Q3 2019 Market Update – A Visual Depiction of the Markets

So the current market mantra is still the same, “there is nothing to see here, everything is wonderful, move along, move along”. While at the same time there is a wide spread acceptance and consensus that we are headed toward the next inevitable recession. Maybe this is why the Central Banks of the world are now throwing the “proverbial kitchen sink” at the markets and ramping up their “Liquidity Supernova” as Bank of America calls it in their chart below:

Central Bank Liquity, Liquidity Supernova, BofAML Projection

BofAML Projection of Total Central Bank Balance Sheets

 

Of course when you need to provide $75 Billion per day just to keep the banks liquid with their overnight needs, how much will actually end up going into stocks and pushing them higher? Effectively Banks have stopped lending to each other and when that happens you must ask yourself. What do THEY know that we don’t?

Repo Operations, Overnight REPO, NYFed

Overnight Bank Liquidity Needs from the Federal Reserve

Maybe it has something to do with the following Chart where the Dow Jones Industrial Average is COMPLETELY decoupled from actual US Industrial Production.

US Industrial Production, Dow Jones Industrial Average, Decoupling

Decoupling of the Dow Jones Industrial Average from actual US Industrial Production

And if the ISM & PMI Business surveys have anything to say about it, they may actually be onto something.

S&P 500 Index, ISM Soft Survey Date, PMI Soft Survey Data

Decoupling of the S&P 500 from “Soft” Survey Data..

But to put things in context, please remember that the previous “2008 blip” in the chart below nearly destroyed the “Global Financial System” and we have continued to egregiously inflate an even larger bubble since then.

US Financial Assets to GDP

US Financial Assets to GDP ratio.

So, do you think that Warren Buffet, due to his own underlying “Best Indicator”, would say that markets are extremely overvalued currently? Maybe that is why he is sitting on $122 Billion in cash right now because there is nothing at “Good Value” to buy…..

Buffet Indicator Variant

A “Favorite Buffet Indicator” variant.

In my “Q2 2019 Market Update” I stated the following: “In addition, since the start of July I have been warning people to “Beware the first Rate Cut” and for good reason. We have all seen what has happened in markets so far as a result of the Fed’s Rate Cut enacted at their recent meeting on 7/31/2019. For reference, here is a visual of past “Market Reactions” to previous initial Rate Cuts by the Fed.”

Market Drop, Initial rate Cut, Market Reaction.

Market reactions to the last two “first” rate cuts.

Or shown in a longer term format:

Rate Cuts, Financial Crisis, Recessions, Market Crash.

Long term charted history of Fed Rate Cuts, Recessions and Market Crashes.

I still do not believe that anything material has changed. You also need to remember where the unemployment rate has now dropped to and particularly what comes next. Unless the Fed has figured out a way to make the Unemployment Rate go Negative (just like so many Interest Rates are around the world right now are).

Unemployment Rate Graph, S&P 500

Correlation of Unemployment to S&P 500 market cycles.

“More ominously, major reversal inflection points in the consumer spending intentions have been a clear leading indicator to what awaits the US unemployment rate, as the chart below shows…”

Unemployment Rate, Umich Survey

Correlation between Consumer Demand and the Unemployment Rate.

So, where are markets headed from here? Higher to “Infinity and Beyond” or Lower?:

S&P 500, Expanding Megaphone, Technical Analysis.

Charting and Technical Analysis of the current S&P 500 Index structure.

And on a Longer Term Scale. (BTW, the Blue segment at the bottom is the “10Y – 3M UST Yield Curve” which has just “Un-Inverted” again for the first time since doing so in 2007)….

Inverted Yield Curve, S&P 500, Market Structure Technical Analysis

Long Term Technical Analysis of the S&P 500 in relation to the Yield Curve.

While you are considering all of this please do not rely too much on those wonderful “Financial Analysts”. Just remember who their “REAL” intended audience is:

Finacial Analysts, Survey, Who is important.

Who is the most important to Wall Street Analysts? Not you.

So even though the Central Bank Money Growth Tide is turning and expanding again. Look at the last two times when they did this and what came next as they were desperately trying to get ahead of the following recessions in 2000 and 2007 (What came next?):

Central Bank, Money Growth, Long Term

Chart of Central Bank Money Growth. Look at the last 2 times when the growth turns up.

While the “Current Situation Recession Odds” remain at “Post-Crisis” Highs…

NY Fed, Recession Odds, Chart

Long Term NY Fed Recession Odds Chart

One final thought, you hear about how “everyone is invested in the markets” and enjoying all these wonderful gains right? Here is a “Reality Check” for you from DB Global Research. Effectively the only “Buyer” of the stock market and US Corporate Equities since 2009 have been the Corporations themselve’s (companies buying their own stock back from the market all facilitated by the Federal Reserve and their “Zero Interest Rate” policies). As a side note the Number One “Seller” to these same “Corporate Buybacks” are the Corporate Insiders themselves (cashing out their own personal positions on the company’s dime)…

Corporate share buybacks, only buyer since 2009

Corporate share Buybacks have effectively been the only net buyer in the markets since 2009.

So given the realities of where things currently stand you may want to think about some downside “Risk Mitigation” for your investment portfolios. (The kind of specialty that we provide at HK Wealth Management, Inc.) Especially when you look at this historical chart of the “REAL” Inflation Adjusted S&P 500 Index, and you see just how long it can take you just to “MAKE BACK YOUR LOSSES”….

Real S&P 500 Index, Inflation adusted S&P 500.

Long Term Returns of the “Real” Inflation adjusted S&P 500 Index.

No one knows the Future but if we do not learn from our Past then we are often doomed to repeat it right?….

 

So how have our 5 Model Portfolio Funds fared since their respective inceptions? Here are the updated lifetime performance graphs as of 10/11/2019.

 

Conservative “Total Return Income” Model [+5.02%] Vs. Broad US Markets – VLGI [-4.78%]

Inception date 08/01/2017 – thru – 10/11/2019

Beat the market, Value Line Geometric Index, VLG, Conservative Model Fund, Total Return Income Model Fund.

Conservative “Total Return Income” Model since 8/1/17, +5.02%: (Broad US Markets VLGI in Gray, -4.78%)

Moderate “Global Opportunity” Model [+1.90%] Vs. Broad US Markets – VLGI [-4.78%]

Inception date 08/01/2017 – thru – 10/11/2019

Beat the market, Value Line Geometric Index, VLG, Moderate Model Fund, Global Opportunity Model Fund

Moderate “Global Opportunity” Model since 8/1/17. +1.90%: (Broad US Markets VLGI in Gray, -4.78%)

Aggressive “100% US Equities” Model [+5.02%] Vs. Broad US Markets – VLGI [-11.50%]

Inception date 08/01/2018 – thru – 10/11/2019

Beat the market, Value Line Geometric Index, VLG, Aggressive Model Fund, 100% US Equities Model Fund

Aggressive “100% US Equities” Model since 8/1/18, +5.02%: (Broad US Markets VLGI in Gray, -11.50%)

Aggressive “100% International Equities” Model [-0.62%] Vs. Broad US Markets – VLGI [-11.50%]

Inception date 08/01/2018 – thru – 10/11/2019

Beat the market, Value Line Geometric Index, VLG, Aggressive Model Fund, 100% International Equities Model Fund

Aggressive “100% International Equities” Model since 8/1/18, -0.62%: (Broad US Markets VLGI in Gray, -11.50%)

Contrarian “Long/Short All Weather” Model [-9.99%] Vs. Broad US Markets – VLGI [-4.78%]

Inception date 08/01/2017 – thru – 10/11/2019

Long/Short, All Weather Fund, Value Line Geometric Index, VLG, Contrarian Model Fund, Long/Short All Weather Contrarian Model Fund

Contrarian “Long/Short All Weather” Model since 8/1/17, -9.99%: (Broad US Markets VLGI in Gray, -4.78%)

As you can see 4 of the 5 funds are still all outperforming the Broad US Markets (VLGI) over their respective “lifespans” since they were each started.

The last Long/Short Fund is specifically designed to benefit from the larger Macro Economic changes yet to come with an increase in commodity inflation (think current Midwest Farmland floods and reduced supply and ultimately a weakening US Dollar) and from the inevitable recession and market swoon/drop/crash (Pick your poison). But History is telling us that right now is a great time to “Love Commodities” and be “Cautious with Stocks”…

S&P 500 Index, Bloomberg, Commodities Index, Severe divergence, historical divergence between stocks and commodities.

Historical Divergence between the S&P 500 Index and the Bloomberg Commodity Index.

S&P 500 Index, Bloomberg, Commodities Index, Severe divergence, historical divergence between stocks and commodities.

Historical Divergence between the S&P 500 Index and the Bloomberg Commodity Index.

Our approach is quite simple: “Invest for Growth, but more importantly Mitigate the Losses, if we do that Returns will take care of themselves”. So if we mitigate the Large Losses in the first place, then we DO NOT have to “Make Back” those losses and so it becomes growth on top of growth. Now think about that over Full Market Cycles (Both Up & Down) and you start to see the value of what we do. The chart below shows a “Buy & Hold” approach (Orange Line) with 100% invested in the S&P 500 Index Vs. a simple “Buy, Hold & Sell” (what we do)(Blue Line) strategy to mitigate and extract the large losses out of the performance equation. You see what can happen to “the numbers” yourself…

S&P 500 Index, Buy & Hold, Buy Hold & Sell, Risk Management, Loss Mitigation, Loss Protection, Market Loss, Market Risk, Exceptional Reurns, outsized returns.

“Buy & Hold” Vs. “Buy, Hold & Sell – Risk Management”

Please feel free to reach out to me with any questions.

Take care and talk again soon,

Cory Reader

Chief Investment Officer

HK Wealth Management, Inc.

Southern California

 

Cell: 213-509-6544

Email:  creader@hkwmanagement.com

Web:  www.hkwmanagement.com   

 

Past performance does not guarantee future results.  All investments carry some degree of risk.

The Answer is:  YES!

This update is for discussion purposes only and does not constitute an acceptance of any offer, agreement or contract.

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