Tag Archives: ideas

Crash Imminent Warning Removed By NIRP Crash Indicator

The NIRP Crash Indicator’s signal changed from its pre-crash or crash imminent Orange to its Yellow cautionary reading level on the close of the market on May 9, 2016. The signal had gone from Yellow to Orange prior to the U.S. stock market’s opening on April 28. During the eight day period that the indicator’s reading was Orange ended on May 9, 2016, the S&P 500 went from 2095.15 to 2058.69, a decline of 1.7%. The signal went to Orange from Yellow because the exchange rates of the yen versus both the euro and the US dollar had stabilized during the week ended May 6, 2016. Additionally, both the euro and the dollar appreciated by more than 1.1% versus the yen on Monday May 9, 2016. Please note: For the NIPR Crash indicator to change from the crash imminent Orange or a crash Red reading to Yellow requires that the exchange rate between the yen and dollar be stable for an extended period of time or that the dollar and euro advance significantly versus the yen. An increase in the indicator’s reading from Yellow to Orange requires a steady advance or a significant one day advance for the yen versus the dollar. The NIRP Crash Indicator was developed in February 2016, from my research on the Crash of 2008. My research revealed the metrics that could have been used to predict the Crash of 2008 and its V-shaped reversal off of the March 2009 bottom. See my Seeking Alpha “Japan’s NIRP Increases Probability of Global Market Crash” March 4, 2016 report. The metrics are now powering the indicator. Information about the NIRP Crash Indicator and the daily updating of its four signals ( Red: Full-Crash; Orange: Pre-Crash; Yellow: Caution; Green: All-Clear) is available at www.dynastywealth.com . Since inception the NIRP Crash Indicator’s signals have proven to be very reliable. Throughout the entire month of March, the signal for the NIRP Crash Indicator had remained at the cautionary Yellow and the S&P 500 experienced little volatility as compared to the extremely volatile first two months of 2016. For the month of March, the S&P 500 increased by 4%. The indicator’s reading went from Yellow to Orange after the market’s close on Friday April 1, 2016 . For the following week ended April 8, 2016, the S&P 500 experienced its most volatility since February of 2016 and closed down 1.5% for the week. The signal’s second Orange reading occurred before the market’s April 28, 2016 open. From the Thursday, April 28 open to the Friday, April 29 close, the S&P 500 declined by 1.2%. The S&P 500 (NYSEARCA: SPY ) and the Dow 30 (NYSEARCA: DIA ) ETFs closing at their lowest prices since April 12, 2016 on April 29. See also my SA post “NIRP Crash Indicator’s Sell Signals Very Reliable for April 2016″ May 3, 2016. The primary metric powering the NIRP Crash Indicator are sudden increases in volatility for exchange rates of the yen versus the dollar and other currencies. The significant appreciation in the yen versus the dollar in 2008 accurately predicted the crash of 2008, and the recent declines of the markets to multi-year lows in August of 2015 and February 2016. In my April 11, 2016 ” Yen Volatility Is Leading Indicator For Market Sell-Offs ” SA post and my video interview below entitled “Yen Volatility Causes Market Crashes”, I provide further details on the phenomenon of the yen being a leading indicator of market crashes. The rationale for the for yen volatility or its appreciating significantly versus the dollar being a leading indicator of crashes is because the Japanese yen and the U.S. dollar are the world’s two largest single country reserve currencies. For this reason, the yen is the best default safe-haven currency utilized by investors during any U.S. and global economic and market crises. When crises unfold, historically the U.S. dollar — by far the world’s most liquid and largest safe-haven currency — is susceptible to dramatic declines until the storm has passed. Savvy investors know that the U.S. is, unquestionably, considered the world’s leading economy and markets. They know that upon a crash of the U.S. stock market, the initial knee-jerk reaction would be a simultaneous crash of the U.S. dollar versus the world’s second leading single-nation currency. The yen is currently the default-hedge currency. Even though the euro, arguably, ranks with the U.S. dollar as the world’s top reserve currency, it is not the preferred hedge against the greenback. The euro is shared by 19 of the European Union’s member countries that have wide-ranging social and economic policies, and political persuasions. For this reason, and also because Japan is considered to be one of the most fiscally conservative countries on the planet, the default currency is the yen. The U.S. dollar does not experience extended crashes versus the Swiss franc and the British pound during times of crises because each of the underlying countries has economies much smaller than Japan’s. From my ongoing research coverage of the spreading negative rates and the devastating effect that they could potentially have on the global banking system, the probability is high that the major global stock indices including the S&P 500 will begin a significant decline by 2018 at the latest. My April 11, 2016 article entitled, “Negative Rates Could Send S&P 500 to 925 If Not Eliminated” , provides details about the potential mark down of the S&P 500 likely being in stages. I highly recommend you also watch my 9 minute, 34 second video interview with SCN’s Jane King entitled “Why Negative Rates could send the S&P 500 to 925”. In the video, I explain the math behind why the S&P 500’s declining to below 1000 may be the only remedy to eliminate the negative rates. The video also reveals some of my additional findings on the crash of 2008. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Best And Worst Q2’16: Financials ETFs, Mutual Funds And Key Holdings

The Financials sector ranks sixth out of the ten sectors as detailed in our Q2’16 Sector Ratings for ETFs and Mutual Funds report. Last quarter , the Financials sector ranked seventh. It gets our Neutral rating, which is based on aggregation of ratings of 38 ETFs and 249 mutual funds in the Financials. See a recap of our Q1’16 Sector Ratings here . Figures 1 and 2 show the five best and worst rated ETFs and mutual funds in the sector. Not all Financials sector ETFs and mutual funds are created the same. The number of holdings varies widely (from 21 to 572). This variation creates drastically different investment implications and, therefore, ratings. Investors seeking exposure to the Financials sector should buy one of the Attractive-or-better rated ETFs or mutual funds from Figures 1 and 2. Figure 1: ETFs with the Best & Worst Ratings – Top 5 Click to enlarge * Best ETFs exclude ETFs with TNAs less than $100 million for inadequate liquidity. Sources: New Constructs, LLC and company filings PowerShares KBW Property & Casualty Insurance Portfolio (NYSEARCA: KBWP ) is excluded from Figure 1 because its total net assets (NYSEARCA: TNA ) are below $100 million and do not meet our liquidity minimums. Figure 2: Mutual Funds with the Best & Worst Ratings – Top 5 Click to enlarge * Best mutual funds exclude funds with TNAs less than $100 million for inadequate liquidity. Sources: New Constructs, LLC and company filings Schwab Financial Services Fund (MUTF: SWFFX ) is excluded from Figure 2 because its total net assets are below $100 million and do not meet our liquidity minimums. iShares U.S. Financials Services ETF (NYSEARCA: IYG ) is the top-rated Financials ETF and Fidelity Select Banking Portfolio (MUTF: FSRBX ) is the top-rated Financials mutual fund. Both earn a Very Attractive rating. iShares Residential Real Estate Capped ETF (NYSEARCA: REZ ) is the worst rated Financials ETF and Rydex Series Real Estate Fund (MUTF: RYREX ) is the worst rated Financials mutual fund. REZ earns a Dangerous rating and RYREX earns a Very Dangerous rating. 595 stocks of the 3000+ we cover are classified as Financials stocks. American Express (NYSE: AXP ) is one of our favorite stocks held by IYG and earns a Very Attractive rating. We previously published a case study outlining how AXP could boost its value by $50 billion by making strategic decisions to boost return on invested capital ( ROIC ). Over the past six years, American Express has grown after-tax profit ( NOPAT ) by 6% compounded annually. At the same time, the company has improved its ROIC from 12% in 2005 to a top-quintile 20% in 2015. However, some short-term issues, which we identify in our case study have left AXP undervalued. At its current price of $62/share, American Express has a price-to-economic book value ( PEBV ) ratio of 0.9. This ratio means that the market expects American Express’ NOPAT to permanently decline by 10%. If AXP can, instead, grow NOPAT by 6% compounded annually for the next decade , the stock is worth $98/share today – a 58% upside. Essex Property Trust (NYSE: ESS ) is one of our least favorite stocks held by REZ and earns a Very Dangerous rating. Essex earns its rating in large part to its misleading earnings. Over the past decade, GAAP net income has grown by 11% compounded annually. However, Essex’s economic earnings , its true cash flows, have declined from $7 million to -$249 million over the same time period. Further highlighting the deterioration of Essex’s operations, the company’s ROIC has halved from 8% in 2005 to a bottom-quintile 4% in 2015. GAAP earnings have propped up shares for too long, and ESS remains overvalued. In order to justify its current price of $225/share, Essex must grow NOPAT by 12% compounded annually for the next 11 years . After a decade of shareholder value destruction, the expectations baked in ESS remain too high. Figures 3 and 4 show the rating landscape of all Financials ETFs and mutual funds. Figure 3: Separating the Best ETFs From the Worst ETFs Click to enlarge Sources: New Constructs, LLC and company filings Figure 4: Separating the Best Mutual Funds From the Worst Mutual Funds Click to enlarge Sources: New Constructs, LLC and company filings D isclosure: David Trainer and Kyle Guske II receive no compensation to write about any specific stock, sector or theme. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Difference Between Value Stocks And Growth Stocks

Analysts like to separate stocks into two categories: value and growth. What is the difference between value stocks and growth stocks, and which style provides better returns? There is no exact definition explaining the difference between value stocks and growth stocks, but each has its own distinct characteristics. In general, value stocks have low price ratios and growth stocks have high price ratios. Value stocks as a whole have been shown to outperform growth stocks over time. Future Expectations The low price ratios of value stocks are a result of investors being cautious about the future of the underlying companies. Similarly, the high price ratios of growth stocks are a result of investors being excited about the future of the underlying companies. While discussing mutual fund investing using either growth or value stocks, Fidelity says the following : Growth funds focus on companies that managers believe will experience faster than average growth as measured by revenues, earnings, or cash flow. The goal of value funds is to find proverbial diamonds in the rough; that is, companies whose stock prices don’t necessarily reflect their fundamental worth. In the stock market, companies are valued based on future expectations. Wonderful vs. Weak If a company’s growth begins to slow down or its profits start to decrease, the result will be a lower share price. Value stocks are typically companies with recently poor operating results and negative outlooks. The weak performance could be due to macroeconomic events or company specific challenges. It could be a temporary setback or a major loss of market share. If a company is growing and its profits are increasing rapidly, the result will be a higher share price. Growth stocks are typically companies with recently phenomenal operating results and bright futures. The wonderful performance could be due to a rising tide in a particular industry or great management of a specific company. If growth stocks are “wonderful” and value stocks are “weak”, how can value stocks be better investments than growth stocks? Value Premium It turns out that human nature causes value stocks to provide better long-term returns than growth stocks. People get too excited about growth stocks and too afraid of value stocks. While discussing the recent trend of investors moving away from value opportunities, Morningstar’s Ben Johnson said : What we’ve seen historically is that it’s exactly this sort of capitulation, this sort of behavioral function that may actually lead to the existence, the creation, the persistence of the value premium. Value exists because there are suckers on the other side of the poker table willing to take the flipside of the value bet. They are betting on growth or something else. Real, true, strong hands at that poker table, in all likelihood will continue for many years to come, to reap the benefits of that value bet, assuming that they are strong hands. The optimism towards growth stocks makes them overvalued. The pessimism toward value stocks makes them undervalued. Investors become overly confident about a growth stock’s future and overly scared about a value stock’s future. Herd Behavior Through a phenomenon called herd behavior, human nature causes a gap to occur between the value of a stock and its price. Herd behavior says that “individuals in a group will act collectively without centralized direction.” In Thomas Howard’s book, Behavioral Portfolio Management , he talks about how following the crowd is an evolutionary trait. It was beneficial at one point but now does more harm than good, especially in investing. Howard says: Doing the same thing as everybody else, the definition of social validation, also made sense thousands of years ago when life was full of danger. Since we lived in small groups then, we depended on others to sense danger and react instinctively. You didn’t want to be the slowest member of the group when fleeing the tiger. In contrast, today we frequently want to take positions different from the emotional crowd as a way to harness the price distortions resulting from collective behavior. Because the stock market is nothing more than a group of individual investors, herd behavior is a common occurrence. No investor wants to be left behind. As prices start climbing, everyone wants to jump on board. This results in the high valuations of most growth stocks. Once prices start falling, investors dump the underperforming stocks in mass. This results in the low valuations of value stocks. It’s important to refrain from following the crowd and to avoid investing in overvalued stocks rather than undervalued stocks. The Difference Between Value Stocks and Growth Stocks A summary of the difference between value stocks and growth stocks is: Value stocks are undervalued, out-of-favor companies with recently poor operating performance and slowing growth. Investors overreact to these stocks and value them lower than they should be. Growth stocks are overvalued, “hot” companies with recently great operating performance and rapid growth. Investors overreact to these stocks and value them higher than they should be. Understanding the difference between value stocks and growth stocks will allow investors to profit greatly over time.