401k Analysis 101

If there was a way you could easily determine when to move the investments in your 401k to the money market option to preserve your gains, you'd want to know about it, right?  It's certainly preferable to listening to me tell you when to get in or out.  If you listen to me, you would have been out of the market since approximately the summer of 2007 and would probably never, ever get back in again.  While you wouldn't make anything on your investments the good news is you wouldn't lose anything either.

It occurred to me that there's a better way.  It's very simple and removes the emotion from your decision and allows you to rationally make these moves.  Best of all, you can do it yourself.  If involves finding a free web site on the Internet where you can put together a daily chart of the S&P 500 and add two exponential moving averages.  Then you simply check your settings say, three times a year at the most and more when certain events like perhaps a riot in a few middle eastern nations or something similar and you can determine all you need to make an informed and rational decision on how to protect your 401k from the inevitable decline that is a virtual certainty.  Someday.

You will need to find a good web site, preferably one that is free that can draw a chart that is similar to this one.  I'll tell you how to do that in a minute.

Weekly chart of the S&P 500 with 10 week and 40 week Exponential Moving Averages (EMA)
Click to enlarge - http://www.freestockcharts.com/

As you can see, over the last 8 years, there have been three sell signals - where you move the assets in your 401k to a money market option and three buy signals, where you move them back into your preferred investments.  When the 10-week (50-day) moving average (the red line) crosses over the 40-week (200-day) moving average (the blue line), you have what is known as a golden cross and it is a bullish signal.  Conversely, when the 10-week moving average crosses under the 40-week moving average, it is known as a death cross and it is a bearish signal.  You can do an Internet search on those keywords to find out more.

So what does this chart say now?  It says sit tight and enjoy the Benron Bernanke money laundering scheme that is propping up the stock market, at least until May when the current QE2 ends.  Then we should be merrily on to QE3 or something similar that will bail out the states.  Or Europe, whichever comes first.  The angle (pretty much straight up) and the degree of separation between the two moving averages pretty much assures us that your investments will keep on ticking for a while longer.

To set up your own chart, here's all you need to do:

1.  Go to http://www.freestockcharts.com/ and sign up for a free account.  They are the best I've seen for free and better than some you might pay for.
2.  Log in so that you can save what you'll be doing.
3.  In the upper left corner, click File and then click Create New Layout.  (You can hover over the border of the left pane and drag that view to the left to give you more chart room.)
4.  Close the lower chart - the volume indicator.  You don't need this.
5.  Type "SP 500 Standard and Poors" and a dialog box will come up.  Sounds strange, doesn't it?  Really, all you do is simply type - but the web page must have the mouse focus.  It works.  Select "SP 500 Standard and Poors"
6.  In my example, the chart defaulted to a 10-minute time frame.  Click the 10 Minute drop list, or whatever time frame yours defaults to and select Weekly.
7.  Click the Add Indicator drop list and select Moving Average.,
8.  A dialog box appears with Price History as its only content.  Select Price History.  (By selecting Price History, you are attaching your new moving average to the price.)
9.  The moving average defaults to 50.  Click on Moving Average 50 and select Edit.
10.  Change the Period to 10 for 10 weeks.  Also change Average Type to Exponential.  You might also want to change the color as well.
11.  Click OK and repeat for the 40-week moving average.  If you didn't change the color for the 10-week, you should change it for the 40-week.
12.  Click File, then Save Layout and give your new chart a name.  (It's also fun to play with it and make the colors the way you want.  Click the Draw button and see all the fun little drawing buttons they supply.)

There.  In 12 easy steps (I'm smiling at that one...) you have now created a tool that allows you to determine the easiest and arguably one of the best ways to protect your hard-earned money.  And it's much better than listening to me!

Happy analyzing!

The $900 Billion Stimulus

The left is throwing a fit over the so-called “tax cuts”, which aren’t really tax cuts but tax-rate cuts. Included is a 2% cut in the employee portion of FICA withholding. All other tax-rates remain the same or were slightly adjusted. If semantics is your thing, then you could say that it is indeed a tax-rate cut, even though tax rates remain the same, because to do otherwise would result in a tax-rate increase.

The right seems to be happy. They got what they wanted. They, along with the rest of the country seem to think that these tax-rate cuts are what we need in a time of recession. While that is true of typical recessions, what we’re currently dealing with - record debt, monetization of debt, global monetary collapse – is anything but a typical recession.

Is it good that we have stopped a $4 trillion tax increase? Or is it good that we just agreed to a $900 billion stimulus bill that isn’t likely to work any better than the previous three? I thought the Republicans hated the idea of stimulus. Whatever, I would stop short of regarding it as the panacea the President is portraying it as. This bill contains up to $900 billion in funding that will have to be borrowed from countries that may or may not approve of the way we are debasing our currency, or to put it in China’s vernacular, “dishonoring our debt.”

With this tax-rate cut we might still be able to continue the scam that is our fiat monetary system if it weren’t for Obamacare. If we could repeal Obamacare sometime in the next few months and if by some miracle Europe gets their financial house in order, then we might temporarily weasel our way out of this mess like we did the housing collapse and the dot-com bust and save the inevitable for some time in the future, possibly when our children/grandchildren are beginning their adult lives.

Even better for the left, although I’m sure they don’t realize it, is that in the end they will be able to make the case when the economy crumbles that “trickle-down” doesn’t work and it must be because “the rich” didn’t put their tax savings back into the economy. Nevermind that "the rich" didn't really get any tax "savings." And they’re likely to get away with it. That’s because this tax-rate cut isn’t going to make a dime’s bit of difference when the cascade of monetary collapse begins in Europe.

Since it won’t make a bit of difference, the best thing to do is to leave the tax-rate increases in place for everybody and swallow what needs to happen, take our medicine if you will.

Recommended reading:
http://www.reuters.com/article/idUSN0761602020101207

http://finance.yahoo.com/news/Debthit-Irish-publish-apf-4008797829.html?x=0&.v=10

Making the Best of a Horrible Bill

“And with so much on the line, it’s time to start doing things differently. That’s why our goal must be to spend these precious dollars with unprecedented accountability, responsibility and transparency.” President Barack Obama

This Tuesday, the President is expected to sign into law a bill that was rushed into passage with about as much obfuscation as one can imagine. (Why is he waiting until Tuesday to enact this "urgent" legislation?) Normally, bills are released in the form of a PDF document that is searchable by certain keywords that normally arouse suspicion. But this time, the Spending Bill, all 1,071 pages of it was released at 1:00 in the morning in the form of a paper document (that can't be searched) with voting in the House scheduled for 10:00 am so that there would clearly not be any time for review. This was obviously done so that those who feverishly poured over the bill couldn’t be as effective in ferreting out nonsense as they normally would. Democrats freely admitted that nobody read the bill they passed.

Mr. President, where’s the “unprecedented responsibility” in that? Is that what you mean by “transparency?” Or do you just think the American people will accept whatever you have to say. By “accountability” do mean the alleged $787 Billion price tag or the real price tag of $3.37 Trillion (over 10 years) as estimated by the Congressional Budget Office?

So here we are about to force upon our children another installment of perpetual debt that will drown our nation and our children. The soap opera continues this week when Secretary Tim the Tax Cheat will ask our children to pay the cost of re-capitalizing our banks, as much as $2 Trillion. His plan includes capital injections to banks, a “bad-bank fund”, funding of consumer debt, and foreclosure mitigation that may include the government picking up the tab for part of some peoples' mortgage payment - I'm not kidding. Each one of these bullet points requires the cooperation of the banks. Yet the Federal Government has infuriated banking executives by dictating what it thinks banks should pay their top people. This is a mistake and this non-stimulus act is mandated by the Spending Bill that will be signed into law on Tuesday.

Geithner’s plan won’t work. Aside from the banks separating themselves from government assistance, Geithner actually believes that private money will come in to buy bad assets. Wouldn’t private money have come in already if there was a market for bad assets? Of course, but Geithner is all but inventing a market where none exists, or claiming one exists that clearly does not.

Geithner’s banking plan may not have a chance. Since the banks are bound by the law described in the “stimulus” bill, and considering how furious they are about this law, it wouldn’t exactly come as a complete shock to see the banks pay back the money from the first TARP funds and dissolve its relationship with the government. Besides, the goal is to “get banks lending again.” I would ask, “To whom?” Banks expect to be paid back and with job losses mounting at historic rates, the American people aren’t in a position to borrow more money whether to buy a house or car or anything else for that matter.

Inflation or deflation?

The case for inflation is obvious. $5 Trillion (or more) over 10 years is extremely inflationary. It took Obama 4 weeks, including this week to accomplish the same debt level it took George Bush 8 years to reach. Don’t forget that the possibility exists for yet another “stimulus” package that might be deemed "necessary" that some economic experts are expecting. Trillions upon trillions are either going to be printed or bonds are going to be sold. All of this is highly inflationary.

However, what most people now realize is that what we’re experiencing is a crisis of credit. We’ve built this house of cards on a mountain of debt and the brain trusts in Washington keep piling on more. They seem to think they can force banks to lend but can they force people to borrow? Lending is a two-way street and our politicians forget that.

We'd prefer to sell government debt in the form of Treasury Bonds. Unfortunately, there may not be the bond market the government thinks there is. When bond investors realize that the government has issued more debt (backed by the taxing power of the United States) than it can handle, investors will flee the bond market. In other words, investors will sell government bonds. That is deflationary. There is nothing the government can do to stop this from happening, especially in this environment where not a week goes by where you don’t hear of tens of thousands of jobs disappearing, further weakening the government’s ability to tax the people of the United States (assuming it wanted to).

In these troubled times deflationary forces trump those that are inflationary, at least for now. That will most certainly change but at least for now and for the foreseeable future, the forces that are in place are that of deflation.

It is not my intention to give investment advice, only to tell you what I’m doing. Forget gold. There are strange things happening with gold and playing gold in either direction could be problematic. In order to make the best of a horrible bill, I’m going to short long term treasury bonds by buying the ETF (Exchange Traded Funds) TBT. Short selling an instrument means to “borrow” the instrument from a broker, sell it on the open market with the expectation that prices will decline. When that decline has reached a predetermined (by the investor) level, shares are “bought back” and returned to the broker for a profit. TBT is a double-inverse instrument that shorts 20-year treasuries. They do this by selling futures each day to an amount that is twice the value of the fund and rebalancing at the end of the day. That means the investor will yield 2% (theoretically) for each 1% decline in the bond market.

With the passage of this so-called “stimulus” bill I believe the US Government has gotten itself in way over its head. I wrote last week that we can’t afford this and as you watch the prices of Treasury Bonds decline in the forthcoming months, you’ll see that the bond market will confirm this is a horrible bill Congress shoved down our collective throats.

Stop the Madness!

The Congress has already passed and the Senate has agreed to a compromise (with the 3 Republicans they need to ensure passage) on a spending bill that comprises 5% as a percentage of our GDP in one act. This precedes debate on another Federal bank bailout bill that will comprise and additional 5% of our GDP. Including the first (seemingly) failed attempt to bail out our banks from their own hubris, we added another (approximately) 5% to the total debt.

We can’t afford this. As of November, 2008 our debt crossed the $10.8 Trillion mark. This debt comprises 71% as a percentage of GDP and does not include the federal guarantees made since last June nor does it include the estimated $2 Trillion in debt between the recently agreed to spending bill and the proposed bank bailout to be debated next week. The following chart shows that we’ve been here before but what is different this time makes this increasing percentage of debt unsustainable.

The Root Cause. On August 15, 1971 Richard Nixon decoupled the US dollar from the gold standard. This began a period where the dollar no longer held an intrinsic value but became worth what the issuer said it was worth, hence a “fiat” currency. This decoupling allowed the US, freed from the fiscal restraints of gold-based currency to issue debt as it pleased, based on the creditworthiness of the issuer. In the ‘70s, ‘80s and ‘90s this wasn’t a problem since the US enjoyed a Triple-A credit rating and each dollar or Treasury Bond was backed by the “full faith and credit of the United States,” and debt to GDP hovered around 30-40%.

Things have changed. Compared to a post-war expansionary period that produced unprecedented growth, we no longer have the means to expect the kind of growth in GDP that we previously enjoyed. In post-war America there was the absence of a looming crisis in entitlement programs we now have. These entitlements make up an additional 400% of current GDP which will certainly affect our ability to sell more debt through US Treasuries. In fact, just last week the NY Times reported that China is “losing its taste for US debt” and the Federal Reserve is assuring us that it is prepared to buy US Treasuries if it needed to, which could be problematic in much the same way as writing youself a check to cover your credit card payment. Japan, the second largest holder of US debt is also pondering a reduction in the purchase of US debt.

With foreign investors rightly shying away from even more purchasing of US debt, the only way we can finance both the spending bill and next week’s bank bailout, part II is to issue dubious treasury notes. If no buyers are found and the Federal Reserve has to buy these notes, interest rates are sure to rise and the value of the dollar is almost certain to halve from today’s value once the current deflationary environment ends.

Non-stimulus Contrary to congressional opinion, this economy does not need to be “jump-started” by expanding the social programs offerings that we can’t afford, that will be “paid for” the same way that helped to bring about the current mess we are in – by selling US debt, assuming that buyers of nearly $2 Trillion in US debt exist.

Two things: 1. The deflationary environment we’re experiencing is psychologically based, or at least it began that way. Currently, those of us who still have jobs are worried we might not keep them much longer. That’s why we’re not spending and that is what is leading to more and more job cuts each month. This deflationary spiral will not end until the social mood improves. 2. 70% of our economy is based on the consumer so the way to stimulate the economy is to get people to spend. To get the folks to spend we need to get them back to work. To get them back to work we need to encourage employers to hire back the millions that have been laid off. Employers can’t hire back people that they can’t pay and they can’t pay these people with the credit markets the way they are. So it stands to reason that if the government truly wants to help with the crisis, they need to unfreeze the credit markets first and foremost.

After the credit markets have thawed we need to promote economic growth. At the risk of starting a political fight here, economists across the country agree that permanent tax cuts, not temporary tax rebates are the best avenue for promoting economic growth. Specifically, a permanent reduction in the corporate income tax to reduce the cost of doing business and a cut in the capital gains tax to encourage capital investment would be all that we need to do.

Bringing domestic growth back to a respectable level of around 2-3% should be primary, not building tennis courts in Bryan, FL ($1.4 Million), providing light bulbs in Hollywood FL ($8 Million), resuscitating Amtrak ($10 Million), or buying digital TV converters ($600 Million), among many, many other trivial items and pork projects that have no stimulus effect whatsoever. When we’re back to where we should be, then we can look into providing the means for American television sets to tune into digital television signals. But let’s not delude ourselves into thinking this spending program will “stimulate” anything regarding the economy. We cannot spend out way out of this!

“We have tried spending money. We are spending more than we have ever spent before and it does not work.” – FDR’s Treasury Sec. Henry Morgenthau Jr., architect of the New Deal.

Tracking Government Failure

The NASDAQ has created an index that allows anyone to track the success/failure of companies who have received $1 Billion or more from the government in the form of a bailout or "rescue", symbol Nasdaq:QGRI. This new index consists of 24 companies, including recognizable names like AIG, Citigroup, Capital One, Wells Fargo, GM, Bank of America, and J.P. Morgan Chase. It is called the Nasdaq OMX Government Relief Index and all concerns are weighted equally.

So far in the first two weeks, performance has been shall we say, "Less than stellar." The index began its calculation on January 5th with a valuation of $1000. Friday, QGRI closed at $724.17 or a loss of 27.5%. Some of us in our personal 401k accounts managed to take all of last year to lose this much but the index that tracks government bailout programs accomplished this astounding feat in two short weeks.

You can't buy this index yet since the folks at Nasdaq haven't made it available for 3rd parties to form options in order to build products on top of the index, but they plan to. When it becomes available, you will be able to buy the index for its current market value if you believe the government is on the right footing with TARP and other bailout oriented concerns. A better bet would be to find a broker who offers shares of the index for shorting opportunities (or put options) since government bailouts have traditionally never produced the intended outcome.

The good news is that QGRI is the first index of the Government Relief Index Series that the Nasdaq plans on launching in the coming weeks. There will soon be many ways to officially track the failure of the US Government.