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How To Be A Long-Term Investor In A High Frequency World

Wall Street so far in 2016 has had some insane swings both up and down that have been breaking all historical records, as the inmates are truly running the asylum this year and are totally off their meds while doing it. The main culprit causing this madness are the high-frequency algorithms that are just trading off the bid and ask spreads and now account for 90% of the volume on a daily basis. Thus, it is insanity to try to follow the daily movements of the markets as there is no way you can compete on a daily basis with these machines as they don’t care if stocks go up or go down and have no idea what the underlying companies do that they are trading 1,000 times a second. All they care about is if they can make a penny a trade profit for each of those 1,000 trades they make a second. By doing so, they make $10 a second in profit (1,000 trades), $600 a minute, $36,000 an hour and that comes out to $270,000 a day in profit. So as you can see, these algorithms in total are trading about $90 billion in volume a day so each firm can make around $270,000 profit a day. That’s a pretty penny but the damage it causes to the markets are intense as we get these wild swings. Anyways, these algorithms operate in milliseconds and there is no way to compete against them. The average day trader who tries, on average ends up losing 90% of their assets within three years of starting operations, as there is no way a human can compete against this madness. To combat this, though, you have to become a long-term buy and hold investor and pretty much pay little attention to what the markets are doing on any given day or week. All you need to do is just read the news on your holdings and that’s about it. But you must firstly have a tool that allows you to get the best analysis possible on Main Street. We don’t compete with high frequency algorithms on a daily basis, but instead have our own algorithm, Friedrich, that high frequency computer algorithms can’t compete against, as all they concentrate is on the bid and ask spread, while Friedrich concentrates 99.9% on Main Street. Thus, while high frequency algorithms are buying and selling 1,000 times a second, we are buying and holding until Friedrich tells us to sell, which could be 5 years from now or never. Thus, Friedrich emulates the strategy of Warren Buffett in a sense as that is how I designed him but is extremely high tech. How do I know that high frequency traders are controlling the direction of the market and have it do what they want? Well, Caterpillar (NYSE: CAT ) came out with a report the other day and said it would miss estimates by a ton next quarter, which should have crashed the stock by -20%, as analysts need to reduce their numbers dramatically. Well, the exact opposite happened as high frequency traders decided to crush the short sellers and force them to cover, and Caterpillar actually is doing amazing on Wall Street even though it is getting crushed on Main Street. Click to enlarge How do I know that Friedrich works so well? Well, I designed it to take advantage of the moon craters that these high frequency traders leave in their wake. So instead of getting rid of high frequency traders, I now welcome them as their destructive behavior actually creates bargains for us like we saw with our recent purchase, Ryman Hospitality (NYSE: RHP ), which we bought cheap after it was hammered and now is skyrocketing because its management is elite and the company is a virtual monopoly. Click to enlarge About a month ago, I tested a Chinese ADR to see if Friedrich works just as well internationally as it does in the USA. Click to enlarge As you can see, it is a Chinese auto dealership and the stock was $67.73 and fell to $16.09, but it actually scored a “6” on Friedrich in early February and was selling at $18.23. Thus, Friedrich recommended it to be a strong buy and just a month later it is now up +53.54% . Click to enlarge The Friedrich Datafile for Bitauto Holdings (NYSE: BITA ) that I created today; as you can see, it is no longer a “6” but is a “4” now, but still has a long way to run. In that Datafile, you will also see that we added a new row called “Super Three Sell Criteria” right under the Super Six rows. We are still in beta testing, which I will spend the weekend doing, but come Monday all future lists will also tell everyone when to “SELL” . How well does it work? Well, just look at the Datafile for BITA in your attachment folder and you will see that in 2014, it triggered an automatic sell at $88.18. Thus, that sell trigger would have had you sell when the Wall Street price was $89.11 and you would have not only got out at the top but would have avoided seeing the stock price of BITA being attacked by high frequency traders, who brought it down to $16.09. Thus, you would have avoided losing -81.94% in just a year and then would have gotten a Super Six buy signal at $18.23 and been up +53.54% in just a month. So just as Donald Trump says that he loves his protesters, we now love high frequency traders as they complement our own more powerful algorithm, Friedrich, as they create opportunities for him. Such results cannot be expected to happen every time, but in backtesting it, I could see some wonderful results. Hopefully, after beta testing the Super Three Sell Criteria, we will be able to launch on Monday and have all Datafiles include it from now on. Thus, in our constant effort to make Friedrich as user friendly for the pro as well as the novice investor alike, we have Friedrich basically giving you an opinion on when to BUY and then when to SELL, and when we expand internationally and are fully automated on that end as well, Friedrich will be an all seeing monster, with the ability to tell investors from all over the world when to buy and when to sell, and more importantly, when to stay in cash when markets are overvalued. Thus, we have “Extreme Capital Appreciation through Extreme Capital Preservation”. Thus, as you can see, having Friedrich in my hands, I no longer try to predict what the market will do but just concentrate all my attention on Main Street and in waiting for buy signals from Friedrich. It is my belief that if Main Street is in serious trouble, eventually it will show up on Wall Street. I find that the Federal Reserve, the bureaucrats and corporate CEOs are all lying all the time and are cooking the books. Want proof? This is what came out from the SEC this week. Click to enlarge For those of you who have been with me for some time, you know that I have been screaming from the rooftops about how non-GAAP reporting results in very bad behavior by management, analysts and the press as the Pro-Forma reporting is actually fiction and even Warren Buffett wrote about it in his latest Annual Letter to Shareholders as his biggest concern. “Wall Street analysts often play their part in this charade, too, parroting the phony, compensation-ignoring ‘earnings’ figures fed them by managements,” Buffett said. “Maybe the offending analysts don’t know any better. Or maybe they fear losing ‘access’ to management. Or maybe they are cynical, telling themselves that since everyone else is playing the game, why shouldn’t they go along with it. Whatever their reasoning, these analysts are guilty of propagating misleading numbers that can deceive investors.” ~ Warren Buffett Thus, I am happy that the SEC will finally address this corruption. Friedrich is already GAAP ready, so you will actually see what a company is actually doing on Main Street when you use any of our Friedrich Datafiles as it is “AS IS” reporting. The markets have come back in the last couple of weeks as the following game is being played by management and by hedge funds taking advantage of the following phenomenon: There is such a thing on Wall Street called a “black out period” where for 5 weeks during earnings season companies and management cannot buy their stock back, so the crash of January was caused by this black out. Well, when the black out was lifted CEOs went hand over fist to buy back stock, borrowing at extreme levels to do so. This forced the shorters to cover and the rest is history as even oil shorters covered as well and that is why oil has rocketed as well. So for about 20 weeks of the year, companies cannot buy back their stock and for 32 weeks they can. This, of course, causes the wild market swings that we saw this year, as in January, there was the black out going on, and thus, there was no backstop to stop the selling. Then when the black out stopped in February, every CEO and their mother went and bought their stocks, borrowing insane levels of money and putting each firm’s balance sheets in serious trouble. The reason Friedrich cannot find anything to buy is because the debt on Main Street is insane and the prices on Wall Street are so overvalued as no one does any research anymore and people are just buying and selling without any clue what they are doing. With the Federal Reserve lying to us that Main Street is doing great a few months back, Friedrich knew they were lying as he sees what results each company is reporting on Main Street and was not believing a word of it. Well, just this week the Federal Reserve came out and said that the economy was not doing as well as they previously thought, so they did not raise rates. Now when someone tells you that things are bad, do you rush out and buy stocks or do you logically hold off and use caution? Well, hedge funds took the “bad news as good news” and bought anything that was not tied down. Unfortunately, this bad behavior is starting to catch up with the hedge fund industry, as 979 hedge funds closed operations in 2015 and 864 closed in 2014. This is all because these hedge fund portfolio managers basically do zero analysis as a group and just take massive risks with their clients’ money. Bill Ackman, who is the poster boy for terrible analysis and high risk, is down -26.4% this year on top of the -20.5% that he lost in 2015. When his main holding Valeant (NYSE: VRX ) fell -56% in one day earlier in the week, he lost -$764 million of his clients’ money in just one day! So as you can see, hedge funds are closing down as their clients are losing tons of money due to their doing little, if any, analysis and being totally reckless with their clients’ assets. In just two years 1,843 hedge funds closed down operations and those were flat years. Imagine what will happen when the trap door opens and the markets finally get hit? As for the government, the numbers by the Fed are cooked as well, and this is mainly because of ObamaCare, as many people cannot work more than 29 hours at one job otherwise the business owner will need to pay into the system. For example, if I were to decide to go work 5 jobs at 8 hours a week in each, I would be counted five times in the government’s jobs report. So those forced to work two to three jobs so their employers don’t pay ObamaCare tax are the reason the unemployment rate is only 5%. So as you can see, with everyone cooking the books at extreme levels, you can see that this will end badly one day. But investors have no clue what they were doing because you would imagine with Donald Trump and Hillary Clinton looking like they will compete against each other for the Presidency, both are going to cause massive changes to the international business environment by using tariffs and going after the drug industry. But instead of being concerned about all this and selling stocks, investors are just piling in because their neighbor is and thus we have HERD MENTALITY! DISCLAIMER: This analysis is not advice to buy or sell this or any stock; it is just pointing out an objective observation of unique patterns that developed from our research. Factual material is obtained from sources believed to be reliable, but the poster is not responsible for any errors or omissions, or for the results of actions taken based on information contained herein. Nothing herein should be construed as an offer to buy or sell securities or to give individual investment advice.

Fed Rate Hike On The Table Again: 5 Finance Mutual Fund Picks

The Federal Reserve had raised interest rates for the first time in almost a decade in December and assured that it would hike rates four times this year, provided there are signs of a strengthening labor market, inflation rises to the target level of 2% and the financial markets remain strong. However, the continuous slump in oil prices, weak global economy and volatile financial markets since the beginning of the year raised doubts as to whether the Fed will be able to fulfill its commitment. Nevertheless, Friday’s upbeat jobs report reinforced the notion that the labor market is firming, which puts Fed rate hikes in play. An uptick in inflation data and rise in consumer spending levels also kept rate hikes in the cards. Additionally, the broader markets regained momentum in the last three weeks after a rebound in oil prices from its 12-year low ebbed deflationary concerns. China’s stimulus measures, on the other hand, raised hopes of a much stable global economy, which would, in turn, contain the volatility in the broader markets. While these encouraging facts aren’t probably enough to push the central bank to raise rates this month, it could bolster the case for a rate hike in the upcoming meetings this year. A large number of economists and some Fed officials also expect the central bank to continue hiking rates this year. Given these positive vibes, it is profitable to invest in financial mutual funds that are positioned to benefit from subsequent lift-offs. These funds also boast strong fundamentals and solid returns. Upbeat Jobs Data The jobs data painted a solid picture of the labor market. The U.S. economy added 242,000 jobs in February, handily beating the consensus estimate of 194,000, according to the Bureau of Labor Statistics (BLS). The tally was also considerably higher than January’s upwardly revised job number of 172,000. Meanwhile, the unemployment rate in February remained unchanged at 4.9%. Further, the unsparing U-6 rate that includes the unemployed, the underemployed and the discouraged dipped to 9.7% in February from 9.9% in January, its lowest level since May 2008. The labor force participation rate also increased to 62.9% last month, the highest level in almost a year. Moreover, the report found that wages went up 2.2% in the past 12 months. Even though it increased at a slower pace compared to the previous month, it is still consistent with a tightening labor market that is viewed by the Fed as one of the major criteria for a rate hike. Underlying Inflation Picks Up, Spending Rises This surge in hiring followed the Commerce Department’s report that showed a rise in inflation. The Fed’s preferred gauge, the personal consumption expenditures index (PCE), increased 1.3% in January from year-ago levels. The so-called “core” inflation that excludes food and energy prices came in at a solid 1.7%, much closer to the Fed’s desired target. Moreover, consumer spending levels increased at the fastest pace in eight months this January. Retail sales are also off to a good start this year, indicating strength in consumer spending, which accounts for more than two-thirds of U.S. economic activity. These reports increase the likelihood of a rate hike soon. Broader Markets Rally The markets have also showed signs of stability in recent times. Oil prices bounced back from their record low in mid-February, which eventually boosted the broader markets. Signs of decline in U.S. production and continuous talk about freezing output by the major oil producers were cited to be the reasons behind the oil price surge. Positive developments in China also fueled investor sentiment. The recent stimulus measures by the People’s Bank of China (“PBOC”) to address concerns over the country’s recent economic slowdown boosted investor sentiment. The PBOC reduced the reserve requirement ratio by 0.5% to 17%. 5 Finance Mutual Funds to Invest In If the broader markets continue their winning streak, the Fed will have to raise rates this year. Additionally, a pick-up in the inflation rate, rise in consumer spending levels and encouraging nonfarm payroll reports are also paving the way for a rate hike as early as possible. Fed Vice Chairman Stanley Fischer had already told the National Association for Business Economics on Monday that inflation may be “stirring,” which suggests that he might want rates to increase in the near future. Richmond Fed President Jeffrey Lacker had also said that ongoing strength in the labor market warrants rate hikes this year. A survey by the National Association for Business Economics on Monday showed that almost 80% of economists expect a Fed rate hike this year at least once. The CME Group’s FedWatch tool expects that there is a solid 53% chance a hike could come as soon as November, while it projects that there is almost a 50% chance of a rate hike in September. Separately, the Bank of America Merrill Lynch Global Research stated last Friday that Americans can witness two interest rate hikes this year and three more next year. Given that there is a fair chance of a rate hike this year, it will be prudent to invest in finance mutual funds. Financial companies, including banks, insurers and brokerage firms, are likely to be among the biggest beneficiaries of the rate hike. Here, we have selected five such finance funds that boast a Zacks Mutual Fund Rank #1 (Strong Buy) or #2 (Buy), have positive 3-year and 5-year annualized returns, offer minimum initial investment within $5000 and carry a low expense ratio. John Hancock Regional Bank Fund A (MUTF: FRBAX ) invests a large portion of its assets in equity securities of regional banks. The fund’s 3-year and 5-year annualized returns are 12.1% and 10.1%, respectively. Its annual expense ratio of 1.26% is lower than the category average of 1.54%. FRBAX has a Zacks Mutual Fund Rank #1. Fidelity Select Banking Portfolio No Load (MUTF: FSRBX ) invests a major portion of its assets in securities of companies principally engaged in banking. Its 3-year and 5-year annualized returns are 8.7% and 7.9%, respectively. The annual expense ratio of 0.79% is lower than the category average of 1.54%. FSRBX has a Zacks Mutual Fund Rank #2. Schwab Financial Services Fund No Load (MUTF: SWFFX ) invests the majority of its assets in equity securities issued by companies in the financial services sector, which includes commercial banks, insurance and brokerage companies. The fund’s 3-year and 5-year annualized returns are 7.8% and 7.1%, respectively. Its annual expense ratio of 0.9% is lower than the category average of 1.54%. SWFFX has a Zacks Mutual Fund Rank #1. Fidelity Select Insurance Portfolio No Load (MUTF: FSPCX ) invests a large portion of its assets in securities of companies principally engaged in property, life or health insurance. Its 3-year and 5-year annualized returns are 12.8% and 11.4%, respectively. The annual expense ratio of 0.81% is lower than the category average of 1.54%. FSPCX has a Zacks Mutual Fund Rank #1. Franklin Mutual Financial Services Fund A (MUTF: TFSIX ) invests a major portion of its assets in securities of financial services companies. The fund’s 3-year and 5-year annualized returns are 8.9% and 7.4%, respectively. Its annual expense ratio of 1.44% is lower than the category average of 1.54%. TFSIX has a Zacks Mutual Fund Rank #1. Original Post

5 Economic Charts Help Investors Understand Trump And Sanders

Investors should be capable of asking a very simple question: If the domestic economy is performing admirably, why are Americans fed up with established politicians on both sides of the aisle? On the Democrat side, a 74-year old white male who admires socialism has inspired more voters than the prospect of the first female president in the country’s history. In the Republican corner, an unconventional billionaire and self-proclaimed wave maker has promised to restore America to greatness – he is trouncing competition on the nationalistic notion that America has lost its five-star status. Along these lines, Real Clear Politics reports that two-thirds (66%) of the electorate believe the country is on the wrong track. Only 28% believe the country is moving in the right direction. It follows that the anti-establishment allure of socialism and nationalism tends to thrive when a country’s economy is frail. Of course, many insist that the U.S. economy is in fine shape with admirable job gains, a vibrant consumer and a healthy business segment. The problem with the assertion? The last 15 years of data portray a very different picture. For example, since 2000, fewer and fewer Americans enjoy home ownership – therefore, fewer and fewer benefited from surging real estate prices on ever-decreasing borrowing costs. Similarly, fewer Americans in the prime age demographic (25-54) are participating in the labor force. For all the “pleasant chatter” about low unemployment, millions and millions of working-aged citizens are no longer being counted or compensated. Along these lines, here are five economic charts that investors might want to consider when deciding upon their asset allocation in a contentious election year: 1. American Households Owe… Big Time . Total household debt hit $12.1 trillion in the fourth quarter of 2015. That’s only a fraction below the all-time record of $12.7 trillion reached in the third quarter of 2008. Between the first quarter of 2003 and the third quarter of 2008, debt grew at an astonishing pace of roughly 74%. That bears repeating. Total household debt rocketed 74% in just five-and-a-half years. Since the debt surge occurred at a time when the Federal Reserve was raising its overnight lending rate – since it occurred when the 30-year mortgage remained in a relatively stable range of 5.75%-6.75% – debt servicing became increasingly difficult. Debt servicing became near impossible when wages did not rise as quickly and when home prices stopped appreciating. It killed the “cash-out refi” game. And the Great Recession wasn’t far behind. One would think that a lesson had been learned about the insidious nature of debt. And yet, instead of deleveraging to reduce overall debt obligations, households have taken the Federal Reserve’s ultra-low interest rate bait. Can households service their debts better when a 30-year mortgage is closer to 4% than when its closer to 6%? All things being equal… yes. Sadly, the capacity to service mortgages and other debts is not merely a function of current rates, but also a function of future rates, household income and cost of living adjustments. It follows that when household income growth only amounts to 26% since 2003 – when real income adjusted for inflation actually declines (e.g., soaring medical costs, rising food prices, etc.) – the 66% surge in total debt since 2003 takes on unsavory dimensions. Why? The Federal Reserve may once again create circumstances where borrowing costs either rise or remain range-bound at a time when inflation-adjusted wages stagnate and home prices cease to climb. Once again, households would struggle to service their debts. 2. Americans Earn Less Than They Did In 2000 . Imagine working your tail off for the last 15 years. Your household income on a nominal basis is higher than it was back then, but your money does not buy what it did at the start of the 21st century. Are you going to feel that the country is on the right path? Are you going to believe those who trumpet 2% annualized gross domestic product (NYSE: GDP )? On an inflation-adjusted basis, middle class households today are taking home somewhere in the neighborhood of $56,746 per year. That is less than it was at the inception of the financial collapse ($57,798). Even more disturbing? Households are bringing home less real income than they did after the recession in 2001-2002 ($57,905). No growth in household income since 2000 and a whole lot of growth in household debt. Thank the powers that be for ultra-low interest rates, right? 3. Millions Priced Out Of The Home Ownership Dream . Twenty years ago, extraordinary stock market gains and genuine labor force participation growth in high quality, high paying jobs made Americans feel more wealthy. Households began trading up, while first time home-buyers flush with cash entered the real estate market. There was more. In 1995, government regulators created new rules for determining whether a bank was meeting the standards of the Community Reinvestment Act (NASDAQ: CRA ). Banks now had to prove that they were making enough loans to low- and moderate-income borrowers. Suddenly, home-ownership rates began skyrocketing. There was a minor flattening out period during the tech wreck of 2000 and the 2001-2002 recession. However, with the Fed slashing overnight lending rates to 50-year lows, the precipitous drops in mortgage rates, as well as the existence of “no documentation”/”negative amortization” loans, home-ownership rates kept right on ascending. Click to enlarge Real estate sales peaked near 2005, prices peaked by the end of 2006. And the “fit hit the ceiling fan” by 2007. Since June of 2009, however, the U.S. economy has been expanding. One might have expected home-ownership rates to rise or level out. Instead, fewer Americans own homes (on a percentage basis), whether it is attributable to stagnant inflation-adjusted income or higher property prices or unfavorable debt-to-income ratios. Keep in mind, this trend is happening alongside record-low mortgage rates. It does not require a leap of faith to suggest that millions of additional renters contribute to economic angst and a dissatisfied electorate. 4. Employment Growth Is Slower Than Population Growth . U-6 Unemployment at 9.9% is far higher than the 8.5% U-6 Unemployment at the onset of the Great Recession in November of 2007 – the 9.9% unemployment rate is actually on par with how Americans felt AFTER the 2001-2002 recession, when U-6 lingered around 10%. In essence, the jobs picture has only recovered to a place that is similar to recessionary times (10%), as opposed to non-recessionary times (8.0%-8.5%). On the one hand, there’s reason to be pleased with the progress of bringing U-6 Unemployment back from 17% at the worst of the Great Recession. On the surface, then, progress is certainly progress. The difficulty in declaring victory in the jobs arena is the fact that nearly one out of five 25-54 year-olds who are actively looking for work remain unemployed. Specifically, we have an 81% participation rate in the key 25-54 demographic. This participation rate is far more dismal than it was during the 2001-2002 recession – it is not even as strong as the 83%-83.5% participation during the Great Recession. In sum, payroll growth that averages 200,000 per month can pull down an unemployment rate. Yet it is insufficient with respect to a population that is growing at a faster clip. That is, companies hire only enough to keep up with modest demand whereas discouraged workers in the labor force are stuck as “extras” in the growth of the population. They’re missing, they are not counted. Can you blame Americans for feeling that there aren’t enough job opportunities for them? 5. The Government’s Debt Is Our Burden . The national debt recently surpassed $19 trillion. Implicitly, Americans understand that there is something very wrong with the number. If it was $6 trillion at the start of the century, and it was $9 trillion near the end of 2007 when the Great Recession began, then how can the country’s economy be humming if it needed $10 trillion of stimulus to get it humming? According to U.S. Debt Clock at USdebtclock.org , the debt each citizen owes is close to $59,000. The average household – not the average person – brings in approximately $57,000. Try to imagine having a credit card balance that is larger than your income stream. (And that’s for a family of 1!) A four-person household might bring in $57,000, yet owe $236,000. Crazy, right? Well, some estimates may be a little more friendly by removing the Federal Reserve’s ownership of U.S. Treasuries from the equation. The way the graphic below presents it, each child born today has an obligation of $42,759. Straight Outta Nutsville. Naturally, you’re free to believe that the federal debt simply does not matter because low interest rates make it possible for the Federal government to service its debt obligations. And you’re free to decide that America just needs to keep paying the interest – we don’t actually have to pay the debt back in its entirety. In fact, worse case scenario, the Federal government can just print money like the Federal Reserve did with its electronic credits in quantitative easing (QE). Fair enough. Still, there comes a point when rates cannot truly be lowered much further. Even negative interest rates would have a lower bound. The implication? Lower percentages of participation in the labor force, record debt levels at the household level as well as the federal level, stagnant wages and declining home-ownership are tell-tale signs of economic trouble. Americans feel it… that’s why many have chosen to support Bernie Sanders or Donald Trump. The stock market has been feeling it too. On the one hand, investors have been breathing a sigh of relief that the S&P 500 SPDR Trust (NYSEARCA: SPY ) has come back out of correction territory. How bad can things really be if SPY is a stone’s throw from record highs? Yet most investors recognize that a pragmatic fear of higher borrowing costs, a realistic concern about the potentially toxic debts of commodity companies, a lack of wage growth for consumers and the potential for the world economy to drag on the domestic scene have combined to create volatile price swings. What’s more, these things provide perspective on the popularity of political outsiders like Sanders and Trump. Disclosure : Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.