At Market Shadows, our goal is to teach sound investing skills and show how to profit from current trends. We also provide insights from financial blog writers who have granted us permission to share their work.

Why we need to act on climate change now


Why we need to act on climate change now

Interview with Jan Dash PhD, by Ilene Carrie, Editor at Phil’s Stock World

Jan Dash PhD is a physicist, an expert at quantitative finance and risk management, and a consultant at Bloomberg LP. In his thought-provoking book, Quantitative Finance and Risk Management, A Physicist’s Approach, Jan devotes a chapter to climate change and its long-term systemic risk. In this article, Ilene interviews Jan regarding his thoughts on climate change and the way it can affect our future.

Ilene: Hi Jan. Thank you for taking the time to share your ideas on global warming. . . I’m looking at a graph, along with the current atmospheric CO2 level that you and Yan Zhang modeled for the Bloomberg Carbon Clock, which shows just how sharply CO2 levels have increased mostly in only the last 50 years relative to the last 12 thousand years. And I can see that CO2 levels are currently about 400 ppm – and that at 450 ppm, the text says we will reach a “danger zone.” What happens when CO2 levels reach 450 ppm? Why is that level considered the “danger zone?”


Screenshot of Bloomberg’s Carbon Clock


Jan: If we can limit CO2 to 450 ppm, it is likely that we can limit the average global temperature increase to around 2 degrees Centigrade or 3.6 degrees Fahrenheit above pre-industrial levels. This is the goal of the Paris Agreement, designed to leave a livable planet to our descendants.

Ilene: Do you think we will be successful?

Jan: With present policies, it does not look like we will achieve that goal. Action must be increased urgently to avoid increasingly severe climate impacts on our grandchildren and their descendants. Climate change is actually the outstanding moral, ethical, and survival issue of our time.

We are in a “danger zone” now. Today’s CO2 level of around 400 ppm is going up rapidly and is already above CO2 levels since the beginning of civilization. The average global temperature is moving out of the stable balanced range that made civilization possible. The present increase in CO2 is outside of natural variation and this extra CO2 can be shown by rigorous physics analysis to be due to human activity, mostly burning fossil fuels. Future climate impacts mostly depend on what we do or don’t do to limit CO2 from burning fossil fuels.

We are now starting to see the effects of climate change (in statistical terms, the signal of climate change impacts is now apparent). Some of the impacts have already been very bad and out of statistics for natural variability. The effects so far, however, are only a small echo of the increasingly severe impacts our grandchildren will experience if we do not act substantially to mitigate climate change now.


Heron by Gellinger/Pixabay


Ilene: If we fail to get CO2 under control, what will the earth be like in the second half of the century?

Jan: We have always had disasters. Climate change makes them worse. Long-term climate impacts in the absence of action will include increasingly severe food and water shortages worldwide, climate-induced migrations due to rising sea levels that will make some coastal cities and regions unlivable, increasing political and military instabilities, increasingly negative health impacts, increasing extreme weather, damaged ecosystems with more extinctions of species, and a whole host of other bad impacts. The US military has been writing for years about climate change negatively impacting US national security.

How increases in CO2 raise the average global temperature, what likely risks will follow, and what we can do to lessen those risks are all presented in comprehensive reports. The Intergovernmental Panel on Climate Change (IPCC) volumes run several thousand pages. I get reports every week from reputable universities and laboratories worldwide detailing the increasing dangers of climate impacts.

The real question is what legacy are we choosing to leave our grandchildren – will they have a decent way of life or will they have to deal with massive climate problems? We actually do not have a choice about finding climate solutions if we want to leave a livable world to our descendants. We should think in a risk-management framework.


This image was taken in Ulm, Germany, when the river Danube (Europe’s second longest river) caused flood damage due to excessive rainfall in June 2013. Hans/Pixabay


Ilene: How do you apply the mathematics of risk management to climate change?

Jan: Climate Change Risk Management is the sensible paradigm that is increasingly being employed to act on climate change. We deal with all sorts of risk. Climate change is a risk. We can deal with the risk of climate change. We have the technology now. Climate risk management is not and does not have to be mathematically precise. We never have complete certainty for anything, and we do not need certainty to act. The analogy I like is that if you are sitting in a car stalled on the railroad tracks, you don’t need to know the exact velocity of the train that is approaching in order to act. The biggest uncertainty is what the human race will or will not choose to do to limit CO2. Climate risk management tools include figuring out corporate climate risk approximately using scenarios, for example the scenarios described by the Task Force on Climate Related Financial Disclosures. Other risk tools include the Social Cost of Carbon and the nascent Climate Change Value at Risk. In my book I also describe how a formal approach to Climate Change Risk Management can be useful. The basic math of risk management is to measure risk at a high confidence level among possible scenarios; this means a precautionary approach. I do want to point out a parallel with former V.P. Cheney’s “One-Percent Doctrine”: If there’s a 1% chance that climate change can be devastating to humanity, we have to treat it as a certainty in terms of our response.    

Ilene: In your book, you discuss “the negatively ethically-based discount rate for valuation of future climate impacts.” Could you explain a little about that?

Jan: There are two ways to look at climate action today regarding discounting, generally used to quantify today’s perspective. The first way uses the profit rate a firm requires. If that profit rate is used as the discount rate to discount future impacts on our descendants, there is hardly any present value to us for the suffering of our descendants, and this discourages climate action. I think this view is unethical. The second (and I believe better) way to look at climate action today is simply the reduction of suffering for our descendants, by climate action, independent of any present value and discounting. Actually, if we do not act sufficiently, ethically we should put something aside for our descendants to cope with climate change. This would translate into an ethically-based negative discount rate.

We can solve the “climate problem,” to mitigate climate change. We really can, and without too much cost, especially taking into account the costs of climate damage due to inaction. The solutions to climate risk will present opportunities, including more jobs, which will act as a counter to mitigation costs. We need leaders that will step up to provide incentives and long-range climate action plans.

Ilene: Speaking of leaders, Donald Trump’s decision to withdraw from the Paris Climate Agreement last month seems like an enormous setback to the worldwide effort to ultimately cap atmospheric CO2 levels. Will Trump’s exit from the Paris Agreement move the day of reckoning substantially closer? 

Jan: The analogy I like is that all countries are in a badly leaking boat. All countries need to help bail out the water to survive. If a country becomes a bad agent and decides not to help, either the others have to work harder or we all sink. The Paris Agreement was the first to achieve international unanimity with the bottom-up approach of each country “doing what it can” to mitigate climate change with the “Nationally Determined Contributions.” To achieve the goals of the Paris Agreement, the world consumption of fossil fuel needs to level off in the next few years and drop to zero by mid-century. Climate change will hit some countries harder than others, but in the end if we all do not act robustly, all countries will eventually be badly hit — there will no place to hide. Trump’s decision to pull the US out of Paris is not the last word, but it adds substantially to the risk of going well past the 450 ppm level and missing the goal of transitioning to renewable energies by mid-century, which is necessary to leaving a livable planet to our descendants.

Ilene: Do you believe that states, cities, and corporations will make up for the lack of participation by the federal government?

Jan: The world’s governments luckily seem to have pulled together since the announcement, with additional motivation to act on climate change, including China and India. Many US local and state governments are being proactive, including mid-western states that have increasing wind energy (because wind is increasingly lower in price and economical). Many corporations are also stepping up significantly. I don’t know if it will be enough. The US federal government is also worsening the climate problem in other ways, including federal opposition to the renewable energy development needed to replace burning fossil fuels. This opposition is economically shortsighted, since renewable energies have the promise to open a new distributed energy economy with significant opportunities. Transition to renewable distributed energies can have huge positive economic significance similar to the change from centralized computing (mainframes) to distributed computing (iPhones, Internet) that led to a new, more productive economic paradigm. In transitioning, we need to be mindful of those people who are tied to the fossil fuel sector, as well as others vulnerable to climate change, who will require assistance to survive.


Flood damage by the river Donau (Danube) in Ulm, Germany, in June 2013. Hans/Pixabay


Ilene: I’ve read that as CO2 accumulates, future warming gets “locked in.” You appear to confirm that claim. 

Jan: You are right about the persistence of CO2. A substantial fraction of CO2 emitted stays in the atmosphere on time scales of 100 years. The higher the cumulative CO2 level gets, the worse the impacts will likely be.

Ilene: Positive feedback mechanisms worsen any increase in temperature, as increased CO2 provokes other effects that lead to further warming. Are there significant negative feedback mechanisms as well? 

Jan:  Positive feedbacks are bad because they increase global warming, and substantial positive feedbacks are known to exist. Negative feedbacks would be good. Unfortunately for us, no convincing evidence exists for negative feedbacks substantial enough to stop global warming. The relevant metrics including all feedbacks are the Equilibrium Climate Sensitivity and Transient Climate Response. The probabilities of various values of these metrics from many sources are documented in the IPCC 2013 AR5 Science report – see Ch. 12, Box 12.2, page 1110. The bottom line is that we should not be hypnotized by the remote chance that negative feedbacks will save us by producing low values for these metrics. Prudent risk management principles tell us that we should base our action using at least the average values for these metrics, even higher than average. Regardless, climate impacts will worsen sooner or later without substantial action. The message is unchanged. We need to act to mitigate climate change now.

Ilene: Do you have a solution to climate change in mind?

Jan: We will need a portfolio of actions. Instead of thinking about a single 100% solution which does not exist, think of twenty 5% solutions which do exist and which provide practical ways of solving the climate problem. This portfolio of risk-motivated solutions will need action from individuals, corporations, investors, NGOs, including faith groups, and governments at all levels to be successful. There are many things we can do. For a start, people can call their representatives to urge climate action. A good idea is to put an honest price on carbon in the US, as suggested by the conservative Climate Leadership Council and by the Citizens Climate Lobby. I repeat, we (humanity) are already in the “danger zone”; we can solve the climate problem, but we must ramp up our efforts now.

Ilene: Many people believe that there’s no such thing as climate change; others believe that, while climate change may exist, it’s due to natural processes over which we have no control. According to a recent Pew Research Center study, slightly less than half of US adults believe that climate change is mostly due to human activity.


Source: Pew Research Center


What do you think the primary reasons are for such widespread skepticism despite an enormous body of scientific evidence? 

Jan: In 2002, a Republican strategist Frank Luntz wrote a very influential memo that recommended deliberately attacking climate science by emphasizing “doubt” as a way to avoid acting on climate change. The same strategy had formerly been used by the tobacco industry that attacked the science demonstrating the dangers of tobacco to protect cigarettes. We now have a whole industry of disinformation on climate change and a destructive politicization of climate science. Careful climate research papers from universities and laboratories worldwide are opposed by scientifically invalid disinformation from right-wing think tanks. The Trump administration is mostly saturated with climate disinformation and ignorance. I believe that as the impacts of climate change become more evident, people will stop trusting the media and politicians that loudly push climate disinformation, in spite of tribal loyalties and confirmation bias. The good news is that most people do want action on climate change. Prudent risk management on climate would say that action is warranted. People who believe climate change is not a problem might ask themselves “what will I tell my grandchildren if I’m wrong?”

We need to act with more urgency now. The costs of inaction are too great.


Arctic Ice Free-Photos/Pixabay


Ilene: How are the impacts of global warming most likely to destabilize the worldwide financial system? Given that there are multiple, serious consequences of climate change, what are the most worrisome pathways to an economic crisis?

Jan: I believe that financial and economic systems worldwide are, to use the language of physics, in unstable equilibrium. Economic and financial systems can be thrown into crisis by any sufficiently strong perturbations. The 2008 crisis is the latest example. I believe that climate change unfortunately has the potential to generate deep economic and financial crises, and I am not alone in that belief. Pathways to an economic crisis if we do not act sufficiently will include physical climate impacts and transition impacts from fossil fuels to renewables. The physical effects will negatively affect supply chains and business generally. If transition risk is not handled reasonably, severe economic problems can result. For large systemic worldwide climate impacts, recovery from crisis could be very long, if it happened at all. Estimates in economic models of future GDP levels generally do not include the climate-induced crisis effect I am talking about.

Ilene: Are there any investing themes we should be aware of?

Jan: Dominant future investment themes are pretty clear – notably renewable energies (wind, solar, batteries, etc.), which are rapidly becoming economically more and more competitive. Electric cars, better electric grids, and energy efficiency are others. Technologies currently in research (fourth-generation nuclear energy, fusion energy, as well as carbon sequestration), are promising long-term investment opportunities. Divestment from fossil fuels will avoid financial losses in the transition from fossil fuels to renewable energies. As mentioned before, transition should be largely completed by 2050 if we are to leave a livable world to our descendants, with large amounts of carbon remaining in the ground as useless “stranded assets.” 

Ilene: What about just adapting to climate change? Is adaptation viable on a long-term basis without mitigating climate change?

Jan: Adaptation to some extent will be necessary along with any amount of mitigation, with increased adaptation needed for less mitigation. The impacts that I mentioned will get worse and worse if we do not mitigate climate change substantially. Some people will adapt, though in a damaged world. Many people will die early. If we have business as usual, BAU (with at most a token amount of climate mitigation), the planet in 2100 will be very different from what it is now. It will be a hostile place. I wouldn’t want to be there. Eventually the planet under BAU basically will become unlivable. It’s that simple. Again, right now we are moving out of the balanced temperature range that has made civilization possible. We need a simple message. The message is “act now.” Anything else is too risky.

Ilene: Are you hopeful?

Jan: Yes. I am optimistic. I feel I have no other choice. I do not want to have a conversation with my grandsons when they get older and ask me “Grampa, what did you do for climate?” and I say, “Well I got depressed and stopped.” I am not going to have that conversation. I will continue to do my best to make sure the world is livable for them and for their grandchildren. I am hopeful that we (humanity) will make the necessary adjustments before it’s too late.

Thanks for reading this. You can help.


Jan Dash previously managed quant/risk groups at Bloomberg LP, Moore Capital Management, Citigroup/Salomon Smith Barney, Fuji Capital Markets, Eurobrokers, and Merrill Lynch. His prior finance and physics academic positions included Adjunct Professor with the Courant Institute (NYU), Visiting Research Scholar at Fordham University (Graduate School of Business Administration), Directeur de Recherche at the Centre de Physique Théorique (CNRS, Marseille, France), and Member of Technical Staff at Bell Labs. He has published over 60 scientific papers, and holds a BS from Caltech in engineering and a PhD in physics from UC Berkeley. The 2nd edition of his book, Quantitative Finance and Risk Management, A Physicist’s Approach, devotes a chapter to climate change and its long-term systemic risk. Jan is also the primary author of the handy list of quick responses to climate contrarian fallacies and the managing editor of The Climate Portal.

Ilene Carrie is editor and content manager at Phil’s Stock World, a popular website for learning investment and option trading strategies. Learn more about Phil’s Stock World here.

The opinions expressed in this interview are those of the author and do not necessarily reflect those of any institution mentioned. 

Trump Error, Day 7 – Waiting on the Fed

Courtesy of Phil of Phil’s Stock World

Well, now what?

The World was shocked at the US’s sweeping Muslim ban with another round of anti-Trump protests at home and abroad and the Global Markets are tumbling and the Volatility Index (VIX) is rising as even Green-Card Holders were banned from returning to the US on a sudden executive order that stranded thousands of legal immigrants overseas this weekend.

I’d love to not talk about politics but politics is driving the markets at the moment so responsible analysts NEED to discuss politics or they are doing you a tremendous disservices.  I’m not going to get into the back and forth of the thing – that’s all over the papers but we also declared a trade war with Mexico and China is now saying:

“‘A war within the president’s term’, ‘war breaking out tonight’ are not just slogans, but the reality.” 

The commentary was first reported by South China Morning Post on Friday, and comes amid concerns about a trade war between the world’s two largest economies. “The Chinese government is quite concerned about the potential for direct confrontation with the Trump administration,” said Ian Bremmer of the Eurasia Group. “Chinese officials are preparing for the worst, and they expect to retaliate decisively in response to any U.S. policies they perceive as against their interests.”

So happy Monday to you on Day 7 of the Trump Error.  Over in Europe, Germany is now worried about too much inflation and is calling for the ECB to start tightening monetary policy but poor Italy is still having bank troubles (and Europe is down 1% this morning with Italy down 2%) and Greece and Puerto Rico are both heading into debt crises (again).

Peurto Rico got an extension but the IMF just said Greece’s debt, at 275% of their GDP is “explosive and highly unsustainable”.  Explosive and unsustainable is what they say about collapsing stars – not economies inside the solar system!  And if the IMF says this about Greece, then why are Japan and China still getting a pass – both of whom have over 250% debt to GDP (assuming you can even believe China’s GDP number).

Perhaps Lord Trump is doing China a favor by starting a war to distract their population – giving the Communist Party someone to blame for their coming economic crisis.  I don’t think he’s gotten around to pissing off Japan yet, maybe because they are still taking bids for casino rights over there – just like the 4 muslim countries Trump does business with were not included in his immigration ban (Azerbaijan, Egypt, Turkey and Saudi Arabia).

In fact, Trump was on the phone with Kind Salman of Saudi Arabia this weekend and reportedly spoke to him for an hour, maybe finding out why 11 of the 19 9/11 hijackers came from Saudi Arabia… maybe.  Actually the call seemed to be about how we can help fighting Saudi Arabia’s enemies,

“The Saudis welcomed Tillerson’s appointment,” Teneo’s Holdings’ Hawes said. “Tillerson is someone who has tremendous diplomatic experience in the region,” he said. “He is a known quantity. Right now, I think this is going as well as Saudi policymakers could have hoped.”

Anyway, back to China!  China is essentially closed this week for the Lunar New Year and that’s a good thing as they’ve been approaching a liquidity crisis all month and a week break will, hopefully, give the PBOC a chance to print up a bunch of money. As you can see from the chart, capital has been fleeing China since 2014 with estimates of $3-5 TRILLION leaving the country and bubbling into foreign stocks, bonds and especially real estate.

More and more of that capital is flowing through China’s unregulated “Shadow Banking” system, which now dwarfs the banks that are under state control.  That means that, in a crisis, there is no way for the Government to control what happens – scary! With borrowing costs rebounding in 2017, firms will likely run into trouble again as the real-estate cycle winds down – this time with even more debt in play.

In some respects, China is much worse off than Japan with 170% of their GDP in Non-Financial Corporate Debt alone but, of course, those corporations are mostly owned or controlled by the Government so running the presses is a short-term solution to that problem too.

My big concern with China (and the World) is that they are one of the largest drivers of the Global Real Estate Recovery and rising rates my depress home prices and then panicky Chinese property investors may decide to dump their holdings and suddenly we’re back in a crisis as home prices begin to drop rapidly, setting off more panic.

Needless to say, we’re a bit skeptical of the Real Estate sector in 2017, even though we do see a US-based housing recovery, with rates holding back some of the enthusiasm.  Nothing matters this week ahead of Wednesday’s 2pm Fed Statement and we don’t expect them to do anything so anything else would be a surprise:

Notice no Fed speak to move the markets and just Evans (dove) after the meeting on Friday morning, presumably to salvage the week with some encouraging words.  We’re still waiting for some encouragement from the earnings reports.  So far, there hasn’t really been much to justify the 10% “Trump Rally” and nothing Trump has done so far has justified buying stocks for 25 times earnings or higher.  We’ll see if this week’s reports can tip the scales (doubt it):

We’re still short (see last week’s posts) and this morning, in our Live Member Chat Room, we added shorts back on the Oil Futures (/CL) at $53.25 to go with our Dow (/YM) Futures shorts from our Live Trading Webinar last Wednesday.  We’ve already hit $52.75 for $500 per contract gains on the oil shorts – isn’t it a good thing you saved $3 today by not subscribing!

Be careful out there!


Smart Shoppers Like Sales: Ross and Costco

By Paul Price of Arrow Loop Research

In recent years retail’s sweet spot has been “off-price” merchandise. That means high-quality, yet deeply discounted goods. People want nice things but are insisting on bargain prices.

Ross Stores (ROST) and Costco (COST) are businesses that have prospered along with that trend. Both companies appear on track to post all-time record earnings in their current fiscal years. Shares of each have risen significantly since the end of The Great Recession.

These firms make money because educated consumers know what things are worth and appreciate getting them at marked-down levels.

Should you be buying, or holding these stocks now, with the expectation of further gains?

Those who buy stocks in the way consumers buy other items won’t be purchasing Ross or Costco at today’s quotes. Neither appears to offer much upside over the coming year. Both ROST and COST are pricey versus their historical valuation metrics.

The 2008-09 recession left ROST available to investors at a single-digit forward multiple. ROST sold at P/Es ranging from 10.5x to 14.0x during each of the next four calendar years (green-starred below). Its asking price escalated in recent years as momentum chasers continued to jump on board.

From 2010 through 2016 ROST sported an average multiple of 16.9x. Its typical yield was about 1.05%.

Prior to 2017, there were three previous periods of clear overvaluation (red-starred). Pullbacks started at P/Es ranging from 20.0x to 22.6x. Ross Store’s Jan. 13, 2017, multiple of 21.4x its FY 2017 projection (ends Feb. 3, 2018) falls right in the midst of that “toppy” zone.

ROST’s long-term holders saw eventual gains. Failure to sell at overpriced valuations forced them to sit through drawdowns of 25.1% (from $35.40 to $26.50), 24.6% ($41.00 to $30.90) and 23.3% ($56.70 to $43.50) over the following 6 – 9 months.

A regression towards a more typical P/E could send ROST back to the $53 – $60 range, even if the coming year plays out well. Unforeseen adversity could make things even worse.

Independent research house Morningstar sees it similarly. They carry ROST with a 2-star, out of 5, sell rating. Their fair value estimate sits at $59, about 12% below last week’s quote.

Costco is a terrific operator which prices product aggressively. COST makes virtually all its net profits from recurring membership fees. High customer loyalty allows management to raise those fees about 10% about once every two years.

The company’s good characteristics are well known and appreciated, though. Costco was so beloved by investors that, late in 2015, its share valuation ventured to north of 32x (red-starred below). That valuation represents a 38% premium to Costco’s 10-year average P/E of 23.2x.

Paying too much achieved the expected result. While profits trended higher over the ensuing thirteen months, COST shares traded last week around $7.70 per share lower.

Costco’s best entry points, during 2009, 2010, 2012 and 2015, came at below average multiples. Current yields at those moments (green-starred) were all higher than average as well.

As of Jan. 13, 2017, COST still fetched a pricey 27.5x its FY 2017 (ends Sep. 2, 2017) estimate of $5.89. Consensus views for FY 2018 now center on a rise to $6.54 per share. Applying a normalized P/E to Costco’s forward estimate would only support an 18-month target price of about $152.

Could COST really see multi-year growth without parallel share price movement? A peek at the chart shows that’s exactly what happened from the top in 2008 through the first half of 2011.

Once again, quantitatively-based Morningstar seconded my conclusion. They rate Costco with just 2-stars while calling fair value as $149, around 8% below the current quote.

Why be the chump who pays top dollar to get stocks which are fated to go on sale later?

There will likely be much better future opportunities to get into Costco shares. It appears appropriate for value-conscious holders of both ROST and COST to be taking profits.

Both are great examples of good companies, trading at bad prices.

Take a free trial to Arrow Loop Research’s Actionable Trade Ideas. Click here to get started.

Monday Mayhem – Riots in Walker’s Republican Dreamland

Courtesy of Phil of Phil’s Stock World

Forget the details of why this started.

What you should be concerned about is how easily a protest march in Wisconsin turned into a riot – to the point where Gov Scott Walker called out the National Guard in Milwaukee.  Six businesses were set on fire during Saturday evening’s unrest, and three of them were destroyed.  About 100 protesters had gathered for a demonstration Saturday evening when violence broke out.  Chief Flynn said the city’s gunshot detection system was activated 48 times during the unrest, adding that some activations recorded several rounds being fired.

Koch-backed Walker has turned Wisconsin into a nightmarish state that is now ranked 49th in the US and is one of 5 states in the country with a contracting economy with a $2Bn budget shortfall in 2015.  Walker has cut $1Bn from education, smashed unions, ended paid leave for sick days and maternity leave requirements and, of course, put in “right to work” laws that have stagnated wages for the past 6 years.

Image result for wisconsin riotsIn short, Walker has implemented the GOPs 2016 platform and his state is in revolt. He even signed a bill that striped public employees of their collective bargaining rights, barred the traditional collection of union dues and forced workers to pay more for their health care and retirement benefits – things the national GOP want but don’t dare put in writing – and this is the result!

The problem is, this is the end of all “cut taxes and cut social programs to pay for it” budget plans – it’s only a question of when it is actually time to pay the piper and deploying the National Guard costs a whole lot more than buying a few kids a decent school lunch but then the money doesn’t go to a contributing military contractor… politics sure are tricky!

Meanwhile, in the rest of the World, we’re ignoring Japan’s horrific 0.2% GDP Report this morning, which would have been negative if not for $276Bn in stimulus spending.  Business investment fell 5.9% and exports fell as well so the only people who actually believe in Abenomics are the Abe Government, apparently.

Household spending in Japan is flat as we approach the 4-year mark on Japan’s experimental monetary policy but please – don’t let that stop us from trying the same thing, right?

Shanghai, meanwhile, jumped 2.4% this morning on news that the mainland Shenzhen and Hong Kong Indexes will soon be linked – allowing 1.3Bn mainlanders to now lose all their money in Hong Kong as well – how exciting!

This morning, we got our own horrific economic news as the Empire State Manufacturing Index collapsed to -4.21, which is 260% below the +2.50 expected by leading Economorons. There’s no point in getting into details though, as the markets have already decided to ignore it and open higher anyway because cities in flames, riots that require the National Guard and worsening business conditions can’t possibly compete with more free money in Asia, can they?

We also have CPI and Industrial Production tomorrow, the Atlanta Fed Wednesday and the Philly Fed on Thursday along wih Leading Economic Indicators and plenty of good earnings reports including HD, DKS, TGT, SPLS, CSCO, AMAT and WMT:

We’re still “Cashy and Cautious” and watching the rally mainly from the sidelines.  While this rally is too scary to short outright, we’re also being very careful with our bullish selections but it’s already Aug 15th and still now ka-boom, so maybe we’re wrong and the markets will go up and up forever and ever.



The Cartoon History Of Elizabeth Holmes & Her Pet Unicorn

If you don’t want to wait for the movie (starting Jennifer Lawrence), here’s the unfinished story.  

Courtesy of ZeroHedge. View original post here.

From Bay Area School Drop-out to Billion Dollar Baby to Biggest Loser… the rise and fall of Elizabeth Holmes and her hobby-horse Theranos is as much media-hyped fantasy as it is smoke and mirrors. In order to help explain the rollercoaster car-crash, KQED put together this comic book. Enjoy…

Source: KQED

Into the Future: Interview with Rick Neaton


Rick Neaton has been investing and writing about technology for over twenty years. In 2008, Rick founded Rivershore Investment Research (RIR), a subscription-based technology newsletter, to share his work with others interested in technology and investing. RIR covers key technology trends, publicly traded technology companies, and numerous investing themes.

In RIR, Rick focuses on important trends in technology and on how these trends will generate winners and losers. By focusing on technology, product cycles, market cycles, and valuations, Rick identifies timely investment opportunities and helps readers avoid costly mistakes. Further, he touches on major political and economic events as they shape the world’s investing environment, helping readers navigate the natural and not-so-natural ups and downs in the financial markets.


Ilene: What is your outlook for the US economy and the global economy over the next 1 to 3 years?

Rick: I think the US economy will continue to grow at a below average annual real rate. That is around 2%.

The world economy will not act in unison. India appears to be capable of producing 7-8% annualized real GDP growth.

China’s problems appear more political than economic in that it is transitioning from being an industrial-based economy to being a services-based economy. People who have made lots of money in China’s old economy are fearful of political repercussions to their capital. They have responded by moving more and more of their assets offshore. That is creating tension between the central government plans and the needs of these individuals.

Thus the pressure in China appears to be more centered on the value of assets held there than on the actual growth in the economy. Remember that 6.5% growth in China’s economy is still far more in dollar terms than prior years in which the growth rate was 7%, 8% or 9% in terms of China’s GDP. Because of the problems in China, you don’t want to own Chinese assets like stocks and bonds.  But you would want to own the offshore assets that Chinese buyers find attractive. These political issues in China explain the sudden surge in the Chinese corporate interest in acquiring western companies for cash.

Europe continues to muddle along hamstrung by political issues there.  At some point, it will become attractive again for investors.

Ilene: What do you see directly ahead for US equities?

Rick: Currently, U.S. stock markets are still consolidating after a very significant correction that occurred from mid-2015 to early in 2016. The actual performance of most companies is actually better than most investors think.  And certain themes like cloud computing and all the build-outs needed to achieve efficiencies in cloud computing will lead the markets from now until 2020.

Ilene: What is the most significant change occurring in technology and how will it change the way we live?

Rick: There are two main changes. First, cloud computing is moving storage and application processing away from each individual user of a device and to the data center. The hyper-speed connections and networks that everyone thought came too soon about 20 years ago are now just beginning to enable this scale.

Second, real time sensors are beginning to be deployed to various devices and they are changing the nature and the needs for computing. We see the first iterations of these sensor deployments in the form of fitness trackers and driver assist devices in automobiles.  But there are many more uses to come over the next 5-20 years. In turn, sensor deployments are driving the need for more programmable logic in devices and the need for more efficient power utilization in many devices that will need to be on 24 hours every day.

Intel (INTC) has been one of first major old tech companies to recognize these trends and implement significant changes to its business structure.  Well-recognized company names that do not respond timely to these changes will not survive.

Our lives will be changed significantly by 2030.  Our health care and the data needed to maintain our health will be sensed on a device that we now recognize as a fitness band.  It will be transmitted to our portable computing device that will be similar to a smartphone. That device will crunch the initial sensing data and send it in real time to a series of server racks in large data centers that will analyze this data and notify our physicians in real time about the findings.  It would even summon an emergency transport vehicle if necessary.

Driving a car may not be totally autonomous by 2030, but it will be much less dependent upon the human driving the vehicle and much more dependent upon the sensors in that vehicle.  Most everything will operate like the old Star Trek computer; i.e., most everything will be voice activated and responsive to voice commands. Keyboards will be as ancient in 2030 as a manual typewriter seems today.  First examples of this new interface are the Amazon Echo and the voice command features in your smartphone like Siri in an Apple product.

Finally, virtual reality and augmented reality will replace the current monitor on your computer.  Google Cardboard and Facebook’s Oculus are first generation examples of this new world; i.e, the Atari Pongs of the VR world.

Ilene: Thank you, Rick. I’m looking forward to further exploring technology trends and the tech companies involved in Part 2 of our interview.
For free samples of recent RIR newsletters, please visit Rick at RIR here.

Pictures via Pixabay. 

Our Investing Philosophy In Action


Paul Price (previous writer for the Market Shadows newsletter) and Market Shadows are now partnering with Lowenthal Capital Partners at Seeking Alpha. The new partnership is called Arrow Loop Research. If you miss reading Paul Price’s articles on stocks and the market, take a free trial to ALR’s newsletter at Seeking Alpha, click here.


  • Value-oriented investing philosophy.
  • Methodology for buying quality stocks when they are trading at attractive levels.
  • Guidelines for building a portfolio.

A. Investing Philosophy

Our investing philosophy is captured well by these famous quotes:

“Basically, price fluctuations have only one significant meaning for the true investor. They provide him with an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal.” ~ Benjamin Graham, The Intelligent Investor

“The common intellectual theme of the investors from Graham-and-Doddsville is this: they search for discrepancies between the value of a business and the price of small pieces of that business in that market.” ~ Warren Buffett, speaking at Columbia Business School in 1984

B. Methods

1. Price Assessment

We love to take advantage of price vs. value divergences when we find them.

Stocks go “on sale” for various reasons such as earnings misses, company-specific setbacks, and/or general market weakness. Sometimes there is no clear explanation. Whatever the cause, price weakness often leads to very favorable risk/reward profiles – i.e., a good time to buy.

Buy/sell decisions can’t be made until we establish “fair value” – our target price – for the stock in question. To arrive at that, we use a combination of fundamental analysis along with the stock’s historical valuation metrics. Applying normalized metrics to forward estimates, we determine a reasonable 12-month target price range.

Experience shows that “reversion to the mean” occurs predictably over almost all six- to 18-month time periods.

Identifying inaccurately priced shares is key to success. However, keep in mind, not all stocks trading near their lows are being mispriced.

Read the full article at Seeking Alpha.

Arrow Loop picture credit: By Urban (Own work) [GFDL or CC-BY-SA-3.0], via Wikimedia Commons. Castle of Caen, arrow slit (or loop) [meurtrière].

“I Used To Be A Big Deal… And Then A Billion Dollars Walked Out The Door” – Hugh Hendry’s Sad Story

Hugh Hendry’s presentation to Skagen is worth watching. Hendry is co-founder and hedge fund manager of Eclectica Asset Management. Zero Hedge provides some excerpts and their comments below the video.

Courtesy of Zero Hedge. View original post here.

Full presentation to Skagen:

In a somewhat more manic-than-usual introduction to his 2016 macro outlook, Eclectica’s Hugh Hendry – the first of the big bears to throw in the towel and kiss the ring of central planners – admits that things did not turn out quite as he expected, noting “I used to be a big deal”, that “I had $1.5 billion in AUM” and that “life is cruel.”

While the entirety of his presentation is certainly worth watching, what specifically caught our attention were the occasional, and rather troubling, streams of consciousness during which we get a glimpse into Hendry’s current frame of mind and, frankly, we are a little concerned, because while we have no doubt in Hendry’s investing genius (even if he did decide to infamously flipflop in 2013 and many of his LPs decided not to stick with him), the content of what he says is just a little troubling.

Some excerpts:

This morning I ended up in an accident in emergency and I just to dispel any rumors that it involved having superglue on my hands or anything else embarrassing. But I’m back, I’m better, albeit my ear is a little bit ringing. And life is cruel, people keep getting younger. The Joseph Stiglitz interview was broadcast on British TV 6 years ago in 2010.

As I say to my children, I used to be a big deal ago 6 years ago. I was at a party recently with some younger girls who represent some fund of funds in New York, I said “I am in global macro, I run Eclectica”… nothing. They had never heard of me. So if I may continue with the introduction, I feel actually now that I have to.

My shrink says I’ve got to get over it, that I keep wishing to express my identity. My identity lies in a post-dated envelope which is going to come through my door in ten years time, and on that number is my compound growth rate. I am that silly person who somehow defines myself by performances… I have survived, I am like when you spill red wine on the carpet and you scrub it, and that stain just won’t come out, it’s difficult to get rid of me. I’ve been running a global macro fund for 14 years, now one of the longest running London global macro teams, and we have compounded at 8%. I wish it was 18%, I would still be on the beach if it was 18%. But with 8% comes a degree of accomplishment I believe, because that 8% has been accomplished with a set of return that just have not correlated with anything. I am eclectic.

* * *

For two years I didn’t take any risk. I had $1.5 billion in AUM. For me that’s a big number and I had clients who thought I was negative correlated to the stock market and they were fearful, Investors are fearful: it’s one of the most bullish things about stocks today apart from their profound underperformance to fixed income markets.

On his intellectual metamorphosis from bear to bull:

I had a Damascene conversion. I was one of those angry, curmudgeonly Austrian economists. I made over 30% in 2008, I won. My AUM halved. But then you had this QE and all those people who didn’t see it, who took the reckless bets, they all came back. We had a chance to kill the vampires and we missed the chance. Purge the system of its rottenness; we failed to do it. That’s how I lived; one should never be angry, it’s such a negative force and I got over that. I survived for 14 years because I was good at making mistakes.

And then this:

Back to my rant about central banks: they were right, I was wrong. The notion that QE has distorted the integrity of market prices is kinda right, but is kinda right in a benevolent manner because without the courageous intellectual decision by the American Federal Reserve to introduce QE shortly followed by the Bank of England, I think without a doubt we would have had another Great Depression. So QE has influenced the integrity of market pricing because it took away the very real risk of a depression. In that sense, equities are worth more.

So without the “courageous intellectual decision” by the Fed to take away “tail risk” and thus eliminate one of the fundamental tenets of capitalism, namely “risk,” equities are worth more? Well, sure. The only question is what happens when the market finally sees through this massive, global experiment in central-planning, one which by definition means that every asset is overvalued. Indicatively we saw glimpses of that before the Shanghai Accord unleashed an unprecedented central bank re-stimulus attempt.

But the saddest part is Hendry’s James Joyceian lament of how he lost virtually all of his AUM – it happened when he infamously flipflopped from bearish to bullish in 2013, a shift we profiled in “Hugh Hendry Throws In The Bearish Towel: His Full Must-Read Letter.”

A funny thing happened at the end of 2013 I wrote a letter to my new clients and I began with the preface “what if I was to tell you that I’d become bullish on equities; is that something you’d be interested in.”

The resounding message no. A billion dollars walked out the door. “What, really, you’re bullish?” This is cabaret maybe I should be in show business. Bullishness, optimstic, bearishness, there are adjectives that are very demeaning to the endeavor of global markets.

In 2013 I was flat and I had one client who said “Gee, if only you had been down 15% I could give you more money, but this being flat, I feel uncomfortable.”

At this point Hendry proceeds to lay out his returns, proudly noting that in 2014 he made 10%, in 2015 he made 6% (mostly on the back of China), and “this year we are flat” (according to the latest HSBC report as of March 31, as of March 31, Eclectica is down to -5.9%).

He goes on: “I am not very good in the company of others; with the greatest of respect to bank credit analysts I’ve never had a call from a buddy at Goldman Sachs, JPMorgan, Morgan Stanley, so I am the author of my own mistakes, but I want to tell you I am very, very good at making mistakes.”

We honestly hope this is not the latest one.

His sad story aside, we urge readers to watch the entire presentation below to see how an honest, in their own mind, transformation from crushed bear to just as crushed bull takes place, as well as Hugh’s quasi-contrarian view on what will happen to China next as well as to the Renminbi (he completely disagrees with the Kyle Bass view that a major devaluation is inevitable) which he says “is the key to the markets today,” something he also touches upon in “Hugh Hendry: “If China Devalues By 20% The World Is Over, Everything Hits A Wall.”

Terrorism Doesn’t Matter to the Markets?

Courtesy of Phil of Phil’s Stock World

I think it’s amazing.

They caught the Brussels bomber (the one that didn’t blow himself up) and there was an extra bomb, so he could have killed more people – yet the markets in Europe are UP this morning.  Sure it’s nice they caught the guy, and they say it’s the same guy who masterminded Paris, but the fact that he’s 24 years-old and that ISIS has 30,000 other core members SHOULD bother people – at least a little.

When the markets are back near their all-time highs, I tend to look for things that can go wrong and it’s kind of strange to think that terror attacks on major cities is not one of those things. Our near-total detachment from reality reminds me of a scene in the movie “Brazil”, where rich people are having lunch and the restaurant is bombed and they simply go on eating amidst the horror, only mildly inconvenienced. Is that the world we’re aiming for? Seriously?

Nevertheless, as you can see, the VIX, the “fear index” has continued its March march lower, down almost 50% from its February peak. The only thing the markets actually fear is that the Central Banks will stop the endless flow of FREE MONEY that is flying off the presses, and 13 Central Bank actions in the past 30 days say that’s not going to happen any time soon (see Monday’s post for the chart).

Speaking of Brazil (EWZ), corrupt President Dilma Rousseff said she will never resign and that she considers the impeachment procedure to be a coup as that country spirals completely out of control with barely 4 months to go before the August 5th start of the Olympics or, as Rousseff likes to think of it – payday!  You have to sympathize with her as all these years of bribes and kickbacks will all be for nothing if she can’t be there in August to collect her take.

You might think that, like terrorism, Brazil doesn’t matter but that country is possibly on the way to bankruptcy and it is the World’s 7th largest economy ($2.25Tn) so I think it’s going to matter a lot once people begin focusing on it as we ramp up for the Olympics.  Just this morning, Petrobas (PBR) announced a $10.2Bn loss for Q4 and will lay off another 15% of their staff to bring the 2016 total firings to 45% – 12,000 jobs.  They’ve also drastically cut spending by 25% ($32Bn), causing a ripple effect throughout Brazil’s economy.  Another massive company, Vale (VALE) is teetering on the edge of disaster with $8.7Bn in Q4 losses.

In the same way our Top 1% strives to emulate the diners in Brazil, the movie, they also want to emulate their peers in Brazil, the country, where the collapsing infrastructure causes 2-hour commutes for the working poor (who used to be middle class before all their money was funneled up to the top) while the Top 1% fly over the traffic in helicopters.  There are more registered helicopters in Sao Paulo than any other city in the world; 593 to be exact, surpassing New York and Tokyo in just the last five years.

Perhaps the most over-the-top example of the trend is that of Rio de Janeiro state Gov. Sergio Cabral. A recent magazine expose showed that his commute to work is only about 6 miles. Yet every morning he gets up, takes a chauffeured car to his helipad about halfway to work, and then takes the rest of the trip, about three minutes, by chopper. The cost to the taxpayer of that daily flight, according to the magazine, is $1.7 million a year. Cabral also used his helicopter to ferry his nanny, his dog and his family on shopping trips and vacations to his country home.

Again folks – this is the 7th largest economy in the World – it’s the “B” in BRIC and rampant “free market Capitalism” has turned it into a nightmare for 99% of the population.  On Dec 16th, Fitch became the second of the three big credit-rating agencies to downgrade Brazil’s debt to junk status.  Days later Joaquim Levy, the Finance Minister appointed by President Rousseff to stabilise the public finances, quit in despair after less than a year in the job.

Brazil’s economy is predicted to shrink by 3.5% in 2016, more than it did in 2015 (-3%).  For her part, PBR kickbacks are minor compared to charges that Rousseff conspired to hide the size of the deficit and Government debt – now 80% of GDP after being run up on failed stimulus attempts (sound familiar?).  Nonetheless, as you can see from the chart, Brazil has popped over 50% off the January lows on all the FREE MONEY enthusiasm generated by our beloved Central Banksters who are smart enough to be far less obvious in their corruption.

Notice the 1-week, 25% pop in the country’s index – yeah, that makes sense…

Meanwhile, we’re STILL shorting at those same lines we laid out Monday and this morning they are working yet again but, so far, it’s been nickels and dimes against quick reversals.  I still think a major sell-off is a lot more likely than a major rally but so far, so wrong.

Don’t forget, we have a Live Trading Webinar at 1pm (EST) this afternoon – last week we made our Members $390 trading the Russell Futures (/TF) – this morning our shorting lines for our Members were:

  • Dow (/YM) Futures short at 17,500
  • S&P (/ES) Futures short at 2,042.50
  • Nasdaq (/NQ) Futures short at 4,435
  • Russell (/TF) Futures short at 1,091
  • Nikkei (/NKD) Futures short at 17,000

The Nikkei is not a great short as the Dollar will rise when our markets fall and, if oil fails to hold $40, it will likely take the Dow with it – so we’ll keep an eye on that.  Our trading rules are very simple, we look for 3 of our 5 indexes to be below and then we short the laggards (the last ones to cross under) on the theory that they’ll catch up a bit.  If ANY of the indexes pop back over their line (including the ones we short), then we GET OUT!  That limits our downside but lets our upside run.

It’s also a good idea to learn how to take a profit – something we emphasize in our Live Webinars! (For replays, visit our YouTube channel here.)

See you later,

– Phil

Try Phil’s Stock World Daily Report, free, by signing up here.


Janet Fakes It and Buys Just One Day

By Phil Davis of Phil’s Stock World

One day more.

Like those about to die miserably in Les Miserables, our fearless Fed leader sang the same old song with a few new lines (well, that’s The Who, actually) and, as Lincoln predicted – you can fool some of the people all of the time. And what a rally we had yesterday, as the Dow popped 200 points on “news” that the Fed would not raise rates more than twice this year.  We took quick advantage of it in our Live Trading Webinar (replay available here) and went long on the Russell Futures (/TF) and made a very quick (15 mins) $390 per contract but, since the whole thing was BS, we took the money and ran!

How much BS?  Janet’s fake, Fake, FAKE!!! enthusiasm for our economy was nicely summed up by Dave Fry, who said:

“There’s a lot of spin (um, lying?)going on with the Fed’s announcement Wednesday. It’s consistent with past comments and runs as follows:

  • Consumer Confidence has improved—no it hasn’t.
  • Economic Growth is growing at “moderate” pace—not really unless you consider 1% moderate.
  • The strong dollar has restricted economic growth—this has been the mantra for past two years, Retail Sales, Industrial Production and so forth remain weak.
  • Oil prices are rebounding has prices increased—that’s possibly true but the category is still weak.
  • Employment is expanding as is participation—most new jobs part-time or in the low paying services sectors, this is BS.
  • Overseas Economic weakness has little effect on our projections—seriously?
  • Financial market (stock markets) are doing well fanning the flames to heat up investor confidence—markets are still rallying based on corporate buybacks.  One thing to keep in mind is that this creates a lot of debt.

And, so the psychological manipulation goes.”

That “psychological manipulation” was enough to buy us that one more day before reality hit this morning as Japan’s February Trade Data was yet another disaster. You can blame a slump in exports to US (down 3.2%) as the source of new woes in addition to a continuing 15.6% decrease in export volume to China.

“The tailwind from the weak yen has gone. We can’t help but hold a pessimistic view on the outlook for exports,” said Atsushi Takeda, an economist at Itochu Corp. in Tokyo, said before the figures were released. “Domestic demand won’t be dependable at all, and the same goes for exports. I can’t deny the possibility of another economic contraction this quarter.”

“The lack of a boost from exports raises a risk of Japan’s contraction this quarter,” said Nobuyasu Atago, the chief economist at Okasan Securities Co. and a former Bank of Japan official. “It’s becoming clearer that the weakness of the global economy is taking a toll on Japan’s economy.” (Bloomberg)

Interestingly enough, going long on the Nikkei Futures (/NKD) was our last trade idea of the day in our Live Member Chat Room, where I said (3:51): “/NKD is the best way to go long overnight above 16,900.  Either Asia likes the Fed and rallies or the Dollar comes back and the Nikkei likes that – two ways to win!”  As you can see on the chart, by 9pm we were back to 17,200 but those who were greedy were punished at the Nikkei pulled a full reversal overnight (we don’t hold Futures positions overnight, in general, so no worries).

Though the Nikkei is back down, the very lousy data has us hesitating to go long again unless the Dollar (95 on /DX Futures) heads back up and /NKD crosses 16,700 – then we can play it long again with tight stops IF the US Index Futures are improving (Dow over 17,200, S&P over 2,120, Nasdaq over 4,375 & Russell over 1,070).  It hasn’t been a whole day yet and tomorrow is options expiration day so anything is possible.

On the whole, our tracking portfolios are all parked in neutral except our Butterfly Portfolio, where our spreads got downright aggressive in last month’s adjustments and that will be changed today as we get ready for a flat to down period between now and April expiration. We’ll want to get more aggressive with our hedges into the weekend uncertainty to protect our still cooking long positions.

CAUTION is the watchword for today and tomorrow.  While the Fed did not disappoint and tank the markets yesterday, it might be even worse that they drastically lowered the rate outlook and it barely got a reaction from the markets.  If we fully reverse the Fed move into the weekend – next week can be very scary indeed!

Tell me when the dollar rally ends, I’ll tell you when EM starts working again

Courtesy of Joshua Brown

A really simple chart that illustrates an incredibly powerful trend.

Emerging markets have been atrocious investments for almost 7 full years now. To me, it’s almost entirely a dollar phenomenon. The theory is that strength in emerging market stocks is predicated on one thing: demand for commodities. When China, Korea, Taiwan and India are buying a lot of what Brazil, Russia and South Africa are selling – commodities – then EM works. When they’re buying less commodities, EM doesn’t work.

And, to a large extent, the dollar’s strength or weakness determines the price and maybe even the demand for commodities. I know that could be considered controversial, but I think the missing piece of the puzzle is asset inflows and outflows around the world and the ability to sell and pay back dollar-denominated debt.

Pretty clear what’s been going on here in my chart below, although obviously after the fact. You’re looking at the EEM index of emerging market stocks priced in the S&P 500, as a ratio chart.

(click to embiggen!)


Emerging markets have underperformed by 50% over the last seven years – which is incredible. In the bottom pane, you see the US dollar chart, bottoming out precisely where the EEM:SPY ratio peaks circa 2011. It’s been all downhill for emerging stocks and all uphill for the dollar ever since.

When will this powerful trend reverse?

As you can see, there’ve been several tradeable rallies in EM stocks relative to US stocks over the years – many believe we’re in the midst of one now thanks to bouncing oil and metal prices. But it’s important to note that every one of these rallies has failed precisely at the downtrend line illustrated above in blue. There’s no reason to believe the next one won’t fail as well.

Guilty until proven innocent. There are very few prolific counter-trend traders in old age homes.

Price Matters

Paul Price (at has been buying MCK and PRGO recently. He sends us a few charts illustrating his strategy, which is simply this: Buy solid companies when they are trading at valuations lower than their own historical averages, when the price is depressed due to market conditions, rather than serious company specific problems. These stocks also present excellent put writing opportunities.

McKesson (MCK) ~ Paul argues that MCK ($153.99) is undervalued by about 50%. He’s been buying the stock and selling long-term puts with a strike price of $140 – $150. He writes,

McKesson’s typical P/E has come in around 15.5x. Its present day forward multiple is just 11.1x. Of the three best buying opportunities since 2007 (green-starred below) only 2008’s absolute bottom presented a more favorable valuation.

McKesson hasn’t changed hands as low as $122 since September of 2013, a year when EPS came in at $8.35 versus an estimated $12.70 in FY 2015. The dividend has increased by 40% since the last time you could get into MCK that cheaply.

Perrigo (PRGO) ~ PRGO ($124.85) dropped recently after taking some charges associated with fighting off a hostile takeover bid by Mylan. Paul thinks the company is undervalued due to its strong balance sheet and earnings growth. He’s buying stock and selling long-term puts. The stock is cheaper now than when Paul first published this article on Feb. 18.

Peak prices of $157.50 to $215.73 were hit during each of the past three years. S&P Research and Morningstar both assign a 4-star, buy rating on PRGO. S&P sees fair value as more than $188 while targeting $200 over the next 12-months. Morningstar tags present day value at $165.

Complete and Utter Scam: Oil Prices

Phil’s article below was from yesterday morning, before today’s big spike in oil prices (2-12-16). He follows up on Oil Fears Spook Investors (Again), from Monday.

Why is oil currently up almost 12%? US crude surges as much as 12% on output-cut hopes.” 

Screen Shot 2016-02-12 at 9.14.20 AM

(Screenshot: Yahoo’s chart)

Markets Collapse as Sweden goes Negative & Oil Spills Over

From Thursday’s article by Phil at Phil’s Stock World

Really, Sweden?  

Well, it’s just an excuse to sell off on a 30-year auction day (happens almost every one) because it panics people into T-Bills at ridiculously low rates and makes it look like the Fed is doing its job and people really do want to lend the Government money for 30 years at 2.5% rather than do something productive with the money.  Why?  Because if people don’t want to by 30-year Treasury Notes at 2.5% then one would have to question our Government’s $19,000,000,000,000 debt load which, at 2.5%, costs $475Bn in interest payments alone to sustain and if we were to assume rates climb to 5%, then another $475Bn per year would have to be figured into the budget (without asking the Top 1% or Corporations to contribute, of course!).

On the other hand, with Sweden now CHARGING 0.5% to put money in the Riksbank, 2.5% on US debt looks like a pretty good deal, doesn’t it?  I already sent out an Alert this morning (tweeted too, with the hashtag #CurrencyWars) on what happened and how we’re playing the Futures, so I won’t rehash all that here.

Oil, meanwhile, is down another 4% this morning ($26.25) and that’s on me as I told Canada that oil was not going to make a comeback on Money Talk last night – and it was not a happy conversation.  We would like to play the $25 line for a bounce on /CL but we’re EXTREMELY concerned about the MASSIVE overhang of FAKE!!! contracts (see Monday’s post and here is a good place to say “I told you so!”) with 324,000 open orders still remaining in the March contracts (but they did cancel 191,000 fake orders in 3 days, so catching up).

In fact, since I get a lot of mail from people who can’t believe the NYMEX is a complete and utter scam used only to defraud the American people by creating a false demand for oil and driving up prices, let’s compare the “open order ‘demand'” (had to double quote demand as it’s such BS) from Monday morning to yesterday’s close.  Here’s Monday’s NYMEX contract strip:

Here’s yesterday’s closing strip (Wednesday 2-10-16):

Updated numbers from Thursday 2-11-16:

Screen Shot 2016-02-12 at 9.58.17 AM

Phil: “Oil Contracts – Looks like they ditched a healthy 66,000 yesterday. At that pace they’ll get it done no problem but they’ll need a new OPEC rumor every day and, eventually, it won’t work well enough to get buyers to step in. Still, there’s record shorts on the NYMEX (and energy stocks) so pretty easy to squeeze them, my bias is still to bet long off support lines (0.50s).”  

Where did the fake orders for 191,000,000 barrels (1,000 per contract) go?  We know they can’t possibly be delivered since Cushing, OK can only handle 40M barrels a month (less than 10% of the fake order capacity) so what happened?  Well, if you noted the next 4 months from Monday – they totaled 665,000 contracts and now, amazingly, they total 875,000 contract – that’s a gain of 210,000 contracts!

In other words, there is no actual change to the fake, Fake, FAKE!!! orders at the NYMEX, they just roll them along to the next months so they can pretend there is demand there as well.  Since all those trading and rolling losses are worked into the price of oil – only the consumer suffers the losses while the traders and the Banksters that work with them make Billions in fees for their barrel-rolling trick.

And I will tell you now that, as usual, 90% of the remaining 324M barrels worth of contracts to buy oil at $27 will be CANCELLED and not delivered to the US in March – in hopes of screwing you with higher prices later.

And this is the problem Canada, and the rest of the World, have now.  There has been a scam, pretty much since the deadly Commodity Futures Modernization Act Revisions, which were literally signed into law the day after Bush won his Presidency in the Supreme Court (hidden inside an 11,000 page appropriations bill that HAD to be signed to avoid a Government shut-down a week before Christmas).  This bill and it’s repercussions are now wreaking havoc with the Global Economy for the 2nd time.

The first time, aside from Enron (Bush’s biggest single donor) et al (made possible by the deregulation in the Act, which was sponsored by Enron) ripping off consumers all over the country, the unregulated trading caused oil to jump from $20 per barrel under Clinton to $140 a barrel under Bush, which ultimately broke the consumers’ backs and led to our 2008 market collapse.

Now it’s time for round two as the misallocation of capital towards energy projects, based on the assumption that $100 oil was a REAL price based on market demand (it’s not, it’s completely unaffordable) has caused MASSIVE over-production of oil all around the World and the companies and countries that borrowed money to finance that production growth AND the banks that lent them the money are now in BIG TROUBLE with oil back at it’s NORMAL price of $26.50 per barrel.

As I said on BNN last night, countries like Canada, where 20% of their GDP comes from the energy sector, are going to have a very painful time adjusting to normal oil prices but the sooner they come to grips with that reality, the better.

The worst thing they can do is attempt to prop up a failing industry that is drastically in need of a consolidation wave as they are currently over-producing, according to the IEA, 1.75Mb of oil per day.  That’s about 2% of global production that needs to go off-line before we’re even close to sopping up the GLUT of oil that has flooded Global storage facilities to near capacity.

The worst part is (for OPEC and the North American Energy Cartel – you know who you are!) is that the sanctions lifted on Iran are now going to put another 1.5Mb/d of production on-line by the end of this year (already over 500,000/day) which is accelerating the problem. OPEC has, so far, not made any moves to cut back – part of their problem is they now only control 30% of the World’s oil because their previous policy of holding back production to jack up oil prices has backfired as the high prices led 60M daily barrels of competing oil to come to market and their share of the global market has fallen 50% since they held us hostage in the 70s.

And now we head towards the end game and it’s the Chinese curse of living in “interesting times” indeed for oil producers. As I told Money Talk last night – don’t rush to find “bargains” in the energy sector – a lot of these guys are never coming back!

This article follows Oil Fears Spook Investors (Again).

Click on this link to try Phil’s Stock World FREE! (click on text at the top). 

Oil Fears Spook Investors (Again)

Oil Fears Spook Investors (Again)

oil-696579_640From Phil Davis’s Monday article at Phil’s Stock World

We should all fear Oilmageddon!” 

That’s the word from CitiBank, which is SUPPOSED to be the voice of reason in these markets. When Banksters tell us to get out of something – it’s usually time to get in.

Nattering Naybob had a very good summary of the weeks events, reminding us of my Wednesday warning that we were simply in a “dead cat bounce” and likely to fall even further this morning. I wrote,

Some are connecting the dots so the 1859 to 1940 SP500 rally, could be the dead cat bounce we alluded to as the overall trend reasserts itself. I said ES could test 1930 and to wake me up when it got there, where it was rejected in a big way. I have a funny feeling this Super Bowl, Monday, and week could all be ugly.

And ugly it is this morning but I’ll be on Money Talk on BNN Wednesday night, explaining to Canada why the collapse of oil does NOT mean the Global Economy is collapsing and I’ll write it down here so you can get ahead of the game and, as Buffett advises: “Be greedy while others are fearful.”

The big problem is that most “analysts” don’t know anything more than they knew in college – especially the ones who wrote books and who, even if they know better, almost never contradict what they have published – no matter how much evidence to the contrary has piled up against them.  Those who aren’t slaves to the status quo are often paid by the-powers-that-be to steer the sheeple in and out of positions as needs dictate, and even the honest media loves a conflict – and they’ll present both sides of an argument as valid – even when one side is clearly idiotic.

So, getting back to oil – most people think oil pricing is a function of supply and demand. Long-term it is. But short-term it’s a function of sentiment and manipulation. We take full advantage of that at PSW and I could give you a dozen examples from our 10 years in circulation but suffice it to say it’s not that hard to spot those patterns. One great pattern we observe is the fake, Fake, FAKE!!! trading of oil contracts over at the NYMEX.

As you can see from the 5-month strip at the NYMEX, there are 515,000 open contracts for March delivery and that’s very high, which puts downward pressure on the price because the contracts close on Feb. 22 (10 trading days, we’re closed next Monday) and, not only are the storage facilities at Cushing, OK (the point of delivery) full to the brim with unwanted oil, but Cushing can only handle about 40M actual barrels of oil per month so there is NO WAY ON EARTH that 515,000 contracts, representing 515 MILLION barrels of oil, can possibly be delivered.

Of course the traders know this and they pull this scam off every month in order to create a false sense of demand for oil and, every month, they whittle their fake orders down to 15-25M actual barrels worth of contacts (15-25,000) and the rests are fake, Fake, FAKE!!! – ALL of the time.

Yes, trading on the NYMEX is a complete and utter fraud BUT knowing it’s a fraud helps us make money so, other than my occasional rants like this one – we could care less – certainly the regulators don’t care…  This month, over 3M contracts will change hands at the NYMEX, representing 600M barrels of oil – all so just 20M can actually be delivered to the US consumers. The rest of the nonsense (99%) is just a game to move the prices around with the US consumers picking up the tab for all the fees that monthly churning generates.

There are 515,000 contracts worth of open orders for March delivery and, since only 25M barrels are likely to be delivered, they have 10 days to cancel or roll 490M barrels worth of crude orders to longer months.  Since most of those contracts are trading at a loss, and since hope springs eternal, and since humans and their corporate masters have a huge aversion to taking losses – we can expect those contracts to be rolled to longer months – only perpetuating the problem.

In addition, we know that “THEY” have trouble rolling more than 40,000 contracts in a single day – usually that causes downward price pressure and they have 10 days to roll 490,000 contracts – so oil will remain under pressure until 2/22, when we should get a nice pop into the end of that week. Meanwhile, rumors are accelerating regarding a possible OPEC production cutback and that’s keeping oil off the $25 line – for now. As I said – we’re playing for a bounce off $30 (with tight stops below) because we expect more rumors to lift oil into Wednesday’s inventory report.

There are over 1 BILLION barrels worth of FAKE!!! orders for oil deliver at the NYMEX in the front 4 months – soon to be the front 3 months in 10 trading days.  The US currently imports just 5.7M barrels per day or 171M barrels per month (but not all to Cushing, of course) so the deliveries FALSELY scheduled for Cushing alone, in March, represent a 3-month supply for the entire US!

There’s problem number one – energy trading is a complete and utter scam (as if Enron didn’t make that plainly obvious 15 years ago) and don’t get me started about the ICE (see: Goldman’s Global Oil Scam Passes the 50 Madoff Mark).  Oil is not racing back to $50 because $50 is not the mid-point on oil – it’s a top and oil should NEVER have been anywhere close to $100 per barrel and that bubble has long since burst.

Again we have to think about the rigid and limited mind-set of the average analyst who thinks that low oil prices mean a bad economy because, clearly, demand must be off.  That was a very solid assumption since the birth of the internal combustion engine but now that we have electric cars and solar and wind power – it’s no longer such a direct correlation.  While we do have an oversupply of oil, to be sure – it’s wrong to blame it on a slow economy.

One solid example of this is auto demand.  You are probably aware of the fact that auto sales hit records in 2015, with 50M cares delivered globally.  While this somewhat represents a bump in demand, it’s mainly about replacement cars. What kind of cars are we replacing?  The average age of the US fleet is 11.5 years and we can safely assume that most cars being replaced fall on the longer end of the scale.  Well, the average car in 2005 got just 22 miles per gallon and we’re replacing them with cars that get 35 miles per gallon (new car fleet average) thanks to Obama’s CAFE standard rules.  And it’s not just the US – the whole world is getting more efficient:

A car being driven 15,000 miles a year (average) that used to use 750 gallons at 20 miles per gallon is replaced by a car driven the same 15,000 miles a year that now gets 35 miles per gallon and used 428 gallons.  That’s 42% LESS fuel than the previous car!  An oil barrel is 42 gallons and it’s not all refined to gasoline but let’s just say that each new car sold requires 10 less barrels per year than it’s predecessor.  At 50M cars a year that’s 500M less barrels per year required for our auto fleet – a 1.5Mb/day demand cut that becomes 3Mb/day in year 2 and 4.5Mb/day in year 3 and THAT is where our demand is going and it’s NOT coming back!

In fact, we also are getting more efficient trucks and more efficient planes and more efficient machines in our factories and a lot of equipment is using wave, wind and solar energy for power and not using any oil at all to run.  So our economy could be off to the races and oil consumption would still be going downhill and, ironically, the better our economy does the faster the old gas-guzzling machines get replaced and the faster the demand for oil declines but that’s a GOOD THING, not a reason to panic.

Yes, there will be disruptions as we move into a post-oil economy – especially for economies that depend on oil.  Saudi Arabia alone has enough oil in the ground to supply the World for 40 years and, sadly, it’s not likely they’ll even use half of it before oil is a fuel of the past and THAT is why no one wants to cut production – despite this persistent glut that is without end – because they know they are playing a game of musical chairs with oil barrels and they are all going to be stuck with a worthless fuel of the past with a rapidly declining inventory value.

This is also bad news for companies like Exxon (XOM), Chevron (CVX) which are, unfortunately, Dow Components.  It’s bad news for the energy sector and the banks that lent them money so there WILL be disruption – but it’s the good and healthy kind as our society moves on from using oil and it’s NOT a sign of a slowing global economy – that’s why we flipped long this morning!

Try Phil’s Stock World Daily Report, free, by signing up here.

Pros and Cons of Obama’s $10 Barrel Oil Tax

Assuming you own some stocks, it’s probably a good idea to distract yourself and avoid headlines this weekend. For instance, 22 Signs That The Global Economic Turmoil We Have Seen So Far In 2016 Is Just The BeginningThe rout could continue next week. Here’s why, and Citi: World economy trapped in ‘death spiral’. Although this one’s interesting.

Pros & Cons Of Obama’s $10/Barrel Oil Tax

Courtesy of ZeroHedge

With President Obama unveiling his $10/Barrel tax plan to fund government-subsidized public transportation (versus having a choice over the method of transportation), we thought a glimpse at the pros and cons of the choices might be useful.

Reporting by The Onion.

Weighing factors such as convenience, time commitment, and environmental impact, deciding whether to commute via your own fossil-fuel-powered car or government-provided unicorn-fueled public transportation can be difficult.

Here is a side-by-side comparison of the two options…

Source: The Onion

This happens all the time

Here’s a very good article by Joshua Brown, who sends you to another article by Michael Batnick, the Irrelevant Investor. Today, Michael writes It Was The Best of Days, It Was The Worst of Days, which I also recommend reading.

This happens all the time

Courtesy of Joshua Brown, The Reformed Broker

What’s taking people’s breath away about this year’s stock market sell-off is probably some combination of three things: A) we’re unaccustomed to it, we’ve been spoiled for years, and B) it’s global in nature (and some would say global in origin), and C) the speed of the selling is incredible, by any historical standard – it feels like a whoosh straight down.

But as disorienting as this all feels, the truth is that double-digit drawdowns from prior highs in the S&P 500 are not an anomaly – they are the norm, statistically speaking. In fact, this happens during 2 out of every 3 years.

My colleague Michael Batnick has run the numbers…

  • The average intra-year decline is 16.4%. This current decline might feels worse due to the speed at which it’s happening, and because it’s occurring right out of the gate.
  • Double digit declines are to be expected, 64% of all years experienced them.
  • It’s not unusual for those double digit declines to be of little importance. 57% of the years with 10% drawdowns finished positive.
  • Stated differently, 36% of all years saw a double digit decline and still finished positive.
  • Drawdowns of 20% or more have happened 23 times, or 26% of all years. On five of those 23 occasions, stocks still ended up positive on the year.

He’s also got a great pair of charts showing the decline in each year along with that year’s closing gain or loss. This is a very powerful thing to be aware of given the cacophony of fear-mongering you’re coming into contact with right now.

Head over and check it out:

What’s Going On? (The Irrelevant Investor)

Turnaround Tuesday (in the Stock Market)?

Courtesy of Phil of Phil’s Stock World

Well, it’s been a rotten month.

All of our sectors are down, other than Utilities, and they are still down 3.4% over the last 6 months so that’s only a strong bounce (40% of the drop) in that sector anyway.  Still, it’s the only ray of sunshine we have so far though now, in the pre-market, at least, we are having weak bounces (20% of the drops) in all of our indexes.  I went over our bounce lines in the Morning Alert to our Members, so I won’t waste space here – it was also tweeted out.  As I summarized there:

Still plenty of stuff to worry about but, in general, it’s the same stuff we’ve been happily ignoring for two years and that’s why I flipped bullish on Thursday – there’s no new news here – just people finally taking the negatives into account, which moved the S&P (and the rest) back to a line (1,850) I consider a fair value.  I don’t think this is way too cheap and I’m not expecting a big recovery – I think 10% +/- 1,850 (1,665 to 2,035) is a fair range for the S&P BUT, since we know how to buy stocks for a 20% discount – there’s no reason for us to fear the bottom of the range from here.

The world’s movers and shakers are over at Davos this week (see our weekend notes) and the people who matter will determine your fate – so nothing for you to worry about.  Most likely, they will come up with a plan to boost their fortunes, which means saving the markets by robbing the people through the Central Banks yet again and, hopefully, transferring another $1,000,000,000,000 ($1Tn) from the poorest 3.5Bn people on this planet ($300 each) to the richest 100 – which is exactly what happened between 2010 and 2015.

That’s right, in order for the World’s richest 100 people to double their wealth in the last 5 years, the World’s poorest 3,500,000,000 people had to lose half their total net worth.  Now they only have $500 left to give and the wheels are still grinding them into what Oxfam calls a humanitarian crisis or what Donald Trump calls “Making America Great Again.”

That’s quite a milestone we passed this month, the wealth of the richest 62 people on this planet is now more than the combined wealth of the bottom 50%.  Of course, it hasn’t occurred to the average person in the top 49-99.999% that, once there are no more poor people to exploit – they are going to be coming for your money too!  This is something I predicted 8 years ago in “The Dooh Nibor Economy (that’s “Robin Hood” backwards!).”  Interestingly enough, Mr. Trump was my prime example at the time!

Hopefully it will be a calm year and the 3.5Bn impoverished people won’t realize that all they have to do is slit the throats of 62 people to double up their lifestyle (see our “2010 Outlook – A Tale of Two Economies for more on that prediction) or that the Middle Class can keep fooling themselves into thinking that they won’t be next. Well, next is a funny word as the Middle Class is obviously dying as the people in the Top 1% need more and More and MORE of their money to keep growing what they have.

That’s right, the more you break it down, the more obvious it is that we are ALL being screwed by the excess of the Top 0.01% unless you are one of those people, in which case please sign up for a Premium Membership HERE!  Actually, all kidding aside, if we don’t put a stop to this soon – things are going to turn ugly pretty fast because it takes more and more of your money for the top 0.0001% to get their next 20%, which is about how fast their pile is growing every year!

We flipped bullish (not very) last week, playing for the bounces and, this week, we’ll simply have to see how much bounce there actually is in these markets.  Mainly, that’s going to be up to earings, but those have been so distorted through manipulative buy-backs and book-cooking that it’s very hard to get a real handle on what’s happening:

This can lead to some dodgy behaviour from executives, who have incentives to massage and inflate earnings figures. Companies that rely on a strategy of misleading investors will get found out eventually.

There’s not too much market-moving data this week.  We have CPI and Housing Starts tomorrow and the Philly Fed on Thursday and Leading Economic Indicators on Friday leading up to next Wednesday’s Fed Rate Decision – THAT will move the markets!  Until then, it’s all about the earnings and we’re getting busy fast on that front.  Starting next week, we have our 3 huge earnings weeks for the season but plenty to keep us busy until then:

Time to have some fun!

Try Phil’s Stock World Daily Report, free, by signing up here.

A Market of Bears

A Market of Bears

By Ilene

We’re already in a bear market, but don’t panic.

Stock markets go up, down and sideways. The declines can be minor (corrections) or severe (bears!!).

The most significant declines are called “bears” because they feel a little like being mauled by a bear. A bear market is arbitrarily defined as a 20% or greater correction. Like with real bears, there are different varieties of market bears. Consequently, predicting the right hand side of a chart (future) based on the left hand side of the chart (past) is interesting but flawed. While many commentators provide lists of “if/then” relationships, those should probably be replaced with “if/maybes.”

My thesis is simple: It’s been a horrible start to 2016, but the weakness in stocks began months ago. Most stocks are already in or approaching bear market territory. As Joshua Brown notes in The Global Bear Market Has Already Begun:

Meb Faber tweeted yesterday on the topic of country stock markets, as he follows them closely as part of his Global Value strategy…

In a 39-page report overnight, UBS technical analysts Michael Riesner and Marc Müller make the case that the global stock market is already in a bear market and that the few remaining soldiers still on their feet will eventually fall. These last few un-corrected markets – Japan, US large caps and European Small/Mid caps -may run on a bit further, but the seven-year cycle demands an end to the bull that began in 2009.

There’s a lot of nuance to the call, of course, but the below introductory paragraph covers the basics. One thing I should mention – I read technical notes from all over The Street and from among my friends in the financial blogosphere every week. I can’t remember the last time I read a bullish one.

And Julie Verhage at Bloomberg reports that while the major US indexes may not be in a bear market, The ‘Average’ Stock Is Already in a Bear Market.

The S&P 500 is down just over 7 percent from its May high, but the average stock in the larger S&P 1500 was down 24 percent from its high as of yesterday’s close, according to new research from Bespoke Investment Group.

Chuck Mikolajczak also notes that For many stocks on Wall St, it’s already a bear market. “With U.S. stocks now on pace for their worst start to the year since 2000, investors are questioning whether Wall Street is headed for a bona fide bear market. The truth is, many stocks are already there. U.S. stocks have fallen nearly 4.0 percent so far in 2016, and more than 40 percent of the stocks in the benchmark S&P500 stock index are 20 percent or more off of their highs, the definition of a bear market.”

So let’s say we are already in a bear market, what do we do now? First, don’t panic. Panic feeds on itself and results in bad choices. In Crash Rules Everything Around Me, Ben Carlson at A Wealth of Common Sense writes,

[In] the headlines we see words like plunge, turmoil, plummet, disaster and destroyed. The panic feeds on itself and people start believing the hype. So people inevitably make mistakes, throw their plan out the window and become traumatized by market corrections and crashes. These periods become seared into the memories of investors even though they’re a natural part of the ebb and flow of market cycles.


Crashes, corrections, drawdowns, losses, system resets or whatever you want to call them are a feature of the financial markets, not a sign that they are broken. These things have to happen every once and a while for the system to function properly and wash out the excesses. It makes sense to learn from them and you definitely have to mentally prepare yourself for dealing with losses. But the infatuation with down markets can be taken too far when loss aversion begins to cloud your judgment.

Today, Ben shares his 10 Bear Market Truths. Before you sell all your stocks, I suggest reading the whole article. Excerpt:

A few truths about bear markets in stocks:

1. They happen. Sometimes stocks go down. That’s why they’re called risk assets. Half of all years since 1950 have seen a double-digit correction in stocks. Get used to it.

2.  They’re a natural outcome of a complex system run by emotions and divergent opinions. Humans tend to take things too far, so losses are inevitable.


10. These are the times that successful investors separate themselves from the pack. Most investors mistakenly assume that you make all of your money during bull markets. The reason so many investors fail is because they make poor decisions when markets fall.

Read more: 10 Bear Market Truths.

PSW’s Secret Santa’s Inflation Hedges for 2016

PSW’s Secret Santa’s Inflation Hedges for 2016

By Phil Davis

Happy Holidays!

I hope you get everything you want this holiday season and, most importantly, hope you have time to spend with your family. I love waiting for my kids to wake up on Christmas morning to come out of their rooms so I can videotape (gosh I’m old, there’s no tape anymore) them in those first moments of Christmas morning – how can I not be of good cheer anticipating that?

I have something to give you for the holidays as well.  Not peace on Earth but perhaps peace of mind heading into the New Year – a way to help insure some future prosperity with a few inflation-fighting stock picks that can brighten up your portfolio, which also can be used to help balance your home’s budget against unexpected cost increases.

This isn’t an options seminar (but check out our free webinars on youtube) or one about risk or leverage – these are just a few practical ideas you can use to hedge against inflation as it may affect your everyday life using basic industry ETFs and some simple hedging strategies to give you an opportunity to stay ahead of the markets if they keep going higher.

We haven’t felt the need for inflation hedges since 2011 as the Fed has kept us in a somewhat DEflationary cycle but our 2011 hedges were good for 300-600% returns and we’re simply going to repeat the same, simple concepts here to set up rational hedges against inflation to insure a financially healthy and happy 2016:

Idea #1 – Hedging for Home Price Inflation

Let’s say you have $40,000 put aside for a deposit on a home but you’re not sure it’s the right time to buy. On the other hand, let’s say you are worried that home prices will take off again (I doubt this but you never know). XHB is the homebuilder’s ETF. It’s currently at $34.49, after bottoming out at $31.62 in August. It’s still well off the highs for the year of $39, right before the flash crash.

You can sell 2 contracts of the XHB 2018 $28 puts for $2.25 each ($450) and that obligates you to buy 200 shares of XHB at $28 (16% off the current price) and you can use that money to buy 2 2017 $28/33 bull call spreads for $3.50 ($700) and that’s net $250 out of pocket and you have 2 $5 contracts that pay back $1000 if XHB simply stays flat through 2016. These bull call spreads, however, do not pay off early – the ETF needs to be above $33 at Jan 2017 options expiration day (the 20th).

So you are putting up $250 in cash and the margin requirement on the sale will be roughly $560 in an ordinary margin account.  What have we accomplished?  Well, if XHB goes up, your $250 becomes $1000, adding $750 (300% gain on cash) to your $4,000 deposit, that should help keep you up with up to a 20% jump in home prices.

On the risk side.  We certainly don’t expect XHB to go to zero but let’s say it falls to $20 (1/3).  Well, you are obligated to own 200 shares at $28 ($5,600) and you would have lost $8 per share, so $1600 is your risk there but I would put it to you that, if we have a crash of that magnitude again, you are better off losing that $1,600 than if you had bought a home for $400,000 and had it drop 20% on you ($80,000) or even 10% ($40,000) and again, that’s a very extreme example and you are not locked into the trade, you can get out when the loss is $500, for example, keeping 87.5% of your deposit and feeling good about your decision to wait out an uncertain housing market.

gas-station-863201_960_720Idea #2 – Hedging for Fuel Inflation

Gasoline prices have dropped drastically this year and, if you are the average family, you buy about 1,000 gallons of gas per year ($2,000) and spend another $1,500 heating your home.  That’s $3,500 a year spent on energy and it’s already down over $1,000 from last year – we might want to lock that in!

XLE is the ETF for the energy market and it’s currently trading at $61.57.  If you want to guard against a $1,500 increase in the price of fuel next year, you can, very simply buy 3 Jan 2017 $60/65 bull call spreads for $2.35 ($705) and offset that cost with the sale of 2 2018 $40 puts for $2.50 ($500) for a total cash outlay of $205.  If XLE simply hits $65 (up 5%) into Jan of next year,  you make $1,295 (631% on the cash).

We can assume any increase in fuel prices over the year will push them higher and XLE has pretty much held $60 since 2010, the last time oil was below $50 that August, so this is a very nice mechanism for hedging 20% of your fuel cost.  What’s nice about this is oil can fall and you’ll save money on your fuel and, as long as XLE doesn’t fall more than 35% by 2018 – the trade only costs your $220 cash outlay and you should save far more than that on lower energy prices (assuming that relationship is maintained).  Below 35%, you get assigned 200 shares of XLE at $40 in 2018 and that’s a price that’s held up very well since 2005, when oil was under $40. So a risk of owning $8,000 worth of the Energy Spider, which puts you bullish on oil at $40 – which will always make another nice long-term general hedge against inflation.

Members at PSW know they can roll those puts or convert those put assignments into buy/writes or do a dozen other things to mitigate the losses – as I said, these are really basic examples of how anyone can hedge their real-life budgets to help them make long-range plans to fight inflation.

Idea #3 – Hedging for Food Inflation

If you think you spend a lot on fuel, maybe you haven’t been to the grocery store lately. I knew food inflation was getting out of hand when the A&P’s fruit and vegetable prices started catching up with Whole Foods. I used to get a few cool items at Whole Foods and stop at A&P for the staples but there’s barely a difference in fruits and vegetables anymore when it used to be extreme. Good for Whole Foods and local growers, but not so good for the average consumer who is being bled dry by commodity speculators and agriculture cartels.

And the middle-men are getting crushed too. A&P (GAP) went bankrupt and DF has flatlined with WFM down for the year, even after a spectacular pop in December. Perhaps the CEO’s of Dean Foods and Whole Foods can benefit from this hedging exercise as well.

DBA is the way to go here.  It’s been a while since we’ve liked them when they shot up early in 2014 from $24 to $29 and, since then, it’s been straight downhill back to $20.48, where we love them on the long side again.

If you spend $10,000 a year on groceries you can risk being assigned 400 shares for $8,000 and sell 4 of the 2018 $20 puts for $1.25 each ($500).  That money can be used to buy 8 of the 2017 $20/23 bull call spreads for $1.15 ($920) and that’s net $420 out of pocket (2 week’s shopping) and the upside, if DBA simply hits $23 (up 7%), is $2,400 less the $420 laid out –i.e. $1,980 — so a 20% hedge against food inflation and your risk is owning 400 shares of DBA at $20 ($8,000) as a long-term hedge – if food prices continue to go lower.

The 2018 put sale, if DBA should go to $16 (down 20%), would cost you $1,600 – less than you will probably save on food.  Remember, these are not magic beans that pay off no matter what the market does – these are hedges against inflation and, if there is no inflation, then you will save LESS than you otherwise would have but, again – there are dozens of ways to make owning DBA long-term a successful part of your portfolio.  Instead of randomly investing your retirement savings – trade ideas like these are ways to put some of the money to work for you – in ways that can help you manage your bills NOW – as part of your daily life.

Inflation Hedge #4 – Hedging Against Rises in PSW Member Fees

We run a unique service.  I am on-line most trading days chatting live with members about trades.  Optrader and Trend Trader and several of our other writers are online as well but there is a limit to how many people we can effectively get back to in a day so we limit our Membership and, when it gets too crowded, raise our prices (we just did last year).

For 2016, let’s make things interesting with my favorite hedge. If you sign up for a full year membership between now and Jan 2, 1016, AND the following trade idea does NOT net 100% on the cash outlay by expiration day on Jan 2017, then I will give you a free Membership for 2017!

(Probably good time to put in some kind of contest disclaimer that this is just for fun and we guarantee nothing at all and that we can change the rules at any time and that we accept no responsibility for anything under any circumstances whatsoever – how’s that?  I just want you to know how good I feel about this trade idea. Always consult a professional investment advisor (I’m not one) before doing anything!)

Anyway, what’s the trade? VERY simple on NATURAL GAS! I just wrote a post on why I love UNG down here (was $7 at the time, already $7.69) and UNG Jan 2017 $5/9 bull call spreads for $2 can be offset with the sale of Jan 2018 $7 puts for $1.60. That will be a net cost of $0.40 for the $4 spread plus the put obligation (we are not counting the margin amount). The payout if UNG reaches expiration at $9 (now $7.69) is $4 – or 900% more than the $0.40 outlay.

To make 100% on the cash ($0.40), the net price of that spread has to be $0.80 or greater – that’s the “bet.” Obviously, if the spread is even a penny over $7, the $7 puts would expire worthless and will not be an issue and, at $7, the spread returns $2,000 for each $400 invested (10 contracts).  Remember, if it fails to return at least 100% and you have signed up for an Annual Membership in the next 7 days – you will get a free year in 2017.

Now, if you are thinking, after going over these ideas and seeing how a few of our old trades worked out: “Well, that’s too easy, there’s a very good chance of making 100% on that trade.” That’s kind of my point!  That is the point to using options and hedging in a balanced virtual portfolio and that is what we teach over at PSW every day.

I very much hope all these trades work out well, ESPECIALLY the last one!

Have a very happy holidays and we hope to see you inside in the new year.

All the best,

– Phil

Sticker Shock: Fed to Hike Rates First Time in NINE Years!

Sticker Shock: Fed to Hike Rates First Time in NINE Years!

Courtesy of Phil’s Stock World

A rate hike – what’s that?

Embedded image permalink

It has been so long since the Federal Reserve has raise interest rates in the US that Banks and Brokerage houses are having seminars for their workers to help them understand the repercussions of a rising rate environment.  If you are working with Mortgage Brokers or Financial Planners under the age of 35 – then it’s very possible that in their entire professional careers, they have never been in an economic environment like this.  Even for the older market professionals and traders, it’s been so long it’s hard to remember.

The Fed last began tightening rates back in June of 2004 mainly to cool a rapidly rising housing market but also to cool off the “irrational exuberance” in the stock market, as the S&P had gone from 800 in August of 2002 to 1,300 in April of 2006 (up 62.5%) while housing prices had doubled off their mid 90’s lows.  The pace of that tightening was 1% every six months, topping out at 5.25% 2 years later:

As you can see – it had a bit more than the desired effect on the housing market though housing prices continued to go up all the way into 2006 before completely collapsing almost all the way back to where they were 10 years earlier – a real “lost decade” for home buyers.  Only then did the ripple effects spill out to the stock market and it was the mortgage lenders themselves and the Financial Institutions that traded their collateralized debt that ultimately took the economy down.

It would seem the Fed has gotten smarter and is not going to even let a runaway housing market get started this time – and that’s a smart choice as we sure can’t afford another round of bailouts, and the low rates have let most homeowners survive the downturn, albeit without the gains they hoped they would make from their housing investments.

Since our September, 2011, lows on the S&P at 1,100, the S&P has climber 950 points, which is 86.3% and Janet Yellen has already said that’s a bubble she is wary of.  It’s very doubtful that the Fed will tighten as aggressively as they did in the 2004-6 cycle and a big thing we’ll be watching today is what kind of signals they do give as to their future intentions.  As I mentioned on Monday, Hilsenrath (the Fed Whisperer) has already prepared the faithful for a gentle, gradual tightening process but we’ve been at almost zero for so long – almost any increase will seem huge to spoiled borrowers.

As rates rise, the Trillions of Dollars of Corporate Bonds that were purchased as low rates will begin to lose their value on the secondary market.  Verizon (VZ) for example, sold $49Bn worth of 5% debt (all at once) in 2013 and has since refinanced it at even lower rates.  That’s great for VZ but it won’t be so good for people holding 5% and lower corporate bonds as “safer” Treasuries begin to rise to match the yields.

Anyone with a portfolio knows a loss is a loss when you are staring at it and, with 10-year notes at 2.15%, heading to just 3% will knock the value of $2Tn worth of corporate bonds down by 10-20% on the resale market. We’re talking $200-400Bn in paper losses on somebody’s balance sheet!  Although, it’s no sure thing as yet, 10-year notes jumped 33% when Greenspan first began tightening in 2004 but they went back down several times as no one really believed the high rates would last 10 years (and they were right!). At the time, Greenspan called it a “conundrum.”

Another thing that happens in a rising rate environment is home refinances dry up very quickly. Obviously, no one wants to refinance their loans for higher rates and that will prevent people from taking money out of their homes leaving less money to spend in the economy. Home sales will also come under pressure as mortgage rates rise.

This could be the end of 0% financing on cars, furniture, etc. as well as teaser rates on Credit Card Debt and $1.3Tn of student loans are geared to the Fed Funds Rate – making them harder to pay off with those minimum wage paychecks.  With Corporations cut off from easy cash, we may finally see a decline in stock buybacks and M&A activity and that, of course, will not be a positive for the markets.

According to the WSJ, $541Bn has already been withdrawn from risky Emerging Markets in 2015 and the Fed hike may push that number much higher.  Corporate Debt Ratios in emerging markets have jumped by 30% of their GDP in the past 5 years – clearly an unsustainable pace and potentially a disaster as the rollovers become more and more expensive. That’s why, so far, the Fed is the lone wolf among Central Bankers in moving towards raising rates. Others are still looking to go lower, some EU Banks are already negative.

Back in September, the IMF’s Christine Lagarde begged the Fed to wait until 2016 to raise rates “because of the implications for developing nations.”  Lagarde said that she is concerned that many emerging markets may have expended their capacity to buffer against shocks in the wake of the financial crisis.  In a much-ignored IMF report back in October, it was esimated that Emerging Markets have over-borrowed by roughly $3Tn:

The IMF estimates developing nations—led by China—may have over-borrowed by roughly $3 trillion, and is warning that those countries could face a wave of corporate defaults. The fund estimates around 25% of China’s corporate debt is at risk, especially in the real estate and construction sectors, and including many state-owned firms.

That “will unavoidably entail some corporate defaults, the exit of a number of nonviable firms, and write-offs on nonperforming loans,” they said.

We are, of course, already seeing those defaults begin to hit – this is why we went short China at the dead top on April 9th (FXI was $51.24, now $35.64 – down 30%) and I was banging the table to get out of China all that month.  In fact, we noticed that Chinese bond defaults were becoming a problem early on:

I know, I sounded like a broken record. If I got just SOME people to get out of China before it all collapsed, then it was worth it. In May (and that last post was 5/2), we finally had a little scare in China and then it rallied but then it completely and utterly collapsed, never to recover (so far), yet the US markets have been chugging along (and we are “Cashy and Cautious” on those now).

Another factor to consider is currency valuations. If the Fed hikes while others remain at ease, then the Dollar may get stronger against other currencies (it’s already at 10-year highs). That puts more downward pressure on commodity prices (priced in Dollars), with many Emerging Markets depend on commodities to survive.  While it’s good for their exports, it also devalues any bonds they sell in their local currency as the relative value of bonds priced in Euros, Yen, Yuan, Aussie Dollars, Loonies, etc. falls compared to bonds priced in greenbacks.

Remember, China did everything it could to prevent a collapse and it still happened.  How do you think other countries will do if faced with the same pressure as defaults begin to rise?


Note: The Fed is in a particularly bad spot. As Paul Price and I wrote in August this year,

[A]ny increase in rates this year will be small, perhaps around 0.25%. Apart from a short-lived reaction by day traders, a small increase in rates is unlikely to have a major effect on stock prices. Even post-rate hike, absolute rates will be low. Income producing alternatives will still be scarce. The lack of risk-free returns drove indexes to higher than average P/E ratios in the first place. A small rate increase won’t change that.

When “safe” investments yield next to nothing, “risky” investments, like stocks, become more appealing, even when the S&P is near its all-time high.

The price of the SPY alone does not determine the best place for new money. The attractiveness of alternatives is also important. And as for new money, many central banks are in “printing” mode. Due to the lack of alternative investments, the demand for stocks has kept US equities almost constantly moving higher. The demand has also lowered the risk of holding stocks. Huge corporate buybacks, using cheaply borrowed money (available due to ZIRP) has further diminished supply while boosting demand.

Only significantly higher rates would break this pattern. But there’s a problem with that.

America’s greater than $18 trillion, and growing, national debt suggests that significantly higher rates are not coming anytime soon. A 1% nominal increase on the average coupon rate that Washington pays would add about $180 billion per year to US’s annual debt service expense.

Raising money to pay off growing government debt, exacerbated by rate hikes, would force the issuance of even more debt. The US, unlike Greece, can and will continue printing money. The money printing (issuing more debt) would inevitably lead to much higher inflation. As many have said more succinctly, we cannot cure an unpayable debt load by issuing more and more debt. The cost of servicing that debt would become a true budget buster. (Opportunity Vs. Risk in a Bifurcated Market)


Try Phil’s Stock World Daily Report, free, by signing up here.

We’re All Hedge Funds Now, Part 3: Even The Swiss Are Taking Insane Risks

We’re All Hedge Funds Now, Part 3: Even The Swiss Are Taking Insane Risks

Courtesy of John Rubino

Let’s start with the latest on the global descent into negative interest rates:

Fed would consider negative rates if economy soured – Yellen

(Reuters) – The Federal Reserve would consider pushing interest rates below zero if the U.S. economy took a serious turn for the worse, Fed Chair Janet Yellen said on Wednesday.

“Potentially anything – including negative interest rates – would be on the table. But we would have to study carefully how they would work here in the U.S. context,” Yellen told a House of Representatives committee.

This would happen if the economy were to “deteriorate in a significant way,” she said, adding that she believed negative rates “would have some at least modest favorable effect on banks’ incentives to lend.”

Janet Yellen is now firmly in the central banking “whatever it takes” mainstream. And since — if the ongoing contraction in manufacturing is any indication — the economy is indeed “deteriorating in a significant way,” the US is now likely to join Europe in pushing rates down (or allowing rates to fall) to negative territory.

But already, the impact of zero and near-zero rates has been seismic. Virtually every class of financial entity, from retiree to central bank has, driven by a need for yield, begun taking the kinds of chances that used to be associated with gambling addiction or drug abuse. See the previous two entries in this series: We’re All Hedge Funds Now and We’re All Hedge Funds Now, Part 2: Tech Startups And Nigerian Bonds.

The latest bit of surreal news on this front concerns the Swiss National Bank, once upon a time the virtual definition of rock-solid risk aversion, and its growing and highly volatile — get this — equity portfolio:

Swiss central bank owns big stake in troubled drug maker

(CNN Money) -Switzerland might be known for making precise clocks, but its timing couldn’t be worse on at least one investment.

The Swiss central bank increased its stake in Valeant Pharmaceuticals (VRX) right before the controversial U.S. pharmaceutical company was accused of Enron-like fraud.

First, you might be wondering, what is a European central bank doing owning stocks in the first place? In recent years the Swiss National Bank has used its swelling currency reserves to acquire equities. The central bank owned nearly $39 billion worth of shares in 2,569 U.S. companies as of the end of September.

The bank doesn’t handpick its stocks. The central bank’s website says it “only invests passively.” It uses a set of rules based on strategic benchmarks to determine which stocks to add to its massive portfolio.

Unfortunately for Swiss taxpayers, one of those stocks is Valeant, the troubled pharmaceutical company whose share price is in freefall mode.

The SNB owned 1.44 million shares of Valeant as of the end of September, up from 1.28 million at the end of June, according to Securities and Exchange Commission filings. The central bank said its Valeant stake was worth about $257 million.

Valeant stock has more than halved to $84, from $178 at the end of September. That means that if the Swiss central bank did not sell any shares, it is staring at a loss of about $146 million on its Valeant holdings.

Other than Valeant, the SNB’s portfolio looks like that of a typical large-cap equity fund’s nifty-50 zero-analysis list, which is to say Apple, Google, GE, Microsoft and other similar household name multinationals. These are the names that money managers pile into at the top of a cycle when they start worrying about how to justify their overvalued losers and decide that whatever happens they won’t be fired for owning Apple. But of course at the top of a cycle even the Apples of the world are destined to fall by half or more.

So what does it mean that governments and central banks have become hedge funds?

Well, now that the monetary authorities have both the ability to push stocks up by buying them with newly-created currency and a burning need to do so in order to protect their multi-billion dollar equity portfolios, can there be any doubt about the course of monetary policy and general financial intervention in the next couple of years? No there can’t. In effect, Wall Street now gets to decide on stock prices rather than wager on them. Every 5% drop in the S&P 500 will be met with both easier money and direct buying by the Swiss, Japanese, Chinese, European and US central banks. Markets — in their old definition as price signaling mechanisms that tell capitalists what to do with capital — are effectively over.

As valuations become more and more unrealistic — either through rising share prices or falling corporate profits the scale of the necessary intervention will expand to the point that central bank equity portfolios will dwarf those of most hedge funds and mutual funds.

The amount of money creation necessary to buy up all those equities will spook the currency markets, leading to even more central bank intervention, which in turn will expose the contradiction inherent in the manipulate-all-markets strategy: Buying stocks with newly-created money is bad for exchange rate stability, but raising interest rates to protect a currency is bad for equity market valuations. One or the other will have to give.

Visit John’s Dollar Collapse blog.


Note: For full appreciation of the Swiss National Bank’s equity holdings and losses on Valeant, Zero Hedge created a chart of the Bank’s stock holdings. (Swiss National Bank Slammed For Massive Valeant Loss; Adds Another 900,000 Apple Shares In Q3.)

The chart is dated September 30. Since then, Valeant has fallen from around $178 to around $78.

From Zero Hedge, “It is this stock which has crashed in the interim period, and which was down another 8% as of this moment to a new 2 year low…”

According to Swiss Finanz and Wirtschaft,

On one item the SNB is likely to have little joy: the shares of Valeant have plummeted around 46% since the end of September. This burdened the portfolio of the National Bank which sat on 1.4 million shares of the pharmaceutical conglomerate. The securities even ranked ahead of Intel and Wal-Mart Stores among the twenty-five largest positions. Measured against the current price of $ 95.41 so that resulted in a book loss of nearly $120 million.

Valeant (VRX) is trading at $79 right now.

Untangling America From The American Empire

Courtesy of Charles Hugh-Smith, Of Two Minds

The Status Quo would have us believe that America and its Empire are one entity. It is false: America could be untangled from its Empire. And many of us believe it is essential that America untangles itself from its Imperial structures and ideologies.

What I call The Imperial Project was cobbled together in the aftermath of World War II, when the Soviet Union and America posed an existential threat to each other's ideologies and systems. It may be hard to believe, but the U.S. did not have a Central Intelligence Agency (CIA) or other espionage/intelligence gathering agency prior to World War II. America had no spy agency and no Black Operations/Special Forces capabilities. The National Security State as we know it today did not exist.

Though the Deep State has long been an essential feature of the American power structure, the post-war Deep State extended its reach globally in ways that the pre-war Deep State could not. I have covered the Deep State for many years:

Surplus Repression and the Self-Defeating Deep State (May 26, 2015)

Is the Deep State Fracturing into Disunity? (March 14, 2014)

The Dollar and the Deep State (February 24, 2014)

Many people naively think all that's needed to end the Imperial Project is close America's overseas military installations and end the endless wars of choice. While the eradication of the neo-conservative Imperial agenda would be a welcome first step, it would only be a first step, as I explained in You Can't Separate Empire, the State, Financialization and Crony Capitalism.

To untangle America from its Imperial Project, we also need to end financialization and crony-state-capitalism, both of which are key features of the Imperial Project. What better way is there to extend influence than exporting inflation and offering limitless credit in U.S. dollars? What better way to skim the profits from trade than importing materials and goods and exporting fiat currency?

The federal state's vast entitlement programs are ultimately funded by the Empire: not directly, but indirectly, via its ability to foist trillions of dollars of debt on the world economy.

The believers that hot wars are all there is to the Imperial Project fall silent when their share of the swag might be threatened. Unsurprisingly, we want the financial benefits of Empire but recoil at the entanglements of Empire.

Imperial Rome offers a useful template for what happens when the domestic populace gets dependent on Imperial wealth: the notion of sacrifice for the nation goes out the window and bread and circuses become the sole source of state legitimacy. Collapse follows these developments like night follows day.

For America to come home and untangle itself from the Imperial Project, it will have to do more than not meddle in everyone else's affairs; it will have to learn to live within its means–what it earns from producing goods and services, not what it skims from global financialization.


Former Australia Prime Minister Chastises EU on Securing Borders, Economic Migration; Mish for President Review

Courtesy of Mish.

In a speech I almost completely agree with, former Australia prime minister Tony Abbott chastised the EU in an address at the Second Annual Margaret Thatcher Lecture in London on October 27, 2015.

Tony Abbott told the EU to shut its borders because "a country that cannot control its borders starts to lose control of itself".

The Sydney Morning Herald has the Transcript of Tony Abbott's Controversial Speech at the Margaret Thatcher Lecture. Here are a few select passages, emphasis mine.

All countries that say "anyone who gets here can stay here" are now in peril, given the scale of the population movements that are starting to be seen. There are tens – perhaps hundreds – of millions of people, living in poverty and danger who might readily seek to enter a Western country if the opportunity is there.

Who could blame them? Yet no country or continent can open its borders to all comers without fundamentally weakening itself. This is the risk that the countries of Europe now run through misguided altruism.

On a somewhat smaller scale, Australia has faced the same predicament and overcome it. The first wave of illegal arrivals to Australia peaked at 4000 people a year, back in 2001, before the Howard government first stopped the boats: by processing illegal arrivals offshore; by denying them permanent residency; and in a handful of cases, by turning illegal immigrant boats back to Indonesia.

The second wave of illegal boat people was running at the rate of 50,000 a year – and rising fast – by July 2013, when the Rudd government belatedly reversed its opposition to offshore processing; and then my government started turning boats around, even using orange lifeboats when people smugglers deliberately scuttled their vessels.

It's now 18 months since a single illegal boat has made it to Australia. The immigration detention centres have-all-but-closed; budget costs peaking at $4 billion a year have ended; and – best of all – there are no more deaths at sea. That's why stopping the boats and restoring border security is the only truly compassionate thing to do.

Now, while prime minister, I was loath to give public advice to other countries whose situations are different; but because people smuggling is a global problem, and because Australia is the only country that has successfully defeated it – twice, under conservative governments – our experience should be studied.

In Europe, as with Australia, people claiming asylum – invariably – have crossed not one border but many; and are no longer fleeing in fear but are contracting in hope with people smugglers. However desperate, almost by definition, they are economic migrants because they had already escaped persecution when they decided to move again.

Our moral obligation is to receive people fleeing for their lives. It's not to provide permanent residency to anyone and everyone who would rather live in a prosperous Western country than their own. That's why the countries of Europe, while absolutely obliged to support the countries neighbouring the Syrian conflict, are more-than-entitled to control their borders against those who are no longer fleeing a conflict but seeking a better life.

This means turning boats around, for people coming by sea. It means denying entry at the border, for people with no legal right to come; and it means establishing camps for people who currently have nowhere to go….

Continue Here

The Demobilization Of The American People & The Spectacle Of Election 2016

Courtesy of Tom Engelhardt of TomDispatch

You may not know it, but you’re living in a futuristic science fiction novel. And that’s a fact. If you were to read about our American world in such a novel, you would be amazed by its strangeness.  Since you exist right smack in the middle of it, it seems like normal life (Donald Trump and Ben Carson aside). But make no bones about it, so far this has been a bizarre American century.

Let me start with one of the odder moments we’ve lived through and give it the attention it’s always deserved. If you follow my train of thought and the history it leads us into, I guarantee you that you’ll end up back exactly where we are — in the midst of the strangest presidential campaign in our history.

To get a full frontal sense of what that means, however, let’s return to late September 2001. I’m sure you remember that moment, just over two weeks after those World Trade Center towers came down and part of the Pentagon was destroyed, leaving a jangled secretary of defense instructing his aides, “Go massive. Sweep it all up. Things related and not.”

I couldn’t resist sticking in that classic Donald Rumsfeld line, but I leave it to others to deal with Saddam Hussein, those fictional weapons of mass destruction, the invasion of Iraq, and everything that’s happened since, including the establishment of a terror “caliphate” by a crew of Islamic extremists brought together in American military prison camps — all of which you wouldn’t believe if it were part of a sci-fi novel. The damn thing would make Planet of the Apes look like outright realism.

Instead, try to recall the screaming headlines that labeled the 9/11 attacks “the Pearl Harbor of the twenty-first century” or “a new Day of Infamy,” and the attackers “the kamikazes of the twenty-first century.”  Remember the moment when President George W. Bush, bullhorn in hand, stepped onto the rubble at "Ground Zero" in New York, draped his arm around a fireman, and swore payback in the name of the American people, as members of an impromptu crowd shouted out things like “Go get ‘em, George!” 

“I can hear you! I can hear you!” he responded. “The rest of the world hears you! And the people — and the people who knocked these buildings down will hear all of us soon!” 

“USA!  USA!  USA!” chanted the crowd.

Then, on September 20th, addressing Congress, Bush added, “Americans have known wars, but for the past 136 years they have been wars on foreign soil, except for one Sunday in 1941.”  By then, he was already talking about "our war on terror."

Now, hop ahead to that long-forgotten moment when he would finally reveal just how a twenty-first-century American president should rally and mobilize the American people in the name of the ultimate in collective danger.  As CNN put it at the time, “President Bush… urged Americans to travel, spend, and enjoy life.” His actual words were:

“And one of the great goals of this nation's war is to restore public confidence in the airline industry and to tell the traveling public, get on board, do your business around the country, fly and enjoy America's great destination spots. Go down to Disney World in Florida, take your families and enjoy life the way we want it to be enjoyed.”

So we went to war in Afghanistan and later Iraq to rebuild faith in flying. Though that got little attention at the time, tell me it isn’t a detail out of some sci-fi novel.  Or put another way, as far as the Bush administration was then concerned, Rosie the Riveter was moldering in her grave and the model American for mobilizing a democratic nation in time of war was Rosie the Frequent Flyer. It turned out not to be winter in Valley Forge, but eternal summer in Orlando.  From then on, as the Bush administration planned its version of revenge-cum-global-domination, the message it sent to the citizenry was: go about your business and leave the dirty work to us.

Disney World opened in 1971, but for a moment imagine that it had been in existence in 1863 and that, more than seven score years ago, facing a country in the midst of a terrible civil war, Abraham Lincoln at Gettysburg had said this:

“It is rather for us to be here dedicated to the great task remaining before us — that from these honored dead we take increased devotion to that cause for which they gave the last full measure of devotion — that we here highly resolve that these dead shall not have died in vain — that this nation, under God, shall have a new birth of freedom at Disney World — and that government of the people, by the people, for the people, shall not perish for lack of vacations in Florida.”

Or imagine that, in response to that “day of infamy,” the Pearl Harbor of the twentieth century, Franklin Roosevelt had gone before Congress and, in an address to the nation, had said:

“Hostilities exist. There is no blinking at the fact that our people, our territory, and our interests are in grave danger. With confidence in our airlines, with the unbounding determination of our people to visit Disney World, we will gain the inevitable triumph — so help us God.”

If those are absurdities, then so is twenty-first-century America.  By late September 2001, though no one would have put it that way, the demobilization of the American people had become a crucial aspect of Washington’s way of life. The thought that Americans might be called upon to sacrifice in any way in a time of peril had gone with the wind.  Any newly minted version of the classic “don’t tread on me” flag of the revolutionary war era would have had to read: “don’t bother them.”

The Spectacle of War

The desire to take the American public out of the “of the people, by the people, for the people” business can minimally be traced back to the Vietnam War, to the moment when a citizen’s army began voting with its feet and antiwar sentiment grew to startling proportions not just on the home front, but inside a military in the field.  It was then that the high command began to fear the actual disintegration of the U.S. Army. 

Not surprisingly, there was a deep desire never to repeat such an experience.  (No more Vietnams!  No more antiwar movements!)  As a result, on January 27, 1973, with a stroke of the pen, President Richard Nixon abolished the draft, and so the citizen’s army.  With it went the sense that Americans had an obligation to serve their country in time of war (and peace).  

From that moment on, the urge to demobilize the American people and send them to Disney World would only grow.  First, they were to be removed from all imaginable aspects of war making.  Later, the same principle would be applied to the processes of government and to democracy itself.  In this context, for instance, you could write a history of the monstrous growth of secrecy and surveillance as twin deities of the American state: the urge to keep ever more information from the citizenry and to see ever more of what those citizens were doing in their own private time.  Both should be considered demobilizing trends. 

This twin process certainly has a long history in the U.S., as any biography of former FBI Director J. Edgar Hoover would indicate.  Still, the expansion of secrecy and surveillance in this century has been a stunning development, as ever-larger parts of the national security state and the military (especially its 70,000-strong Special Operations forces) fell into the shadows.  In these years, American “safety” and “security” were redefined in terms of a citizen’s need not to know.  Only bathed in ignorance, were we safest from the danger that mattered most (Islamic terrorism — a threat of microscopic proportions in the continental United States).

As the American people were demobilized from war and left, in the post-9/11 era, with the single duty of eternally thanking and praising our "warriors” (or our "wounded warriors”), war itself was being transformed into a new kind of American entertainment spectacle.  In the 1980s, in response to the Vietnam experience, the Pentagon began to take responsibility not just for making war but for producing it.  Initially, in the invasions of Grenada and Panama, this largely meant sidelining the media, which many U.S. commanders still blamed for defeat in Vietnam.

By the First Gulf War of 1991, however, the Pentagon was prepared to produce a weeks-long televised extravaganza, which would enter the living rooms of increasingly demobilized Americans as a riveting show.  It would have its own snazzy graphics, logos, background music, and special effects (including nose-cone shots of targets obliterated).  In addition, retired military men were brought in to do Monday Night Football-style play-by-play and color commentary on the fighting in progress.  In this new version of war, there were to be no rebellious troops, no body bags, no body counts, no rogue reporters, and above all no antiwar movement.  In other words, the Gulf War was to be the anti-Vietnam. And it seemed to work… briefly.

Unfortunately for the first Bush administration, Saddam Hussein remained in power in Baghdad, the carefully staged post-war “victory” parades faded fast, the major networks lost ad money on the Pentagon’s show, and the ratings for war as entertainment sank.  More than a decade later, the second Bush administration, again eager not to repeat Vietnam and intent on sidelining the American public while it invaded and occupied Iraq, did it all over again.

This time, the Pentagon sent reporters to “boot camp,” “embedded” them with advancing units, built a quarter-million-dollar movie-style set for planned briefings in Doha, Qatar, and launched its invasion with “decapitation strikes” over Baghdad that lit the televised skies of the Iraqi capital an eerie green on TVs across America.  This spectacle of war, American-style, turned out to have a distinctly Disney-esque aura to it.  (Typically, however, those strikes produced scores of dead Iraqis, but managed to “decapitate” not a single targeted Iraqi leader from Saddam Hussein on down.)  That spectacle, replete with the usual music, logos, special effects, and those retired generals-cum-commentators — this time even more tightly organized by the Pentagon — turned out again to have a remarkably brief half-life.

The Spectacle of Democracy

War as the first demobilizing spectacle of our era is now largely forgotten because, as entertainment, it was reliant on ratings, and in the end, it lost the battle for viewers.  As a result, America's wars became ever more an activity to be conducted in the shadows beyond the view of most Americans. 

If war was the first experimental subject for the demobilizing spectacle, democracy and elections turned out to be remarkably ripe for the plucking as well.  As a result, we now have the never-ending presidential campaign season.  In the past, elections did not necessarily lack either drama or spectacle.  In the nineteenth century, for instance, there were campaign torchlight parades, but those were always spectacles of mobilization.  No longer.  Our new 1% elections call for something different.

It’s no secret that our presidential campaigns have morphed into a “billionaire’s playground,” even as the right to vote has become more constrained.  These days, it could be said that the only group of citizens that automatically mobilizes for such events is “the billionaire class” (as Bernie Sanders calls it).  Increasingly, many of the rest of us catch the now year-round spectacle demobilized in our living rooms, watching journalists play… gasp!… journalists on TV and give American democracy that good old Gotcha!

In N.H., Ignoring the GOP Clown ShowIn 2001, George W. Bush wanted to send us all to Disney World (on our own dollar, of course).  In 2015, Disney World is increasingly coming directly to us.

After all, at the center of election 2016 is Donald Trump.  For a historical equivalent, you would have to imagine P.T. Barnum, who could sell any “curiosity” to the American public, running for president.  (In fact, he did serve two terms in the Connecticut legislature and was, improbably enough, the mayor of Bridgeport.)  Meanwhile, the TV “debates” that Trump and the rest of the candidates are now taking part in months before the first primary have left the League of Women Voters and the Commission on Presidential Debates in the dust.  These are the ratings-driven equivalent of food fights encased in ads, with the “questions” clearly based on what will glue eyeballs.

Here, for instance, was CNN host Jake Tapper’s first question of the second Republican debate: “Mrs. Fiorina, I want to start with you. Fellow Republican candidate, and Louisiana Governor Bobby Jindal, has suggested that your party’s frontrunner, Mr. Donald Trump, would be dangerous as president. He said he wouldn’t want, quote, ‘such a hot head with his finger on the nuclear codes.’ You, as well, have raised concerns about Mr. Trump’s temperament. You’ve dismissed him as an entertainer. Would you feel comfortable with Donald Trump’s finger on the nuclear codes?”

And the event only went downhill from there as responses ranged from non-answers to (no kidding!) a discussion of the looks of the candidates and yet the event proved such a ratings smash that its 23 million viewers were compared favorably to viewership of National Football League games.

In sum, a citizen’s duty, whether in time of war or elections, is now, at best, to watch the show, or at worst, to see nothing at all.

This reality has been highlighted by the whistleblowers of this generation, including Edward Snowden, Chelsea Manning, and John Kiriakou.  Whenever they have revealed something of what our government is doing beyond our sight, they have been prosecuted with a fierceness unique in our history and for a simple enough reason.  Those who watch us believe themselves exempt from being watched by us.  That’s their definition of “democracy.”  When “spies” appear in their midst, even if those whistleblowers are “spies” for us, they are horrified at a visceral level and promptly haul out the World War I-era Espionage Act.  They now expect a demobilized response to whatever they do and when anything else is forthcoming, they strike back in outrage.

A Largely Demobilized Land

A report on a demobilized America shouldn’t end without some mention of at least one counter-impulse.  All systems assumedly have their opposites lurking somewhere inside them, which brings us to Bernie Sanders.  He’s the figure who doesn’t seem to compute in this story so far. 

All you had to do was watch the first Democratic debate to sense what an anomaly he is, or you could have noted that, until almost the moment he went on stage that night, few involved in the election 2016 media spectacle had the time of day for him. And stranger yet, that lack of attention in the mainstream proved no impediment to the expansion of his campaign and his supporters, who, via social media and in person in the form of gigantic crowds, seem to exist in some parallel universe.

In this election cycle, Sanders alone uses the words “mobilize” and “mobilization” regularly, while calling for a “political revolution.” (“We need to mobilize tens of millions of people to begin to stand up and fight back and to reclaim the government, which is now owned by big money.”) And there is no question that he has indeed mobilized significant numbers of young people, many of whom are undoubtedly unplugged from the TV set, even if glued to other screens, and so may hardly be noticing the mainstream spectacle at all.

Whether the Sanders phenomenon represents our past or our future, his age or the age of his followers, is impossible to know. We do, of course, have one recent example of a mobilization in an election season. In the 2008 election, the charismatic Barack Obama created a youthful, grassroots movement, a kind of cult of personality that helped sweep him to victory, only to demobilize it as soon as he entered the Oval Office. Sanders himself puts little emphasis on personality or a cult of the same and undoubtedly represents something different, though what exactly remains open to question.

In the meantime, the national security state’s power is largely uncontested; the airlines still fly; Disney World continues to be a destination of choice; and the United States remains a largely demobilized land.

[Clown Picture: Photo Illustration by Emil Lendof/The Daily Beast]