cut since 2020.Conversely, the Bank of Japan might increase rates from 0% in an effort to bolster the yen, following suspected currency intervention last week which resulted in USD/JPY dropping 2.3% - its largest weekly decline since April.
After the market volatility last week, earnings results may well sway an already sensitive market into a chop and churn behavior pattern, especially with the backdrop of the Fed interest rate decision on Wednesday, and the Jobs Report on Friday.For the week ahead, 171 S&P500 companies, along with 10 Dow members, report results.
The market is expecting no change in rates on Wednesday from the FOMC, but it may clarify whether rate cuts are slated for September, aligning with trader expectations. The Jobs Report may show unemployment figures ticking up.
Amazon.com Inc. will be one to watch.It can show investors both sides of the coin, so to speak.Amazon’s e-commerce network can offer details on the state of online spending for both consumers and businesses.And its other segments provide a look into AI and cloud competition and entertainment.
Also on my radar is Starbucks.Earnings results will show the spending habits of consumers and any shifts in behavior toward discretionary expenses.
The Paris Olympics has begun.Spectators and television audiences saw a rain-soaked opening ceremony. (Many spectators at the opening ceremony complained they couldn’t see anything, and so chose to go home). Australia has been successful in many events, most notably swimming and most recently in the kayak singles final where Jess Fox won gold.
MARKET UPDATE
S&P 500
Since recording a Bearish outside reversal week in mid-July, the S&P 500 has been undergoing a significant corrective decline. From an Elliott Wave perspective, the market is interpreted to have completed its extended Wave 3/ advance to signal the start of a broad Wave 4/ correction.Support should be found between 5, 265 and 4,954.Only a sustained break below key 4,954 support (the prior 4th wave low) would instead signal that the market is correcting its entire uptrend from 3,492 – 5,670, to then risk a deeper sell-off back toward the late 4,500’s.
GOLD
Gold is still completing an irregular corrective wave structure.Resistance = around $2400/$2440.There is a risk of a deeper correction below $2365/$2350 support toward the $2290/$2275 support area and even $2225/$2200, before exhaustion.If that move eventuates scale into GLD to build your holdings here.It may be a similar story with silver.If silver follows a similar pattern, scale into SLV to build your position here as well.
BITCOIN
Strong resistance in the low $70k’s is likely to contain strength in the short term, which may prompt a correction back to the low $60s/high $50s in the near term.If this eventuates, scale into Bitcoin on this corrective move.
WHAT IS…
Temporal Discounting
…is the common experience of valuing more immediate rewards over those in the future.In Behavioural economics and neuroeconomics, temporal discounting, or hyperbolic discounting can help us appreciate how our financial decisions are not always rational.Understanding the phenomenon, also known as time discounting or intertemporal choice, can help us make better decisions.
We all know that sometimes we make poor financial decisions, and even unhealthy lifestyle choices, but understanding temporal discounting helps us not only gain greater awareness of our financial and lifestyle choices but also develop insight into the extent it affects our emotional well-being when we opt for short-term gratification, which can ultimately lead to regret or guilt later.
At its core, temporal discounting is about how we perceive the value of time.
Let’s look at an example here.Imagine you have the choice of receiving $100 today or $110 in a month.Many people are going to take the $100 today even though the future number is greater.Many people perceive the $10 as less valuable because it is delayed or seen as so far away.Temporal discounting relates to how we value future rewards or punishments.
Understanding hyperbolic discounting sheds light on why we make illogical or self-defeating choices.Whether it’s skipping a workout, wasting money on a rash purchase, or opting for fast food over a healthy meal, the appeal of immediate gratification frequently overshadows rational decision-making.
WE OVERVALUE IMMEDIATE REWARDS AT THE EXPENSE OF LONG-TERM GOALS
Delaying Gratification is Challenging
The tendency to focus on the now often puts an individual/family at risk of not achieving important long-term goals.Why are people behind on saving for retirement?
The following data shows results from a Franklin Templeton Retirement Strategies and Expectations Survey conducted in early 2022. The sample size was 2,029 adults 40 years of age and older and weighted by age, gender, geographic region, race, and education.
The survey also showed that many of those nearing retirement are ill-prepared.As illustrated in the chart here, 37% of those aged 60-69 have between $0-$100K saved for retirement, and 35% have nothing saved at all.
QI CORNER
AUSTRALIAN CORNER
40-50-year mortgages
Lower deposit requirements
These are a couple of the notions being tossed about by big four bank Australian CEOs to help fix the nation’s housing crisis.
Commonwealth Bank group executive retail banking services Angus Sullivan said, “improving housing affordability is a complex issue and there’s no silver bullet, but product innovation is key, as are partnerships between the public and private sectors.”
(CCI) 8/$90-$95 call spread 10% (profits taken on this trade on July 25)
(BRK/B) 8/$405 - $415 call spread 10%
(DE) 8/$330-$340 call spread 10%
(IBKR) 8/$110-$115 call spread 10%
(SLV) 8/$23-$25 call spread 10%
(JPM) 8/$190-$195 call spread 10% (profits taken on this trade on July 25)
(DHI)8/$150-$155 call spread 10% (trade added on July 25)
Profits were taken on (TSLA) and (NVDA) put spreads this week.
METHOD TO MY MADNESS
The cool June CPI was a game changer, according to John, assuring a slower economy and lower interest rates.
Leadership flipped from big tech to industrials, precious metals, financials, and bonds.They will all be active for the rest of 2024.
The first interest rate cut in five years in September is now a certainty.
All interest rate sectors catch huge bids.
US dollar gets dumped and could stay weak for years. (So, you should be looking to go long these plays FXA, FXB, FXE.Scale in by buying small parcels of shares at different prices.You are then building a good position)
Technology stocks will recover after a correction lasting months.
Energy gets dumped on recession fears if the Fed acts too slowly.
Buy stocks and bonds on dips.
THE GLOBAL ECONOMY – SLOWING
Fed Beige Book shows a slowing economy, assuring a September interest rate cut.
Inflation plunges to 3.0%, a new two-year low.
US Manufacturing jumps, up 0.4% in June.
US Retail sales hit a three-month high, up 0.4% last month.
Chinese GDP disappoints at 4.7% in the second quarter, missing their 5.0% target.Inflation comes in weak, at only 0.2%.
PPI rises 0.2%, up 2.6% year over year.
Consumer sentiment is at a three-year low at 66.0%, down from 68.5 as the economic slide continues.
STOCK – SUMMER CORRECTION
Money pours into equities.According to LSEG data, investors bought a net $21.7 billion worth of U.S. equity funds during the week.
Bank earnings beat, and the stocks are rising in expectation of falling interest rates, with (JPM), (BAC), and (C) reporting.Wells Fargo (WFC) was disappointed again.Buy banks on dips which have been on a great run all day.
Small cap stocks poised for major chart breakouts, after underperforming for years.Remember, 60% of these are regional banks which would love to see lower interest rates.
Netflix grows subscribers, following a crackdown on password sharing ebbed and viewer attention moved to summer sporting events including the Euro soccer tournament.
CrowdStrike flaw crashes global transportation cancelling 4,000 flights in the U.S. alone, costing airlines billions.
New China chip bans send Big Tech stocks tumbling.
(Buy NVDA if it gets to $100 and/or deep in the money call spreads/LEAPS.AMZN is cheap – buy.ROM – buy pre-election.CAT, DE, and Home builders – all buys on dips.ITB – a great candidate for a LEAPS trade on a pullback).
BONDS – HOLDING UP
Cold CPI assures September interest rate cut.This sends all fixed-income securities soaring.
Bonds holding gains even in the face of a summer stock correction.
Bonds see the biggest cash inflows since 2021.
The top ticker symbols are (SLRN), (BRLN), (BKLN), and (FFRHN).
Buy (TLT), (JNK), (NLY), (SRRN) and REITS on dips.
FOREIGN CURRENCIES – GOODBYE DOLLAR
Dollar falls against all currencies, including the Japanese Yen.
A coming decade of falling interest rates makes the dollar a big “SELL”.
The prospect of falling interest rates means that the greenback is toast.
It’s all in response to the blockbuster negative CPI.
Buy (FXA), (FXE), (FXB), (FXC).
ENERGY & COMMODITIES – RECESSION FEARS
U.S. Oil production hits an all-time high, as are energy company profits, and is producing more oil than any country in history.
The world record was set by the U.S. in 2023, averaging about 12.9 million barrels per day.And this exceeded the Trump-era record, an average of about 12.3 million barrels per day in 2019.
U.S. production of dry natural gas = new high in 2023, as did U.S. crude oil exports.
Overproduction has crushed prices and made energy the worst-performing stock market sector of 2024.
Gasoline demand has been in long-term secular demand since 2019.
Replacement by EV’s and the shift out of cars into planes are big factors.
PRECIOUS METALS – NEW HIGHS
Gold hits new all-time highs.
Silver takes a break from the economic slowdown and enters a sideways range.
Miners have started to outperform metals for the first time in years, indicating an increase in investor leverage.
A global monetary easing is at hand.
Buy precious metals on the dip because rates have to fall eventually.
Miners are expanding their operations and ramping up production as prices for the precious metal climb to decade highs.
Buy (GLD), (SLV), and (WPM) on dips.
REAL ESTATE – WAITING FOR RATES
Single Family Home starts hit 8 month low, down 2.2%.
Higher mortgage rates hurt, suggesting the housing market was likely a drag on economic growth in the second quarter.
The report from the Commerce Department on Wednesday also showed permits for future construction of single-family houses dropped to a one-year low last month, indicating that any anticipated rebound in activity if the Federal Reserve cuts interest rate in September as expected, could be muted.
This market needs actual lower rates to pick up, not just hopes of one.
Record Prices but Scarce Sales Volume.U.S. housing is unaffordable but aggregate demand continues to push prices higher.
(CONSUMERS ARE BEING SWINDLED IN THE BANKING WORLD)
July 24, 2024
Hello everyone,
Savings account traps:why billions are disappearing
Research shows that Australian adults are losing an average of $1500 per person every year through using the wrong savings accounts.
The research paper by financial services technology company Upworth says consumers collectively miss out on about $30 billion in interest annually, often because of confusing accounts, information overload, or overconfidence.
It says cash deposits currently pay between 0% and 5.75%, and almost three-quarters of bonus interest savings accounts do not pay the bonus rate because savers don’t meet the conditions required.
Upworth illustrates the fact that complex product design often makes it hard to compare products.The headline interest rate is a very different concept from the effective interest rate an individual earns. Base rates, bonus rates, and introductory rates all come in the mix.
Upworth co-founder Maxime Chaury said people with deposits were lending money to their banks, and banks were trying to minimize their borrowing costs.
Chaury points out one of the easiest ways to do this is to make their product offering confusing and have as many low-interest-rate savings accounts as possible and as few high-interest-rate savings accounts.And what that does is increase the chances you will end up with a low-interest rate account.
Chaury says that people had psychological biases that resulted in them earning less interest.
This included overconfidence, loss aversion, and preferring the status quo.Information overload also played a role.We all know that when we are faced with too many options and an overload of information, we are typically overwhelmed.And rather than engage with any complexity, we are likely to default to inaction.And the banks are counting on that behaviour.
Chaury said conditions attached to many accounts – such as minimum monthly deposits or limited withdrawals – could drastically reduce interest, while introductory interest rates were only temporary, typically three to six months.
Banks understand many people will never change their savings account, despite the rate dropping significantly after the introductory period.
Savings rates are littered with fine print (that many people never read), designed to limit the amount of interest a bank has to pay its customers, from balance-based rate tiers, age minimums and maximums, and monthly bonus rate conditions.
There are millions of big bank online saver customers who signed up for an introductory rate five or ten years ago, which gave them a higher interest rate for the first few months or so and have now been earning next to nothing for years because they haven’t been bothered to switch to a more competitive account.
Australians aren’t the only ones confused about their Savings Accounts.
The largest cybersecurity breach in Australian history
Cybersecurity experts say the highly sensitive data of 12.9 million Australians, stolen from eScripts provider Medi Secure, has already been sold on the dark web and is up for sale again.
MediSecure confirmed in May it was the victim of a ransomware attack in 2023 and last week revealed the scale of the breach, which puts it among the largest in Australian history.
Data stolen includes names, phone numbers, addresses, and Medicare numbers, as well as sensitive medical information such as which drugs people had been prescribed and why they were taking them.It was previously unclear if the data had been sold, but cyber threat intelligence analysts say there’s a strong indication that at least one sale has taken place.
(A GLOBAL PORTFOLIO + REAL ASSETS MAY BE THE BEST INVESTMENT FOR THE FUTURE)
July 22, 2024
Hello everyone,
The week ahead calendar
Monday, July 22
8:30 a.m. Chicago Fed National Activity Index (June)
Earnings:Verizon
Tuesday, July 23
10 a.m. Existing Home Sales (June)
10 a.m. Richmond Fed Index (July)
Earnings:Visa, Enphase Energy, Capital One Financial, Texas Instruments, Tesla, Alphabet, Freeport McMoRan, Lockheed Martin, Sherwin-Williams, Comcast, Coco-Cola, Kimberly-Clark, General Motors, United Parcel Service, Philip Morris International, GE Aerospace
Earnings:O’Reilly Automotive, Chipotle Mexican Grill, International Business Machines, Las Vegas Sands, Ford Motor, Align Technology, Lamb Weston, Next Era Energy, AT&T, GE Vernov.
This week we will get insight into the economy from more than half the broad market index.Results from earnings this week should give investors valuable information about the economy, and the consumer.
We have had data showing a slowing economy, and inflation easing, but corporate results and commentary could give investors a very transparent lens into how the consumer is really traveling in this economy.
On the investor side of the fence, that could determine what happens to markets in the short to medium term.
Last week, the S&P 500 and the Nasdaq dropped as we saw investors pivot away from the mega-cap tech leaders into the market laggards, such as small caps, healthcare, and energy.This rotation out of the mega-cap tech stocks has been a long time coming, so expect some volatility as the dust settles from this stampede out of one sector and into several others.
To say that the market is due for a rest would be an understatement.Expectsome corrective movement as we digest near-term market antics and political turmoil.
Macroeconomic data is also reported this week, which will give the investors some clarity on how the Fed may act in the near term. Let’s be mindful that there is potential for the economy to deteriorate much faster than most people are expecting right now.If this comes to pass, and the Fed is too slow to act, the market may give an abrupt response.
There have been significant events in the world over the last week or so.The attempted assassination of Mr Trump, an IT outage caused by CrowdStrike, and today, July 21, Mr Biden withdrawing from the Presidential race.Even though it is mostly economic data, company earnings, and Fed policy that moves markets, we must also consider the policies of political parties and their potential effects on equities/sectors and the dollar moving forward.
Let’s look at the classic 60/40 portfolio split.
According to Bank of America (BofA) analysts, over the past decade, the Vanguard Balanced Index Fund (VBINX), which basically follows the classic 60/40 formula, has returned 8.24%.
The 60/40 portfolio provided its classic diversification benefit only when inflation was running at less than 2%.That encompasses much of the two decades of the current century, a limited span on which much of the historical data supporting the 60/40 is based.
International diversification makes sense given the strong preference for a weak dollar by both Republican and Democratic parties.Republican policies show that they see a strong dollar as a hindrance to U.S. manufacturers and a subsidy for cheap imported goods for U.S. consumers. The Democrats continue to back tariffs.Neither side has shown support for free trade or a stable dollar.
This landscape means that we are likely to see less stability and diminished purchasing power.And with such a backdrop, it will be important to look at global equities, not just U.S. stocks, and real assets, most notably gold (which we have seen hitting new highs recently) and cryptocurrencies (which are likely to face fewer regulatory constraints), rather than bonds with fixed claims on dollars losing value in real terms.
In other words, regardless of investors’ political preferences, they must accept that the future is unlikely to resemble the past.Inflationary trade and budget policies are favoured by both Democrats and Republicans, differing only in degrees.BofA analysts contend that’s bad for long-term bonds, but favourable for inflation hedges such as commodities.
History draws a telling picture.BofA analysts point to the entire post-World War II period which showed that a 60/40 portfolio hedged with the latter portion in commodities did better than with long-term Treasury bonds.And going back even further to the 1919 era, it was found that bonds were a drag on returns, with a 60/40 portfolio returning 8.8% per annum versus 10.3% for U.S. equities.
However, four decades of falling interest rates and inflation after 1980 resulted in bonds providing a substantial contribution to balanced portfolio returns.Traditional conservative policies promoted by former President Ronald Reagan were part of this era.These have been replaced by progressive or populist policies of the current left and right.
Global diversification should be the catchcry.Let’s not forget to point out that Vanguard’s 60/40 portfolio is globally diversified.The 60% equity portion is 36% in broad U.S. market stocks and 24% in non-U.S. stocks.The 40% bond portion is 28% in broad U.S. fixed income and 12% non-US., nondollar bonds.This mix provides a significant hedge against the decline in the dollar’s value.
Vanguard Balanced Index Fund (VBINX) weekly chart
PSYCHOLOGY CORNER
Balance Trading Risks
It is a common psychology of trading to take positions in the stock market even when there is no meaningful opportunity.Such traders can’t resist the temptation to play in the market and end up losing money.
A successful trader, however, understands that capital protection is a more important objective of trading than profit maximization.Profit maximization can be achieved only after the capital is protected.A successful trader knows when and what to trade as well as he knows when not to trade.
A trader trades mindfully using safety measures like stop loss to protect capital and follows a disciplined trading plan to balance risks while minimizing losses.
WHAT IS…Capital Gains Tax?
Tax on gains(profits) you make from the sale of capital assets, like stocks and other investments.Under U.S. tax laws, if you hold an investment for more than a year before you sell it for a gain, you may qualify for a long-term capital gains tax rate.Gains from investments held for less than a year are usually considered short-term capital gains and are taxed as ordinary income (which is usually a higher tax rate than long-term capital gains).
MARKET UPDATE
S&P500 – The stock market has reached an interesting stage.The S&P500 made a Bearish “Outside Reversal” week which cautions us to prepare for a possible trend change.However, it is too early to call an end to this bull market.From an Elliott Wave perspective, the S&P500 can be interpreted to have completed a Wave 3 advance (from the 3,809 low of February 2023), to signal the start of a Wave 4 correction.Sustained break below 5,440 would confirm this correction is underway.
Wave 4 correction would likely find support between 5,265 -4,954.
There remains a final Wave 5 advance ahead before this bull market is complete.Only a sustained break below 4,954 would frustrate this outlook.
GOLD – Gold’s selloff last week from the $2,484.00 high can be viewed as corrective.In the short term, resistance now lies at $2,420/$2450.There is a risk of a test of the $2350/$2325 support area over the coming days.
BITCOIN- Bitcoin looks to have completed an irregular corrective structure on its July 5 low of $53,500.An advance appears in progress which should target the low $70k area.Support lies around the low $60s.
AUSTRALIAN CORNER
An alarming number of Australian homeowners may be forced to sell their homes, if interest rates stay elevated into next year.According to the Bureau of Statistics, about 3.3 million Australian households have a mortgage.Should rates stay at current levels (4.35%) into 2025, 165,000 households “would have to sell”, a survey found.The unemployment rate nudged up 0.1% to 4.1% in June.Many economists believe unemployment needs to be half a percentage point higher for inflation to cool.
Adding rooftop units is like making money from air
According to Warren Livesey, Airspace development is growing in Australia.Livesey finds old buildings around Sydney that have the capacity to hold a home or two on top and checks their zoning requirements.
In Sydney alone, the industry is valued at $150bn, with the potential to build homes on top of 90,000 strata buildings.Livesey says that the average strata rooftop is about 300 square metres.
Livesey points out that in Sydney there are about 30 million square metres of unused roof space in urban areas that could be used for housing.He goes on to say that there are about 100 million square metres in Australia above our stratum retail buildings that can be used for new rooftop homes.
Rooftop space is about $2500 per square metre, but in some areas, including Sydney’s eastern suburbs, it could go as high as $10,000.
Livesey explains that if you live in an area where you can build up to 12.5 metres and the building only goes to nine, you have that 3.5 metres of airspace that can actually be sold off and be rebuilt by somebody else.
It’s an industry that is still relatively secretive in Australia.Building owners request buyers’ agents, like Livesey, as well as developers and the new property owner to sign non-disclosure agreements on the deals.
Basically, owners don’t want anyone to know. The fear is that if the neighbours found out they would complain and object to the deal before a development application could be approved by a council.
Livesey has been selling between three and four spaces a month.He runs buyairspace.com.au.He set up the business after he had spent 10 years selling airspace in New York, London, and Paris.
He sees a big opportunity to build thousands of homes on top of existing buildings across Australia and says the fact that the homes are more sustainable is proving popular.
Most projects were for modular homes – homes that are built off-site and often take little to put together once on site – with cranes lifting them on top of properties room by room.
This is what makes them more sustainable – modular homes are built in controlled environments where manufacturers have more control over what products are used and how they are built.
If you want to find investments that are cheap, look abroad.
Europe’s Stoxx 600 index and the Japanese Nikkei 225 hit record highs earlier this year, along with the S&P500.But the Stoxx and Nikkei are trading at much more attractive valuations.FactSet data shows the Stoxx is trading at 15 times trailing 12-month earnings, while the latter has a multiple of 23.The S&P500, meanwhile, has 27 times earnings multiple.
This creates an opportunity for investors to find attractive investments at a cheaper valuation.
Europe has shown resilience in the face of recessionary concerns over mounting Russia-Ukraine tensions and a potential energy crisis.
The Stoxx 600 has gained nearly 8% in 2024, while the UK’s FTSE 100 is up 6%.
Here are exchange-traded funds to look at:
iShares MSCI Japan ETF (EWJ): The fund is up 11% year to date and charges 0.5% in fees.
iShares Core MSCI Europe ETF (IEUR):The ETF has climbed 6% in 2024.It has an expense ratio of 0.11%.
Franklin FTSE United Kingdom ETF (FLGB): The fund has gained 8% this year and has an expense ratio of 0.09%.
iShares Core MSCI Europe ETF (IEUR) Weekly chart
Franklin FTSE United Kingdom ETF (FLGB) Weekly chart
Portfolio Update
Options:
On the 7th of February, I recommended options and stock buys on Microsoft, Exxon Mobile, and Barrick Gold.
(XOM) 105/110 and 110/115 out of the money LEAPS expiring on January 17, 2025.These are well in the money, so if you would like to take profits on these, do so.I know there is still time left in these positions, but when the market is giving you a gift, why not take it? The profit is only realized when the money is taken off the table.
I recommended 15/17 January 17, 2025, out of the money LEAPS in (GOLD).These are also in the money.It is up to you when you choose to take profits from this position.I do see gold continuing to rally.
LEAPS were also recommended on Microsoft (MSFT), but strikes were not specified.Again, it is up to you, when you take profits here, but just be mindful that the position was created when Microsoft was $403.66, so any position would be well in the money.
Australia has quietly become a “food superpower” over the past decade, as local farmers have increased their output by more than 90%, according to billionaire paper, packaging, and recycling magnate Anthony Pratt.
The Australian food production industry now represents 6% of Australia’s gross domestic product (GDP).
Over the past 10 years, 1200 food factories have been built across the nation and food exports have more than doubled from $29 billion to $59 billion.
Beef exports to China over the period have grown 200%.
More than one in four Australian manufacturing jobs are in food and beverage manufacturing – and food is by far the largest manufacturing sector in our economy.
Australia has secured 11 new free-trade agreements (FTA) in recent years, including the landmark Australia-India FTA that came into effect in December 2022.
It now has 18 FTAs in place, which has helped diversify the nation’s food exports at a critical time.
Australian barley exports to ASEAN countries have tripled in the past three years and Australian lobster exports to ASEAN have quadrupled.
$300 million worth of premium wine is now also being sold to ASEAN countries for triple the price Australia would get in the American market.
Cash-free charging trial for EV drivers
One of Australia’s largest electric car-charging networks will test drive cashless technology to remove another barrier to adopting the transport technology.
Evie Networks announced plans to introduce “Auto charge” technology to more than 80% of its network on Wednesday, to be tested by a select group of users before a widespread roll-out in August.
The technology comes in addition to other industry efforts to reduce drivers’ reliance on apps at charging stations, including RFID cards that work across networks.
Evie Networks public charging head Bernhard Conoplia said the company invested in the technology after drivers expressed concerns about the complexity of charging vehicles at public facilities.
Thirty percent of Australian drivers have expressed a lack of confidence about mastering EV charging-related technology, which is why Evie Networks has prioritized activating the Auto charge feature.
The feature, which must be set up in the company’s app, is compatible with electric vehicles from brands including Tesla, BYD, MG, Volvo, and Polestar, and automatically recognizes the vehicle when users plug in a charging cable.
The feature eliminates the need to use the Evie Networks app to identify the location of the charger or an RFID (radio frequency identification) credit card to tap on a reader.
The technology would be made available to all users at 83% of its 255 charging locations in early August.
Electric cars made up eight percent of new vehicles sold in Australia during June, according to the Federal Chamber of Automotive Industries, and represented more than 50,000 vehicle sales in the first six months of the year.
Australian real estate stocks you should be watching as the Fed cuts and bond yields fall
UBS says Australian real estate stocks could benefit from expected US interest rate cuts, despite local rate cuts not anticipated until 2025.
UBS says names like Stockland, Scentre Group, and Goodman Group are attractive amid a falling yield environment.
UBS analysts said that Stockland is currently trading at a price-to-earnings ratio of 13 and is expected to deliver a 3-year EPS compound average growth rate of 7%.
Earnings:SLB, American Express, Halliburton, Fifth Third Bancorp, Regions Financial, Huntington Bancshares
PREPARING FOR THE INEVITABLE RATE CUT
With interest rates predicted to fall, the bond Universe is looking increasingly attractive.
Falling interest rates tend to be a good thing for the bond market because interest rates and bond prices historically share a strong, inverse correlation.
Three niches of the bond market – government bonds, investment-grade corporate bonds, and high-yield bonds – look more attractive due to the ongoing shift in interest rate expectations for the second half of 2024.
Morningstar recently published its 2024 outlook on interest rates and projected that the federal funds rate could drop as low as 3.75-4.00% by the end of 2024.Morningstar expects that downward trend to persist into the next year, forecasting that interest rates could drop to a range of 2.25-2.50% by the end of 2025.(I have been forecasting this for some time in my Zoom monthly meetings).
Like Morningstar, PIMCO also expects rate cuts this year.It sees 75 basis points of net cuts in 2024, which implies that the federal funds rate will drop to roughly 4.50% by the end of 2024.
So, now we understand that it is almost a done deal that the Fed will cut this year, and maybe more than once, what should we be looking at to capitalize on this landscape?
Bond products to consider in 2024
One that immediately comes to mind is the iShares 20 Plus Year Treasury Bond ET (TLT).
You should be buying the TLT and/or buying LEAPS one or two years out.If you want to be conservative, buy in the money LEAPS, if you want to be more aggressive, buy out of the money LEAPS.
As shown here in this chart, the expected returns for government bonds, aggregate bond funds, corporate bond funds, corporate bonds, and high-yield bonds have trended above their long-term averages.
Source: Morningstar
The current yield-to-worst (YTW) for each of the above-listed bond categories has climbed well above its respective long-term average.
Yield-to-worst is a projection for future returns and represents an estimate of the lowest possible yield for a bond by averaging returns across a wide range of different scenarios.Investors use yield-to-worst as a risk management tool to evaluate the potential downside risk associated with a particular bond investment.
But we always must remember, that no investment is without risk. If you are very risk-averse, look at investment-grade bonds, which are typically issued by financially stable and reputable organizations with access to considerable financial resources.
Two well-known ETFs that focus on high-quality corporate debt include the iShares iBoxx Investment Grade Corporate Bond ETF (LQD), and the iShares 5-10 Year Investment Grade Corporate Bond ETF (IGIB). Investors and traders looking for exposure to international corporate bonds can also consider the Invesco International Corporate Bond ETF (PICB).
In addition to high-grade corporate bonds, investors and traders may also consider high-yield bonds. These bonds, often referred to as junk bonds, are a category of corporate bonds that have credit ratings below investment grade. And this means that the companies issuing these bonds have a higher probability of defaulting on their interest rates or failing to repay their principal at maturity.
The potential returns are higher for this category of bonds due to their elevated credit risk.If you are risk-averse, this category might not be your cup of tea.
Two well-known high-yield ETFs include the iShares iBoxx High Yield Corporate Bond ETF (HYG) and the SPDR Bloomberg High Yield Bond ETF (JNK).Investors and traders who are interested in internationally focused high-yield bonds can also consider the iShares International High Yield Bond ETF (HYXU).
Returns for bond ETFs since rate expectations started to shift. (returns from Oct. 19, 2023, through Jan. 3, 2024):
iShares 20 Plus Year Treasury Bond ETF (TLT), +19%
iShares iBoxx Investment Grade Corporate Bond ETF (LQD), +12%
Invesco International Corporate Bond ETF (PICB), +10%
iShares 5-10 Year Investment Grade Corporate Bond ETF (IGIB), +9%
iShares iBoxx High Yield Corporate Bond ETF (HYG), +7%
SPDR Bloomberg High Yield Bond ETF (JNK), +7%
iShares International High Yield Bond ETF (HYXU), +7%
Considering the above returns, TLT’s performance outshines all bond categories.It is theoretically less risky than corporate bonds and high-yield bonds, and arguably the best bet for investors and traders who want exposure to the bond market but also want to minimize risk.
TLT tracks the performance of U.S. Treasury bonds with maturities of 20 years or more.As such, TLT provides investors with exposure to long-term U.S. government debt, which is generally considered one of the safest assets in the fixed-income universe.
Of course, I am not saying that significant rallies in corporate and high-yield niches will not occur.But they carry more risk than TLT.Ultimately, it is up to each investor and trader to choose the product that matches their risk appetite and outlook.
The usual narrative we hear all the time is that you should be weighted 60% in equities and 40% in fixed income. I believe it is a personal choice dependent on many factors, as every person’s situation is unique.Ultimately, as investors, we want capital preservation, but we also have to embrace risk as part of the investing process. Your risk appetite and your goals, as well as many other factors, will determine your weighting of equities and fixed income.Diversification amongst sectors is key.
iShares 20 Plus Year Treasury Bond ETF (TLT) Weekly chart
iShares iBoxx Investment Grade Corporate Bond ETF (LQD) Weekly Chart
iShares iBoxx High-Yield Corporate Bond ETF (HYG) Weekly Chart
MARKET UPDATE
S&P 500
Uptrend closing in on targets.Support lies at 5, 525/5,4440.Only a break of these levels would signal that a correction has started.
GOLD
Uptrend in progress.Support lies around $2,400.Initial target is the mid-400s and then onto upside targets around $2,550.
BITCOIN
It is too soon to say that Bitcoin has completed an irregular corrective structure.At the present time, support lies around $58,000/$57,000.If Bitcoin can hold this level, we should see it continue its upside rally.
US DOLLAR
The dollar may be on the verge of starting its journey south.You want to be scaling into Pound Sterling (FXB), Euro (FXE), and Aussie Dollar (FXA).If you trade FOREX and are experienced,look for a good entry point to go long the Euro and Pound Sterling, either by reading the candlesticks or bar chart price action.The charts tell the story.
RECORDING OF JUNE 2024 JACQUIE’S POST ZOOM MEETING
How many times have you sold your position before the stock hit your stop loss level?If so, why did you place your stop-loss order to begin with?
I could also ask the question; how many times have you sold a position before your TP (Take Profit level)?
Did you think the stock was not acting as you anticipated?Your wise decision to cut the trade often happens right before the market takes off.If this has happened to you, it is one of the most frustrating events that can occur in the market.
Your analysis was correct. In the end, the market gave you what you expected.Why did you second guess it? It seems likely that you were not willing to accept the randomness of the market and the fact you could lose money.
Until you truly learn to accept the risk, you will interpret the noise of the market as a potential threat and will find some way of rationalizing to yourself that you must exit the trade now.
QI CORNER
Tesla originally purchased $1.5 billion worth of #BTC in January 20221, just weeks after this exchange below, and after a few rounds of selling it now holds roughly 10,000 of the original 43,000 bitcoin purchased.
This single formula in the image represents the entire monetary policy of Bitcoin, now and forever.You don’t need to fully understand it to use it.You can easily create a private wallet and buy Bitcoin and receive Bitcoin in exchange for your goods and services.Bitcoin is a vehicle which highlights the flaws in our financial system.What does it mean to you?
MY CORNER
Alex and I played pool quite recently.He beat me 4 games to 0.My only consolation was the games were close.(I will have to keep practicing).
There is a very high degree of risk involved in trading. Past results are not indicative of future returns. MadHedgeFundTrader.com and all individuals affiliated with this site assume no responsibilities for your trading and investment results. The indicators, strategies, columns, articles and all other features are for educational purposes only and should not be construed as investment advice. Information for futures trading observations are obtained from sources believed to be reliable, but we do not warrant its completeness or accuracy, or warrant any results from the use of the information. Your use of the trading observations is entirely at your own risk and it is your sole responsibility to evaluate the accuracy, completeness and usefulness of the information. You must assess the risk of any trade with your broker and make your own independent decisions regarding any securities mentioned herein. Affiliates of MadHedgeFundTrader.com may have a position or effect transactions in the securities described herein (or options thereon) and/or otherwise employ trading strategies that may be consistent or inconsistent with the provided strategies.
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