Subscribe FREE to the Moneyball
Economics Newsletter


Markets Happy As It Climbs “The Wall Of Worry”

By | charts, data, economics, economy, statistics, Uncategorized | No Comments

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

By | charts, data, economics, economy, statistics, Uncategorized | No Comments

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

Here’s What To Expect After The Market Selloff

By | charts, data, economics, economy, statistics, Uncategorized | No Comments

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

By | charts, data, economics, economy, statistics, Uncategorized | No Comments

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

Make Sure You Avoid Healthcare Stocks

By | charts, data, economics, economy, statistics, Uncategorized | No Comments

Make Sure You Avoid Healthcare Stocks

Buffett: Healthcare Costs are an Angry Tapeworm in the Belly of the US Economy

JP Morgan, Berkshire Hathaway and Amazon announced a joint agreement to develop a healthcare alternative on January 31.

This is a BIG deal. Why?

Well first, these companies have a combined 1 million workers. Second, other companies will likely follow suit and join.

Really what’s going on is are businesses are stepping in to fix what politicians won’t.

The history of American healthcare is a history of shared expense and employer supported payments.

Hospitals emerged in the early part of the 20th century and they were business failures from the start.

They have high fixed costs (buildings, equipment) and high operating costs (physicians, nurses, operating staff). That turns into a positive: a large barrier to entry reduces competition. Also, they have a massive base of repeat customers.

The first big development came in the 1920s with the concept of prepaid health care access. That was the start of Blue Cross. For hospitals, a guaranteed revenue stream reduced risk.

The second big development came in the 1950s when employers started to foot the healthcare bill.  

This required two things to come together.  

First was labor’s bargaining strength: after World War II there were fewer workers and stronger labor demand. Second, Washington made healthcare payments a fringe benefit that fell outside of wage definitions. Workers liked it because wages get taxed and healthcare coverage wouldn’t get taxed. Companies liked it because they pay matching taxes on wages, but the healthcare would be exempt.

But this is where things began to go horribly wrong.

This always happens when payments (costs) are spread across a large base: the payers purchasing power gets diluted.

See, the business model was originally like a co-op: members pre-paid for services and that enabled hospitals to thrive and provide services.  But the employer-supported plans created a system of massive greed:

  1. Pool of money surged: more participants contributing more dollars
  2. Buyers (employers) were not the consumers.
  3. Hidden prices: healthcare is probably the only industry where prices are hidden
  4. Guaranteed money

By inflating the guaranteed payment mechanism, the business model pivoted away from guaranteed money in order to stay alive and towards guaranteed money to charge maximum prices.

Hospitals Are Incentivized To Be Expensive

Start with the concept of nonprofits.  The most profitable businesses in America today are non-profit hospitals.

Non-profit means that hospitals can’t show a profit: they must spend all their revenues.  And they do: on executive pay and doctor pay and union pay.  This is why 60% of all hospitals are non-profits – so they can make massive profits and call it take-home pay.

Hospitals are basically local monopolies.  They charge whatever the market will bear.  The hospital system leverages that monopoly to always raise prices.

The customer market is fragmented: companies must negotiate one-on-one. They are doomed to fail.

Where else can you conceive of a system where the intermediaries – the payment system negotiators – are multi-billion dollar profit making companies?

The healthcare system is a runaway train.  healthcare costs go up because the system can raise prices and those higher costs are then spread out across hundreds of millions of payees. You and I may grip about paying another $100 a year. That’s tens of billions of dollars extra per year to line the pockets of the healthcare system.

A successful system would drive down the cost of providing healthcare.  A lot of treatments are routine.

Instead, the healthcare ecosystem actively resists any and all moves to lower costs of services and treatments that are essentially commoditized.  It took forever for nurse practitioners to be allowed to give shots and other routines treatments instead of the higher priced doctors.

Healthcare spending takes away from other forms of spending and the reality is that the cost of providing the service is much lower than the prices charged. This is enabled by (1) the evil of guaranteed and growing funding and (2) a lack of competition.  

In terms of scale and impact, healthcare is indeed an evil tapeworm that needs to be tamed. But how do we restore some balance?

The Amazon Move: Changing The Balance Of Power

There was an attempt to introduce collective bargaining into pricing. The U.S. government is a major purchaser of healthcare services – through the Veterans Administration, through the Defense Department, and through entitlements like Medicare and Medical.

The U.S. government represents tens of millions of users.  But when they attempted to introduce drug price negotiation, Big Pharma lined up lobbyists and successfully blocked the move.

Clearly politicians won’t make the necessary changes.

It’s An Amazon Retail Play

Look at it as another marketplace and one where Amazon does one thing well: creating a marketplace that eliminates the middle-merchants by connecting consumers closer to suppliers. The consequence is lower costs as the supply chain tightens, as competition emerges and as prices are more visible.

Backing the Amazon play is the one million strong base of angry customers who can’t be bought off.

That number will balloon as it gains traction.

Expect Walmart to jump in.

The goal is to reduce the pool of funds available to the healthcare system.

So who loses funds?

  • Healthcare facilities: mixed.  Hospitals are somewhat immune: while they are big abusers, they are also monopolies.  Perhaps they can be cut down to size if the new system rewards the cheaper HMOs and physicians outside of hospitals
  • Drug companies: This will be a bloodbath.  Epipens that enjoyed 10x price hikes?  Sorry, expect alternatives to emerge.
  • Insurance companies: Very exposed.  Ultimately they are playing a middleman role and Amazon is a middleman-killer.  They are glorified paper-pushers adding no value in a digital world.
  • Prescription management: this will get streamlined

There are two bottlenecks in the system which are lovingly maintained by incumbents.

The first is money. Insurance companies control the aggregation and disbursement.  

Hospitals and service providers play hide the price. Both of these will get beaten up because Amazon is all about price clarity.  They could probably develop and deliver a proprietary system for managing the funds, one that will be a lot better and cheaper than what’s out there costing billions.

The second bottleneck is prescriptions. A lot of money goes to drug companies.

Imagine being able to source your medicines as you would a book on Amazon.  Prices would collapse.  But there is an inherent risk – are suppliers delivering quality products?  That’s the same risk you take when buying anything off Amazon today.  But instead of a shirt that  might not fit, it’s drugs that don’t work.  Not good.  So some work is needed here.

KEY TAKEAWAY: Disinvest from Healthcare Stocks

There are no discernible winners at this time.  Oh, some companies will win, that’s for sure.  But it’s not clear which ones.  Amazon will be playing kingmaker and it has the capability to bring certain functionalities in-house.

Biotech and certain device & drug companies will be immune.

But the trend is to cut healthcare funding – which will make the market turn bearish.

It will take time.  The healthcare industry will put up a fight. Don’t expect them to take losing 1 million higher-income consumers lying down.

You don’t have to rush for the exits, but the writing is on the wall.


Andrew Zatlin

Editor of Moneyball Economics