Why the market is down now for 2 days.

The US stock market indices are down this week for one simple reason: POLITICS. Nothing else has changed.

NYT: G.O.P. Extracts Price for Averting Shutdown

WaPo: We’re two days away from a government shutdown. Here’s what’s at stake.

IBT: Government Shutdown 2014: What Will Happen If The Federal Government Doesn't Pass A Budget

The Case for Aflac

Unlike the stock featured on my previous post, my old screen gave me a decent company with Aflac.It hasn't soared, but my current option strategy does not require a fly highing stock, just one that is stable to be profitable. And this is what AFL has given me. It is a stock with a long history of rising dividends and currently with a low PE ratio of 9.4 with an expected 5 yr Earnings growth of 6%pa.

So why is the duck not soaring?

1. Japan. 74% of AFL business is in Japan and the country is now "officially" in recession with the last two quarters' GDP print being negative. 
2. Abenomics has only helped to lower the value of the USD:JPY exchange rate. This has caused lower repatriated profits for the US company.
3. Although the company is a steady operator, it's next year expected earnings growth rate is almost zero. More growth is expected in the out years, though.

But let us get back to the good things that will sustain AFL's strong balance sheet, steady cash flow and stable price base.

1. In Japan, it has a very solid agreement with Japan Post. In case you are not aware, the japanese use the post office as a bank, making it one of the world's largest financial institutions. This makes it a perfect venue for selling all kinds of insurance. The agreement should help the revive growth of japanese sales for the company.
2. On top of the long history of increasing dividends, making it part of the S&P Dividend Aristocrats list, it has also been implementing Share Repurchase Program that should give some price support to the stock price by increasing the EPS.
3. As a company, it has one of the most respected and admired companies in the world.This reputation makes it an easy sell to clients, representatives and all other stakeholders.
4. Sales in the United States are slowly growing, but should improve along with the employment picture given that much of the insurance are sold through employers.

Keep on Quacking.

Asset Bubble and How It May Pop...in 2016.

No. I'am not a Bear yet. Like I've said before, I see an 85% chance that the Bull market will continue into 2016. But I do think a fair amount of effort should be put in watching for the current easy money driven bubble in Bonds to burst.

US Stocks are richly valued, but not to the point of previous market frenzies. I'll be more bearish when the Trailing PE multiple of the S&P 500 is scratching 21. (e.i. the index would have to be above 2200 today).

To get there, we need more money to go into Stocks. That will have to come from the Bond Market. As interest rates rise, eventually, a Bond selloff will begin and move to stocks as the US Economy will be seen as strong to support higher stock multiples because of expected accelerating earning growth, as seen with the November Jobs numbers out today.

The Bond market has been seeing a flight to quality rotation for some time as you can see in this graph depicting the ratio of the TLT and JNK ETFs as the Proxy for the 20 yr Treasuries and the High Yield market.

The High Yield market is under threat from the marginal Oil Shale producers that are in danger of default if oil market doesn't at least stabilize soon. 

As the bond market deflates, all that money will go into the Stock market and multiples will begin to get high overall. At which time, the prudent investor should be looking for the door as the final leg up of this long bull market cycles back into a retreat. 

For now, the trend looks positive for now.

Market Indicators I Like: 1) VIX Futures Premium

From time to time, I'll be listing market technical indicators I use to gauge the strength of the US Stock Market.

From the front page of iVolatility.com, I like to look at the VIX Futures Premium. It measures how much more are hedgers willing to pay for Implied Volatility  (i.e. the risk premium for options on the S&P 500 Index) in the future two months than in the current spot market. If hedgers are worried of an upcoming downturn, they are likely to pay more for the current spot market protection than for future, bringing the Premium down to negative levels. If, on the other hand, hedgers are less worried about the risk of a market downturn, then they will be less eager to buy protection now, then in the future, making the Premium higher.

iVolatility instructs its users that a VIX Futures Premium:

Premiums for a normal term structure are 10% to 20%, while premiums above 15% appear to suggest a lack of enthusiasm for VIX hedging. Premiums less than 10% suggest caution and negative premiums are unsustainable suggesting an oversold condition. 

 Today at market open the premium is at +15.37% suggesting a continuation of the uptrend.

I recommend that every Monday morning you read, like I do, their weekly newsletter.

2015: A Raging Bull Market or a Financial Apocalypse?

All over the internet and on the financial media, pundits, gurus and experts are making their prognostications for the market direction in the coming year. There are basically two extreme voices out there. First, the Pro-Keynesians who believe the Fed and other central banks are creating a Goldilocks scenario of growth in a low inflation environment. And second, those with a more Austrian Business Cycle approach who see QE-infinity as just a doomed attempt at re-inflating the bubble that will lead to a collapse of all fiat currencies..

Personally, I am of the Austrian view, although I’m not in the Doom and Gloom camp in the short to medium time-frames. I accept that all the money creation is ultimately a form of currency debasement done out more of dogmatic ignorance than of outright malice. And this debasement, that can be traced back to the 1913 creation of the Federal Reserve, could in the long run make the world economy go into shock and seizure.

I also realize I am in the minority. The majority tend to be more sanguine and thus will likely drive stock prices higher and make this market cycle not that much different than any others. The “This Time is Different” Fallacy applies to both Bears and Bulls.

Given this, I am 85% sure that the U.S. stock market will continue to rise and multiple expansion will continue as part of the more or less normal market cycle script in 2015. Before a true stock market bubble happens, the bond market bubble must burst first and push that money flow into the stock market and Trailing PE multiples should be in the low to mid 20s (For more on the end game, I recommend this podcast with Jim Puplava of Financial Sense.). 

If we take the current 2015 earnings estimate for the S&P 500 of $134.89 and we shave off 10%, just to be conservative, we end 2015 with $121.40 earnings. Now we apply a 20x PE multiple we get an S&P 500 index over 2400.

So what about that 15% doubt?  Well, I’ll tell you how I’m preparing for that in my next post.