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Stack: Bear Market Ahead

Mr. Stack’s technical indicators are still pointing toward a bear market. He’s also worried about the shaky housing market, with price drops and slowing sales showing up in major cities.

“We’re not trying to time the market, but we’re very comfortable with our defensive allocation,” he said. Although he predicted higher volatility a year ago, he was nonetheless surprised by the extremes reached in December, without even “a single hard warning sign of recession on the horizon.”

“Can you imagine,” he asked, “how volatile it will be when we do have those warnings?”


Z-val: James Stack
Via: The New York Times
Date: 1/4/19
Disposition: Medium-Term Bearish
S&P 500 on 1/4/19: 2532
S&P 500 on 7/4/19: TBD
Change: TBD
Judgment: TBD

Z-val definition and more forecasts in The Z-val Zone.

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China’s Debt, 2018 Midterms, Trump Impeachment, Bond Funds, Maslow, and Halloween

These discussions are on The Kelly Letter premium subscriber site:

In a comment below last Sunday’s letter, Henry asks why China’s debt is worse than America’s. I answer that Beijing is probably understating the level of its debt, wastes much of its spending just to grow GDP, and does not enjoy the benefit of controlling the world’s reserve currency.

In a comment below Note 23 sent October 14, Greg suggests that the midterm elections would be better discussed in the Politics forum. I agree, and created a 2018 midterms topic. There, Greg writes that he’s “not very concerned” by the trade war with China: “When I think about Chinese trade practices (or requirements for foreign companies to do business in China), it seems there is a lot to be gained there by challenging the status quo.”

Also in the 2018 Midterms forum, I review the long odds of President Trump being removed from office through impeachment, as outlined in Note 21 sent June 3, then show that those odds remain long now, according to FiveThirtyEight, which sees only a 19% chance of Republicans taking the Senate. Of course, you know how forecasts go.
Earlier this month, Cody asked about which bond fund to use for his 3Sig plan at Fidelity. I answered: “Why not run iShares Bond (AGG)? It’s one of the letter’s approved funds, currently running in 9Sig, and free to trade at Fidelity, It would work for any Sig plan.” Remember that the bond funds shown in the letter are interchangeable among the plans.

A number of people emailed me in praise of last Sunday’s End Note, “Stop and Smell the Roses — for Maslow.” Much appreciated. You can comment on it and any End Note in the End Note Archive, or below the Sunday note in which it was sent. I love the feedback.

Finally, please take a moment to appreciate the Halloween header and sidebar images on the subscriber site! We even put up a special spooky typeface for this month. You can see the site photo history in The Kelly Letter Collection. The Halloween set has only another week to go.

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Can Trump Reach 3% Economic Growth?

In this video, I’ll explore whether the Trump administration stands a chance of reaching its goal of 3% economic growth.

On the campaign trail, President Trump said he would get the US to 5% annual economic growth. In office, his team lowered this to 3-4%.

The economy hasn’t growth at 3% in more than a decade. Its recent pace has been 2.1%.

Nonpartisan Congressional Budget office predicts a long-term growth average of about 2%.

Reasons: Slower growth of eligible workers, and a declining productivity rate.

Three years ago, The WSJ published a chart from John Burns Real Estate Consulting. It shows declining growth of the US labor pool.

Potential long-term growth rate is the sum of workforce growth and productivity growth. The workforce is projected by the CBO to expand at 0.5% annually over the next decade and productivity at 1.3%, for growth of 1.8%. That’s the “about 2%” I mentioned earlier.

In May, the WSJ published charts of the two trends, with data from the Labor Department: [chart shown in video]

Turning back to the CBO’s projection of the two components of economic growth, we see that Trump will need to focus on boosting productivity. This chart was also published by the WSJ in May: [chart shown in video]

Can Team Trump boost productivity? Probably not. Demographic trends point to lower human productivity in the decades ahead.

However, a trend completely independent of government policies could come to the rescue: automation.

Better robots and artificial intelligence are more productive than people. Factories are spending millions on upgrades to machines that can do the work of many human employees.

The problem is that even if higher productivity through bots increases economic growth, it will be pointless if people don’t benefit.

This is a tough nut to crack. Here’s hoping for higher growth in a way that helps people.

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Thank you for watching!

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Valuation Got Amazon Wrong

In this video, I’ll explore the rise of Amazon.com over the past 20 years, and offer it as evidence that stock market valuation measures can’t be trusted.

Amazon.com went public on the Nasdaq on May 15, 1997 at a value of $438M. Today it’s worth $460B (May 2017).

Look at the chart from Recode, showing the price of Amazon’s stock rising 600 fold over 20 years.

Two years ago, its value surpassed Wal-Mart’s:

It has kept its revenue climbing, and used almost all of it to reinvest in new projects rather than dropping it to the bottom line of profit.

It now commands a 33% share of the US e-commerce market.

An unequivocal success. Did you invest in it along the way? Many didn’t. Why? Overvaluation.

Amazon’s current trailing price/earnings ratio is 180. Microsoft’s is 30. Wal-Mart’s is 17. For most stocks, most investors consider 20 to be expensive and 30 to be nosebleed. What to make of 180?

It’s been a lot higher, too, as the chart from Zacks shows. Over 2,000 in 2013.

Keep the Amazon example in mind whenever somebody talks about a stock or the market being overvalued.

Says who? By what measure? Maybe the measure shows overvaluation, but the stock or market can keep rising.

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Thank you for watching!

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How to Manage Your Index Funds

In this video, I’ll show you a good system for managing your index funds for high profit and low stress.


Index funds are catching on for their low cost and better performance than active management.

Passive funds now more than one-third of market, projected to reach half in five years or so.

Fine, but just switching to index funds from active management is not enough.

Same mistakes can be made. Investors’ biggest challenge is overcoming in themselves the same flaws that bedevil active managers.

A system is needed to remove emotional indecision, and all pretense of market timing.

My Signal system.

One uses IJR/BND, one MVV/SCHZ, one TQQQ/AGG. All index-based products. Others work, too.

How the system works.

Join The Kelly Letter to manage your index funds the right way!

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Thank you for watching!

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