Thursday, February 18, 2010
Saturday, February 13, 2010
The 3 Waves
Risk Aversion: The Final Wave
by Bryan Rich
Dear Anthony,
Bryan Rich
Over the past months I've written extensively in my Money and Markets columns about the bubbling over of the risk trade. I also warned about the rising threats that would likely make a sustainable recovery, at this point, a low probability.
And as time passes, we're beginning to see that these threats, including a growing sovereign debt crisis, rising protectionism, and threatening asset bubbles, are becoming ripe and dangerous.
But in a world of instant information, it's easy for our focus to be drawn away from the underlying fundamental problems in the world economy ...
It can be difficult to see the forest for the trees when stock markets are rising, commodity prices are recovering and the media is touting hot burgeoning world economies.
Internal Sponsorship
Recovery a major DUD — what to do ...
A shocking new report out earlier this week gives the lie to the government-endorsed myth that the worst is behind us.
Official figures out of Europe show that the Eurozone barely had a pulse. The news from the U.S. wasn't much better: Foreign investors are recoiling in horror from Washington's spending and borrowing spree.
No wonder so many Americans are FED UP with Washington and Wall Street!
Click here to register for our FREE briefing with our NEW predictions for what's ahead ...
But if you step back and examine the activities in the global economy and the global financial markets over the past 2½ years, based on history it looks like the roadmap to sustainable recovery has three waves. And we're likely only two-thirds of the way through the economic drawdown.
Wave #1:
Panic
Wave number one was panic-induced, risk aversion. It was the unraveling of the credit bubble, the seizing of the financial system and the flight of capital from all corners of the world back toward the center (the United States).
Wave #2:
Stabilization
Risk appetite returned when central bankers blanketed the world with easy money.
Risk appetite returned when central bankers blanketed the world with easy money.
The second wave was the eye of the storm. Here, risk appetite bounced back. Global central banks engaged the biggest experiment in history in an effort to stabilize a rapidly deteriorating financial system. In the process, they opened up the money spigot and flooded banks with capital, backstopped failing giants, guaranteed obligations, and printed trillions of dollars.
For many, this started looking more and more like the recovery phase. But in reality, it was nothing more than a retracement of the initial, panic-induced risk aversion trade.
Wave #3:
Pain & Cleansing
Tony: We miss the graph here which indicates the market is going down.
The final wave is another bout with pain. This is where all of the underlying problems come home to roost. Ultimately the problems get faced and worked through, only after which a path to a sustainable economic expansion opens.
This phase is best described as the final leg of the risk aversion trade. This is where global investors, again, flee for safety as the uncertainty elevates surrounding the fallout from damaged economies and the ability of central banks to manage all of the aggressive policy responses.
Here, investors abandon the pursuit of return ON capital, in favor of return OF capital. And this is precisely what we're seeing now in response to the dominoes lining up with sovereign debt problems.
The final phase will be a time of higher savings and flight back to the U.S. dollar.
The final phase will be a time of higher savings and flight back to the U.S. dollar.
It's also a period that begins the healing of economies. And it's driven by austerity. This means increased taxes, higher savings and a lower standard of living. In short, it's a period of rebalancing and rebuilding.
A Technical View ...
The three-phase cycle I just described is nothing new. It follows a time-tested theory on the behavior of markets and human psychology called Elliott waves. This principle suggests that patterns in markets tend to form five-wave and three-wave structures.
The five-wave structure is the dominant trend (i.e. economic expansion), and the three-wave structure is the corrective trend (economic downturn). My analysis suggests the recent downturn carries the three-wave, corrective characteristic.
Let me simplify this for you ...
A good proxy for global risk appetite has been the U.S. stock market. This is where global risk taking, or lack thereof, is among the most easily identified.
When investors shy away from risk, the stock market tends to fall. When investors embrace risk, the stock market usually rises.
S&P 500
In the chart above, it's easy to see the first two waves that I've laid out: Wave #1 — Panic; Wave #2 — Stabilization.
Admittedly, Wave #3 — Pain & Cleansing, is highly debatable. But if I'm right, it could be the phase that finally flushes out the landmines in the global economy and puts us back on a sustainable path of growth.
How this Impacts Currencies ...
This third wave supports the thesis that I've been writing about for months in this column. That is, market participants will become more averse to risk.
And it also supports my argument from last year that the U.S. dollar's demise is greatly exaggerated.
In the greatest monetary experiment of all times, following the broadest and deepest downturn since the Great Depression, you can expect surprises.
We've seen those surprises with more frequency and growing intensity over the past two months — and there will be more to come.
As this third leg of risk aversion unfolds, the dollar will again continue to function as the safe parking place for global capital. Not because the U.S. is in superior economic condition, but purely because it's the best alternative.
Regards,
Bryan
by Bryan Rich
Dear Anthony,
Bryan Rich
Over the past months I've written extensively in my Money and Markets columns about the bubbling over of the risk trade. I also warned about the rising threats that would likely make a sustainable recovery, at this point, a low probability.
And as time passes, we're beginning to see that these threats, including a growing sovereign debt crisis, rising protectionism, and threatening asset bubbles, are becoming ripe and dangerous.
But in a world of instant information, it's easy for our focus to be drawn away from the underlying fundamental problems in the world economy ...
It can be difficult to see the forest for the trees when stock markets are rising, commodity prices are recovering and the media is touting hot burgeoning world economies.
Internal Sponsorship
Recovery a major DUD — what to do ...
A shocking new report out earlier this week gives the lie to the government-endorsed myth that the worst is behind us.
Official figures out of Europe show that the Eurozone barely had a pulse. The news from the U.S. wasn't much better: Foreign investors are recoiling in horror from Washington's spending and borrowing spree.
No wonder so many Americans are FED UP with Washington and Wall Street!
Click here to register for our FREE briefing with our NEW predictions for what's ahead ...
But if you step back and examine the activities in the global economy and the global financial markets over the past 2½ years, based on history it looks like the roadmap to sustainable recovery has three waves. And we're likely only two-thirds of the way through the economic drawdown.
Wave #1:
Panic
Wave number one was panic-induced, risk aversion. It was the unraveling of the credit bubble, the seizing of the financial system and the flight of capital from all corners of the world back toward the center (the United States).
Wave #2:
Stabilization
Risk appetite returned when central bankers blanketed the world with easy money.
Risk appetite returned when central bankers blanketed the world with easy money.
The second wave was the eye of the storm. Here, risk appetite bounced back. Global central banks engaged the biggest experiment in history in an effort to stabilize a rapidly deteriorating financial system. In the process, they opened up the money spigot and flooded banks with capital, backstopped failing giants, guaranteed obligations, and printed trillions of dollars.
For many, this started looking more and more like the recovery phase. But in reality, it was nothing more than a retracement of the initial, panic-induced risk aversion trade.
Wave #3:
Pain & Cleansing
Tony: We miss the graph here which indicates the market is going down.
The final wave is another bout with pain. This is where all of the underlying problems come home to roost. Ultimately the problems get faced and worked through, only after which a path to a sustainable economic expansion opens.
This phase is best described as the final leg of the risk aversion trade. This is where global investors, again, flee for safety as the uncertainty elevates surrounding the fallout from damaged economies and the ability of central banks to manage all of the aggressive policy responses.
Here, investors abandon the pursuit of return ON capital, in favor of return OF capital. And this is precisely what we're seeing now in response to the dominoes lining up with sovereign debt problems.
The final phase will be a time of higher savings and flight back to the U.S. dollar.
The final phase will be a time of higher savings and flight back to the U.S. dollar.
It's also a period that begins the healing of economies. And it's driven by austerity. This means increased taxes, higher savings and a lower standard of living. In short, it's a period of rebalancing and rebuilding.
A Technical View ...
The three-phase cycle I just described is nothing new. It follows a time-tested theory on the behavior of markets and human psychology called Elliott waves. This principle suggests that patterns in markets tend to form five-wave and three-wave structures.
The five-wave structure is the dominant trend (i.e. economic expansion), and the three-wave structure is the corrective trend (economic downturn). My analysis suggests the recent downturn carries the three-wave, corrective characteristic.
Let me simplify this for you ...
A good proxy for global risk appetite has been the U.S. stock market. This is where global risk taking, or lack thereof, is among the most easily identified.
When investors shy away from risk, the stock market tends to fall. When investors embrace risk, the stock market usually rises.
S&P 500
In the chart above, it's easy to see the first two waves that I've laid out: Wave #1 — Panic; Wave #2 — Stabilization.
Admittedly, Wave #3 — Pain & Cleansing, is highly debatable. But if I'm right, it could be the phase that finally flushes out the landmines in the global economy and puts us back on a sustainable path of growth.
How this Impacts Currencies ...
This third wave supports the thesis that I've been writing about for months in this column. That is, market participants will become more averse to risk.
And it also supports my argument from last year that the U.S. dollar's demise is greatly exaggerated.
In the greatest monetary experiment of all times, following the broadest and deepest downturn since the Great Depression, you can expect surprises.
We've seen those surprises with more frequency and growing intensity over the past two months — and there will be more to come.
As this third leg of risk aversion unfolds, the dollar will again continue to function as the safe parking place for global capital. Not because the U.S. is in superior economic condition, but purely because it's the best alternative.
Regards,
Bryan
Saturday, February 6, 2010
Stock screen on penny stocks
A Purely Systematic Strategy
Our process screens for companies exhibiting some, if not all of these characteristics:
1. Earnings growth > 50% (and accelerating)
2. Revenue growth > 30% (and accelerating)
3. PEG Ratio < 1.50
4. Debt-to-equity < 0.5
5. Current-ratio > 1
6. Return-on-equity > 20%
7. Management ownership of stock > 10%
8. Double-digit (and increasing) profit margins
9. Market size of $1 billion or more
10. Institutional accumulation
11. Dividend yield < 1%
12. Short interest < 25%
In short, we hone in on tomorrow's big gainers with pinpoint accuracy – using a systematic, rigorous and completely proprietary 12-factor screening process. (See sidebar to the right for full details.)
By doing this we drill-down and target a very specific "sub-niche" of penny stocks.
One that's almost always profitable.
It's a certain kind of penny stock that meets very specific criteria.
Introducing SAFE
Penny Stocks
Fact is, our revolutionary screening methods – which we spent five years perfecting – let us identify SAFE penny stocks that can hand you astounding gains no matter what the markets do.
Our process is so effective because it doesn't merely focus on the upside. That's the risky way to invest in penny stocks.
It also focuses on the downside.
You see, it weeds out risky stocks, too. It does this by targeting factors such as significantly leveraged balance sheets or pending legal problems that can undercut growth and stock price.
This is why we believe that these penny stocks are one of the safest and easiest ways for you to get rich in the markets today.
Our process screens for companies exhibiting some, if not all of these characteristics:
1. Earnings growth > 50% (and accelerating)
2. Revenue growth > 30% (and accelerating)
3. PEG Ratio < 1.50
4. Debt-to-equity < 0.5
5. Current-ratio > 1
6. Return-on-equity > 20%
7. Management ownership of stock > 10%
8. Double-digit (and increasing) profit margins
9. Market size of $1 billion or more
10. Institutional accumulation
11. Dividend yield < 1%
12. Short interest < 25%
In short, we hone in on tomorrow's big gainers with pinpoint accuracy – using a systematic, rigorous and completely proprietary 12-factor screening process. (See sidebar to the right for full details.)
By doing this we drill-down and target a very specific "sub-niche" of penny stocks.
One that's almost always profitable.
It's a certain kind of penny stock that meets very specific criteria.
Introducing SAFE
Penny Stocks
Fact is, our revolutionary screening methods – which we spent five years perfecting – let us identify SAFE penny stocks that can hand you astounding gains no matter what the markets do.
Our process is so effective because it doesn't merely focus on the upside. That's the risky way to invest in penny stocks.
It also focuses on the downside.
You see, it weeds out risky stocks, too. It does this by targeting factors such as significantly leveraged balance sheets or pending legal problems that can undercut growth and stock price.
This is why we believe that these penny stocks are one of the safest and easiest ways for you to get rich in the markets today.
Tuesday, February 2, 2010
Proposed taxes
NEW YORK (CNNMoney.com) -- President Obama, in his proposed 2011 budget, is calling on Congress to make a number of tax changes for individuals.
Some ideas are new. Many others were made last year, but not enacted by Congress. So the estimates of the revenue that may be raised by his proposals may be overly optimistic.
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Across the universe of individual and corporate taxes, "what's most striking is how little new ground [the president's budget] ploughs," said Clint Stretch, managing principal of tax policy at Deloitte Tax LLC.
Here's a breakdown of some of Obama's key proposals for 2011 and beyond that would affect individuals:
High-income households
Let tax cuts expire: The 2001 and 2003 Bush tax cuts are scheduled to expire by 2011. Obama is sticking to his call to let those tax cuts expire for high-income households ($200,000 for individuals; $250,000 for families). The White House estimates close to $700 billion would be raised over 10 years.
This provision would raise the top two individual income tax rates to where they were in 2001, before passage of the Bush tax cuts. The 33% bracket would become 36%. And the 35% bracket would rise to 39.6%.
In addition, the long-term capital gains tax rate would increase to 20%, up from 15% currently.
The provision would also reinstate so-called phaseouts for high-income households, which would essentially reduce their eligibility for a host of personal exemptions.
The House may be amenable to letting the tax cuts expire in 2011 for wealthier Americans. But Stretch said it may be a tougher vote in the Senate, where there may be more of an inclination to wait until 2012 when the economy is expected to be on firmer footing.
Limit itemized deductions: The president proposes to cap at 28% the rate at which high-income households can itemize their deductions. Currently the value of a deduction is equal to the deductible amount multipled by one's top income tax rate, which can range well above 28%. So deductions will be worth less to a high-income tax filer under the president's proposal.
Capping itemized deductions is a proposal he made last year and it went nowhere. That's in part because many in Congress said it would seriously curb charitable giving, even though that is not a foregone conclusion. If the measure gains any traction this year, it's likely Congress would limit the cap to only certain types of deductions, thereby muting its revenue-raising effect.
The White House estimates that capping the rate on deductions could raise $291 billion over 10 years.
Obama maps routes to lower deficits
Keep the estate tax: The president's budget assumes the estate tax will be made permanent at a $3.5 million exemption level per person and a top rate of 45% on taxable estates. That's much more generous than current law, which calls for a $1 million exemption level and a 55% top rate starting in 2011.
But it's less generous than a proposal getting bipartisan support in the Senate. The Senate proposal would institute a $5 million exemption level per person and a top rate of 35%.
Altering the estate tax to the levels Obama has proposed would increase the deficit by $262 billion over 10 years.
Raise taxes on investment fund manager profits: Obama would like to tax the portion of profits paid to managers of hedge funds and private equity funds as ordinary income rather than as a capital gain. That would subject it to much higher tax rates than the 15% capital gains rate currently imposed. The White House estimates the measure would raise $24 billion over 10 years.
This is a carryover proposal from last year. While Congress hasn't acted on it yet, there's a fair chance they may move on it in the next year, since lawmakers will be looking for ways to pay for other costly legislation they'd like to pass.
Eliminate capital gains tax on small business stock: There are currently capital gains tax breaks in place for investors in small businesses, defined as companies with gross assets of $50 million or less. But the president is proposing to eliminate the capital gains tax altogether on stock in small businesses held for at least five years. The measure would only apply to stock acquired after Feb. 17, 2009. The cost of the president's proposal is an estimated $8.1 billion over 10 years.
Lower and middle income households
Make tax cuts permanent: The president's budget assumes all the 2001 and 2003 tax cuts will be made permanent for everyone making less than $200,000 ($250,000 for couples), which is the majority of American households.
That means, among other things, that today's rates on income tax, capital gains and dividends would remain the same.
It's an expensive proposition, however, costing federal coffers nearly $2 trillion over 10 years.
Permanently protect the middle class from the "wealth" tax: The administration assumes in the president's budget that Congress will permanently change the parameters of the Alternative Minimum Tax (AMT). That would protect tens of millions of middle-income families from having to pay the tax, which was originally intended only for the highest earners.
The cost of such a provision is close to $660 billion over 10 years.
Extend the Make Work Pay credit: The president's 2011 budget calls for a one-year extension of the stimulus-created tax credit that adds a few dollars to workers' paychecks every pay period. The extension is estimated to boost the deficit by $61.2 billion over 10 years.
Calling for just a one-year extension is a switch from Obama's call to make the credit permanent last year. The hope may still be that the credit is renewed every year -- as many tax breaks are. But by only calling for a one-year extension, the impact on the 10-year deficit appears to be less.
Permanently expand a low-income tax credit: The stimulus package temporarily expanded the Earned Income Tax Credit for very low-income families with three or more children. The expansion meant such families could claim a credit equal to 45% of their qualifying earnings, up from 40%, so that they could get a maximum credit of $5,657. President Obama wants to make that increase permanent at an estimated cost of $15.2 billion over 10 years.
Expand child-care tax credit: Under the president's budget, families making less than $85,000 would be able to claim nearly double the child and dependent care tax credit for which they currently qualify. The White House estimates the increase will raise the deficit by $12.6 billion over 10 years.
Permanently extend the American Opportunity Tax Credit: Created under stimulus legislation, the American Opportunity Tax Credit expanded for 2009 and 2010 the existing Hope Scholarship tax credit and made it partially refundable -- meaning that a tax filer could get money back even if it meant he or she would be getting back more from Uncle Sam than paid in federal income tax.
The credit is worth up to $2,500 for higher education expenses, up from $1,800 previously. The president would like to make the measure permanent, adding to the deficit by $75.4 billion over 10 years
Some ideas are new. Many others were made last year, but not enacted by Congress. So the estimates of the revenue that may be raised by his proposals may be overly optimistic.
* Digg
* Buzz Up!
* Comment on this story
CDs & Money Market
MMA 0.87%
$10K MMA 0.96%
6 month CD 0.89%
1 yr CD 1.31%
5 yr CD 2.63%
Find personalized rates:
Rates provided by Bankrate.com.
Across the universe of individual and corporate taxes, "what's most striking is how little new ground [the president's budget] ploughs," said Clint Stretch, managing principal of tax policy at Deloitte Tax LLC.
Here's a breakdown of some of Obama's key proposals for 2011 and beyond that would affect individuals:
High-income households
Let tax cuts expire: The 2001 and 2003 Bush tax cuts are scheduled to expire by 2011. Obama is sticking to his call to let those tax cuts expire for high-income households ($200,000 for individuals; $250,000 for families). The White House estimates close to $700 billion would be raised over 10 years.
This provision would raise the top two individual income tax rates to where they were in 2001, before passage of the Bush tax cuts. The 33% bracket would become 36%. And the 35% bracket would rise to 39.6%.
In addition, the long-term capital gains tax rate would increase to 20%, up from 15% currently.
The provision would also reinstate so-called phaseouts for high-income households, which would essentially reduce their eligibility for a host of personal exemptions.
The House may be amenable to letting the tax cuts expire in 2011 for wealthier Americans. But Stretch said it may be a tougher vote in the Senate, where there may be more of an inclination to wait until 2012 when the economy is expected to be on firmer footing.
Limit itemized deductions: The president proposes to cap at 28% the rate at which high-income households can itemize their deductions. Currently the value of a deduction is equal to the deductible amount multipled by one's top income tax rate, which can range well above 28%. So deductions will be worth less to a high-income tax filer under the president's proposal.
Capping itemized deductions is a proposal he made last year and it went nowhere. That's in part because many in Congress said it would seriously curb charitable giving, even though that is not a foregone conclusion. If the measure gains any traction this year, it's likely Congress would limit the cap to only certain types of deductions, thereby muting its revenue-raising effect.
The White House estimates that capping the rate on deductions could raise $291 billion over 10 years.
Obama maps routes to lower deficits
Keep the estate tax: The president's budget assumes the estate tax will be made permanent at a $3.5 million exemption level per person and a top rate of 45% on taxable estates. That's much more generous than current law, which calls for a $1 million exemption level and a 55% top rate starting in 2011.
But it's less generous than a proposal getting bipartisan support in the Senate. The Senate proposal would institute a $5 million exemption level per person and a top rate of 35%.
Altering the estate tax to the levels Obama has proposed would increase the deficit by $262 billion over 10 years.
Raise taxes on investment fund manager profits: Obama would like to tax the portion of profits paid to managers of hedge funds and private equity funds as ordinary income rather than as a capital gain. That would subject it to much higher tax rates than the 15% capital gains rate currently imposed. The White House estimates the measure would raise $24 billion over 10 years.
This is a carryover proposal from last year. While Congress hasn't acted on it yet, there's a fair chance they may move on it in the next year, since lawmakers will be looking for ways to pay for other costly legislation they'd like to pass.
Eliminate capital gains tax on small business stock: There are currently capital gains tax breaks in place for investors in small businesses, defined as companies with gross assets of $50 million or less. But the president is proposing to eliminate the capital gains tax altogether on stock in small businesses held for at least five years. The measure would only apply to stock acquired after Feb. 17, 2009. The cost of the president's proposal is an estimated $8.1 billion over 10 years.
Lower and middle income households
Make tax cuts permanent: The president's budget assumes all the 2001 and 2003 tax cuts will be made permanent for everyone making less than $200,000 ($250,000 for couples), which is the majority of American households.
That means, among other things, that today's rates on income tax, capital gains and dividends would remain the same.
It's an expensive proposition, however, costing federal coffers nearly $2 trillion over 10 years.
Permanently protect the middle class from the "wealth" tax: The administration assumes in the president's budget that Congress will permanently change the parameters of the Alternative Minimum Tax (AMT). That would protect tens of millions of middle-income families from having to pay the tax, which was originally intended only for the highest earners.
The cost of such a provision is close to $660 billion over 10 years.
Extend the Make Work Pay credit: The president's 2011 budget calls for a one-year extension of the stimulus-created tax credit that adds a few dollars to workers' paychecks every pay period. The extension is estimated to boost the deficit by $61.2 billion over 10 years.
Calling for just a one-year extension is a switch from Obama's call to make the credit permanent last year. The hope may still be that the credit is renewed every year -- as many tax breaks are. But by only calling for a one-year extension, the impact on the 10-year deficit appears to be less.
Permanently expand a low-income tax credit: The stimulus package temporarily expanded the Earned Income Tax Credit for very low-income families with three or more children. The expansion meant such families could claim a credit equal to 45% of their qualifying earnings, up from 40%, so that they could get a maximum credit of $5,657. President Obama wants to make that increase permanent at an estimated cost of $15.2 billion over 10 years.
Expand child-care tax credit: Under the president's budget, families making less than $85,000 would be able to claim nearly double the child and dependent care tax credit for which they currently qualify. The White House estimates the increase will raise the deficit by $12.6 billion over 10 years.
Permanently extend the American Opportunity Tax Credit: Created under stimulus legislation, the American Opportunity Tax Credit expanded for 2009 and 2010 the existing Hope Scholarship tax credit and made it partially refundable -- meaning that a tax filer could get money back even if it meant he or she would be getting back more from Uncle Sam than paid in federal income tax.
The credit is worth up to $2,500 for higher education expenses, up from $1,800 previously. The president would like to make the measure permanent, adding to the deficit by $75.4 billion over 10 years
Monday, February 1, 2010
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