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Markets Happy As It Climbs “The Wall Of Worry”

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Update: March 2018

The market is very, very happy.

The fiscal stimulus and lack of major “inflation scare” is helping keep markets steady, yet trending higher on a positive note.

So here’s the wall of worry that is getting built.

  1.  Economic growth is again topping.
  2.  Inflation could run up faster than expected
  3.  Slowdown in Europe and China could drag down US production

Each of these is real in my opinion.

Inflation is the big one that worries the market. Interest rates are rising and the pace and degree would normally be affected by the pace of inflation. I say normally because the Fed isn’t about to turn hawkish. That is, they aren’t suddenly going to undo 10 years (yep – 2008 was 10 years ago) of policy because they suddenly want to get ahead of the inflation curve. Nope. The Fed is going to be led by the market. 

Right now, the market will accept three rate hikes.

That doesn’t mean the market won’t get nervous. For example, a sudden jump in inflation will scare traders into expecting more rate hikes.

The market should worry because inflation is already here.  Consider truck rates – 70% of all goods in the US are shipped by truck. This means trucking inflation affects everything.

Trucking price inflation just surged into the double digits on a contractual basis.  But on a spot price basis, they hit 25% year-over-year.

However, the market has mostly shrugged off the recent blow-off. It’s down just 3% from its recent top. Here’s another look at the revised SouthBay Fair Value Index.

The S&P is still a bit overbought, although the gap has closed a bit thanks to the blow-off in the S&P. There’s also been an improvement in conditions for the SouthBay Index.

Now look at the S&P y/y growth rate.

Pessimism was at its peak in early 2016 when market growth slowed to -5% (actually contracting on a year-over-year basis).

With Trump elected, it surged but it has been looking toppy ever since the underlying economic data (reflected in the SouthBay Fair Value Index) started to soften.

KEY TAKEAWAY: The market rebounded with Trump and the underlying economic growth supported the reflation. Fast forward to mid-2017 and the underlying growth started to soften, and so did the market’s growth. Indeed, the surge from the tax cut does not seem to be halting the slowdown in economic fundamentals.

In other words, the divergence won’t hold. I think the S&P will be lucky to see 10% growth by year end. But that’s still great growth



Andrew Zatlin

Editor of Moneyball Economics

Business Is Booming For This Industry

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Marijuana Goes Mainstream

In October 2015, Oregon legalized the sale of recreational marijuana. The following month I flew to Portland to gauge the market. I visited 5 stores and monitored foot traffic and sales.

The atmosphere was somewhere between furtive and matter-of-fact. The products were fairly limited: cannabis buds and smoking accessories.

Business was very hot. In a one hour period during the afternoon on week days, I counted roughly 25 visitors per hour per store, with a spend of at least $40 each. Nearly $1000 an hour, all cash.

And that was during the off-peak hours.

Two years later, in November of 2017, I again flew to Portland and visited the same shops.

The question I wanted to answer whether or not cannabis was a novelty. If so, then business would have dropped.

Instead, I saw the exact opposite: business was just as high as when it was first legalized. More interestingly, because it was close to the holidays, the stores were offering gift baskets.

The product lines had evolved: in addition to green buds, they offered oils and edibles. There were also more accessories, but of a higher quality.

Imagine a Starbucks gift basket, but for cannabis.

The gift baskets spoke to the mainstreaming of cannabis.

There were identical sample packs that offered a variety of buds (a smoke-of-the-day club experience), a mix of edibles, or a mix of different cannabis products (oils, edibles, buds). There were baskets that gifted both the cannabis and the means to imbibe. Everything was wrapped in the same happy rattan baskets.

How is this mainstream? First, ubiquity. Every store had them.

Second, visibility. These gifts of joy were being given openly, without concern that recipients or givers would be outed.

Third, price. Holiday gift giving tends to follow a price point. These were novelty items or “cheapies.” The minimum price was $50.

Fourth, popularity. Many of the baskets had been sold out.

This mainstreaming is important. At some point, high volume products like Doritos will likely add cannabis oil.

And it is that oil where the investing opportunity sits. As demand for cannabis expands, it will drive up the use of oils. The facilities that convert marijuana bud into oil will be highly profitable.

KEY TAKEAWAY: The cannabis industry is booming. More states are heading towards full legalization. Companies that convert marijuana buds into oil will be huge winners in this industry. I’ll keep a lookout for the winners and report back.



Andrew Zatlin

Editor of Moneyball Economics

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Don’t Just Settle for a One-Fits-All Life Insurance Plan in 2018

Last May, Five Thirty Eight forecasted several changes in the health insurance industry once the GOP healthcare bill was passed. Fast-forward to today and some of these forecasts, including increased premiums for lower income individuals and lower premiums for young, healthy policyholders, have, indeed, happened.

Simply, the reality is that Americans now need to pay more to get the best health insurance possible, and this is fast becoming a concern for many, especially those who live paycheck to paycheck or are otherwise burdened financially already. Add to that burden the high cost of healthcare, which in part is due to hospitals being incentivized to be expensive as we touched on in ‘Make Sure You Avoid Healthcare Stocks’. It is thus imperative to find a value-for-your-money policy to ease the financial load of being insured. To this end, you ought to reconsider those one-fits-all life insurance plans, even though getting one might be the most convenient.

As The New York Times explains in ‘The Problem With One-Size-Fits-All Health Insurance’, this approach to insurance coverage “disproportionately hurts low-income people” because it affords people no choices other than all medically necessary healthcare interventions. Unfortunately, “necessary” in this context means any “any care that offers a clinical benefit” regardless of their cost. This means that you are more than likely to receive hi-tech medical care even if there are cheaper alternatives.

To illustrate, let us consider the same example given by The New York Times: A policyholder of a one-size-fits-all policy suffering from prostate cancer will, in all likelihood, get the highly technical yet rather expensive proton-beam therapy as a medical intervention, even though it has not been proven to be significantly better than more affordable treatment alternatives such intensity-modulated radiation therapy. Now, this setup is well and fine for people who have money to spare, but for those with lower incomes, this approach is quite burdensome, especially considering the availability of health insurance plans that allow you to say no to high-cost treatments that have little to no medical value.

Even more, why even settle for a rigidly structured policy that affords no flexibility when there are better options available? Take Health IQ, a startup in the industry which according to Venture Beat “collects data to let health-conscious people save an average of $1,238 a year on their life insurance premiums.” The company, founded by Munjal Shah, has in fact helped thousands secure a staggering $5.3 billion in life insurance coverage in a little less than 2 years.

So, how then can Health IQ help people save on their life insurance? The startup, a pioneer in the rapidly expanding InsureTech industry, requires prospective clients to take the Health IQ test, a carefully designed quiz that’s aim is to gauge not only the current health of an individual but also their lifestyle. Those who score elite in this test are presumed to be healthy and living a healthy lifestyle and are thus qualified to get the savings. Meet certain fitness thresholds in the course of your policy and you will get additional savings every year. This type of insurance is far more suited for those who follow a healthy lifestyle than the more general insurance options.

Getting value-for-your-money life insurance is not actually rocket science, but it is not that easy either. But with patience and due diligence, finding one that suits your needs is now, very possible.

Here’s What To Expect After The Market Selloff

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So…What’s Next?

A sell-off happens for good reasons.

The equity market is adjusting to fundamental changes in liquidity.

  • Previous conditions: Cheap money has been floating around everywhere with no inflation to show for it. There’s also been share buybacks galore as CEOs used free money to boost share prices by reducing their company’s outstanding shares.
  • Current conditions: The era of low inflation and cheap money is ending. Inflation is picking up and interest rates are poised to rise another 0.75%. Share buybacks will discontinue.

The trigger was Friday’s strong payrolls and strong wage inflation. The markets read this to mean economic growth would drive inflation and higher interest rates. This would likely lead to more fed rate hikes.

Now, these are good things because they are deriving from economic growth, instead of the previous 10 years of financial shenanigans.

But stocks look pricey as a result.

Higher input costs like wages will pressure company margins.  That means lower earnings, so the price-to-earnings ratios (P/E) are overstretched. Meanwhile, higher bond rates make stocks look less competitive. For example, when a stock was pumping out 2% in dividends but bonds paid <2%, then the stock looked valuable. But no longer. Ten year Treasury yields are around 2.8%. (The basic income investor question is: Would you rather own the safest asset – U.S. government bonds – yielding 2.8%? Or would you rather own “riskier” stocks yielding 2%?)

As subscribers to our sister site know, I expected a bit more of a blowoff because the market typically overshoots. We certainly got that. Now we are seeing some selective buying back in.

Stocks now look attractive for a few reasons.

One is mechanical: when stock prices surged 8% in January, this put institutional investors under pressure to sell equities. Most major funds have a bond/equity balance that they must maintain. Post-selloff, they can buy back into stocks.

What Will Trigger My Buy-In Target?

Here again, TheMoneyBallTrader subscribers know that last week I said anything below 2,650.

I said 2,650 for two reasons.

First is a back-of-the-envelope approach. The economy should be growing 3% per quarter. Maybe 4% with the tax cut.  (My gut feel). Instead, it grew 7% in January. If we expect Q1 2018 to be another 3% rate, then it should be 2,700 by March end (~6 weeks away).

An alternative is a more rigorous, data-driven approach.

I have a proprietary labor-driven metric (the SouthBay Fair Value becnchmark).  As you can see from the 20 year chart, this data reflects strong correlation between the Fair Value Index and the S&P 500.  The 2nd chart is the same data on a shorter time-scale.

Based on this data, the market was overvalued 10% on a y/y basis.  So a drop to 2,650 is more in-line with the underlying economic fundamentals.  And that’s about where we are.


Andrew Zatlin

Editor of Moneyball Economics

The Absolute Best Forecast Of Where Bitcoin Is Headed

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Fibonacci, the Golden Ratios, and Stock Trading

Stock prices ebb-and-flow according to various factors, not all of which are financial.

There’s the human factors – success attracts investors, losers lose investors – and so there’s a herd effect that tends to move prices higher or lower as people react to news and circumstances.

There’s also mechanical factors – once buyers have bought, there are fewer buyers and stock prices sag.  And so on.

This is the technical aspect of investing and it does make sense. For example, you do want to track the money flow (forget the price – is more money flowing in or out, indicating more or less buying enthusiasm). A lot of the overbuying and overselling can  be explained by this aspect of stock trading.

There are also technical measurements that are more akin to mumbo jumbo or Rorshach tests – you see patterns that you want to see.  One such technical metric is the Fibonacci numbers or the Golden Ratios. Wiki it to learn more ( The concept is that nature follows a certain set of ratios. The shape of the Nautilus shell, for example, embodies the ratio. And for a good reason: the proportions echoed in the Golden Ratios deliver a certain physical strength and solidity. It is found in everything from art to architecture.

Some investors believe that these ratios can also apply to stock prices. Which seems strange – how could physical ratios map to investments and in particular financial behaviors. Believe it or not, they can and do.

Shopping is one classic example of human financial behavior.  Think about the ratios used during a sale. We often see stickers telling us to take 25%.  Over time, the sale price drops: take 50% off! And at the most extreme, take 70% off.

These figures correspond neatly to Fibonnaci numbers. The Fibonacci numbers say that when a stock is retracing (aka falling), it hits several ratios of the peak price: 61.8%, 50%, 31.8%, and 23.6%.

If the stock were on sale, those figures would translate to discounts of 28% (100%-61.8%), 50%, 68%, and even 76%. Very, very close to what we encounter in real life when sales are underway.

In other words, there seems to be a human perception at work where we are stimulated to act when we encounter certain proportions of change. We know that the human beast is wired to act – fight or flight. It’s just a little hard to imagine that there might be actual formulas that dictate how far we will run. (A lion is chasing me: how much distance do I need to be in order to feel safe?)

In the stock market, technical traders applying the Fibonacci ratios would say that these become resistance lines. The stock price will move to these levels and then bounce around. The thinking is that prices are drawn to these points. And when they hit the resistance level and continue to drop, then the stock price tends to gravitate to the next resistance point and that’s defined by the next Fibonacci number.

Too neat and pat? Well, it just happened with Bitcoin.

Start with the peak price of $19,870. The Fibonacci numbers tell us the resistance levels are:

  • 61.8% = $12,280
  • 50% = $9,935
  • 31.8% = $7,590
  • 23.6% = $4,690

And here’s what just happened. On Dec 16th, Bitcoin peaked and then steadily dropped. On Dec. 30th it fell to $11,962 and then promptly climbed back to $17,152

If you buy into the Fibonacci framework of thinking, then you would say that the stock price bounced off the first resistance level (the difference between the predicted $12,280 and the actual $11,962 is just noise).

Under the Fibo rules, if the price dropped again and remained below that $12.3K level, then it would next drop to $9,935 or thereabouts, before bouncing again. And that’s exactly what it did.

On Jan 16th, it fell below $12,000 and then promptly slid to $9,981 – the next Fibo resistance level. And then it bounced up again (again, the predicted resistance point was $9,935 and the actual $9,981 is just noise).

Twice in a row it would seem that the Fibo numbers were predicting the price destinations.

Here again, the theory is that with the resistance at $9.9K (as defined by the Fibo numbers), the next resistance would be $7,590. So let’s look at what happened.  For almost a week, BTC held at $11,000. But the price did not recover the $12,280 level – implying that it would fall back down again and re-test $9,935.

And BOOM! It fell below this level and promptly marched down on Friday to $7,760. Fibo said $7,590, but what’s $170 difference between friends.

It recovered but because it stayed well below the $9.9K level, it was destined to re-test $7.6K.  And, sure enough, on Feb 5th it is doing that.

From a behavioral standpoint, investors are being offered a deal: BTC is on sale at 61% off the recent peak price. If you liked it at 50% off, why wouldn’t you add to your position at 61% off?

Because that’s how investors – aka shoppers – think.  But I think there’s a lot more downside still, and that’s what the resistance points are indicating.

Is this a deal? Even at $7K BTC is up 7x over the year. So it’s hardly a bargain.

Never mind the emotional or behavioral aspects of buying an asset at a perceived discount.  Consider now the practical limits: where is the new money?

Recall that a lot of money piled into BTC the last few months.  They no longer have money to put into the pot. Worse, there is a margin squeeze which is adding to selling pressure: many buyers used leverage.

Plus go back to fundamentals.  Is Bitcoin for transactions or a storage of value?  BTC was used in the gray economy for buying goods and services.  For example, Craigslist has a filter on the FOR SALE section where buyers can indicate that they take cryptocurrency.  So there is a value of sorts.

But the bulk of the price surge comes from BTC as an alternative to dollars and gold.  And that makes it hugely emotional and driven by speculation.

Which means that a blowoff will remove almost all of the speculative surge.  Which means that BTC has a floor of $1,200 – it’s transactional value.

Pump and Dump: price collapse started when short selling commenced Dec. 18th As retail money came in, smart money found an exit. Starting Dec 18th, the CME allowed bitcoin futures. With just 35% margin, put options could be purchased.

Follow the history: Bitcoin peaks December 17th. Bitcoin begins to slide the next day, Dec. 18th, on the day that investors can start shorting it. Cause, meet effect.

What happens next

BTC will drop to $4,700.  That assumes that $7,000 won’t hold.  And that’s not a cause for panic – BTC was $1,000 last January, so that’s still a handsome profit.  And I believe that there are a lot of people who will sit tight.  That end-of-year surge caught a lot of people by surprise.  They didn’t sell all Summer when BTC was $4000, so why sell now?

But a lot of people are now going to be forced to sell, and that’s the pressure into tax season.


Andrew Zatlin

Editor of Moneyball Economics