The Middle Class Is In Trouble

The Erosion of Americas Middle Class

The stock market looks like it wants to roll over. Whether it will or not, we don’t know. We’ll just have to wait to find out. The US Middle Class is in trouble.

Here’s what Germany’s leading newsmagazine, Der Spiegel, has to say on the subject:
The Erosion of America’s Middle Class

While America’s super-rich congratulate themselves on donating billions to charity, the rest of the country is worse off than ever. Long-term unemployment is rising and millions of Americans are struggling to survive. The gap between rich and poor is wider than ever and the middle class is disappearing.

Finley calls them “the new poor.” “That is a different category of people that I think we’re seeing,” he says. “They are people who never in their wildest imaginations thought they would be homeless.” They’re people who had enough money – a lot of money, in some cases – until recently.

“The image of what is a poor person in today’s day and age doesn’t fly. When I was growing up a poor person, and we grew up fairly poor, you drove a 10-year-old car that probably had some dents in it. You know, there was one car for the family and you lived out of the food bank,” says Finley. “In the past, you got yourself out of poverty and were on your way up.”

It was the American way, a path taken by millions. “Today the image is you’re getting newer late model cars that at one point cost somebody 40, 50 grand, and they’re at wits end, now they’re living out of the food banks. And for many of them it takes a lot to swallow their pride,” says Finley.

Today the American way is often headed in the opposite direction: downward.

Two weeks ago, Microsoft founder Bill Gates and 40 other billionaires pledged to donate at least half of their fortunes to philanthropy, either while still alive or after death. Is America a country so blessed with affluence that it can afford to give away billions, just like that?

Gates’ move could also be interpreted as a PR campaign, in a country where the super-rich sense that although they are profiting from the crisis, as was to be expected, the number of people adversely affected has grown enormously. They also sense that there is growing resentment in American society against those at the top.

For people in the lower income brackets, the recovery already seems to be falling apart. Experts fear that the US economy could remain weak for many years to come. And despite the many government assistance programs, the small amount of hope they engender has yet to be felt by the general public. On the contrary, for many people things are still headed dramatically downward.

In a recent cover story titled “So long, middle class,” the New York Post presented its readers with “25 statistics that prove that the middle class is being systematically wiped out of existence in America.” Last week, the leading online columnist Arianna Huffington issued the almost apocalyptic warning that “America is in danger of becoming a Third World country.”

More than a year after the official end of the recession, the overall unemployment rate remains consistently above 9.5 percent. But this is just the official figure. When adjusted to include the people who have already given up looking for work or are barely surviving on the few hundred dollars they earn with a part-time job and are using up their savings, the real unemployment figure jumps to more than 17 percent.

In its current annual report, the US Department of Agriculture notes that “food insecurity” is on the rise, and that 50 million Americans couldn’t afford to buy enough food to stay healthy at some point last year. One in eight American adults and one in four children now survive on government food stamps. These are unbelievable numbers for the world’s richest nation.

Even more unsettling is the fact that America, which has always been characterized by its unshakable belief in the American Dream, and in the conviction that anyone, even those at the very bottom, can rise to the top, is beginning to lose its famous optimism. According to recent figures, a significant minority of US citizens now believe that their children will be worse off than they are.

Many Americans are beginning to realize that for them, the American Dream has been more of a nightmare of late. They face a bitter reality of fewer and fewer jobs, decades of stagnating wages and dramatic increases in inequality. Only in recent months, as the economy has grown but jobs have not returned, as profits have returned but poverty figures have risen by the week, the country seems to have recognized that it is struggling with a deep-seated, structural crisis that has been building for years. As the Washington Post writes, the financial crisis was merely the final turning – for the worse.

Some Weeks Are Better Than Others

This week was one to forget. It felt like I made every mistake in the book. Let’s take a look at a few of them.

I sit behind 3 computer screens. The screen on the left is for the stock market. I have my portfolio, research screens and scrolling news. The center screen is dedicated to currencies. On this screen is my trading station and global currency news. I also have a couple of other quote services that I serve as backups. The 3^rd screen is dedicated to email, writing, Skype, and anything else that makes sense during the day.

When I am on the hot seat, I eyeball everything that happens. I look at every news item and the price reaction to them.

This might seem like a lot to process but it isn’t. I trade stocks differently than I do currencies. This helps me keep my sanity. I am a position trader when it comes to stocks. I am not a stock day trader. I have positions on the board that have been there for as long as a year. My typical position stays on the books an average of 3 months.

Currencies are a different story. I am a day trader. My typical position lasts anywhere from 2 to 5 minutes. Anything longer and I most likely have a problem on my hands.

This week, I missed out on a few stock trades. I have no idea what I was thinking. Actually, I wasn’t thinking at all. I kicked the can like a moron. I also managed to have a few names blow through stops like hot knives through butter.

Then there’s Potash. It’s been on my watch list and I never seemed to getting around to buying any. That one hurts the pocketbook because it was a no-brainer.

My currency trades didn’t fare much better. I’ve been in a funk for the past 2 weeks. My trading platform went to fractional pips and it has truly screwed my trading formulas. Why, I am still looking, but the problem is most likely between my ears.

My reaction has been nothing short of pure emotion. This has led to something known as revenge trading. I didn’t even know that it even had a name.

So in the course of 2 weeks, I missed a few trades, blew a few stops, traded emotionally and failed to exercise common sense when my platform changed.

There is no excuse for this kind of bad behavior. As a trader, I am responsible for 100% of my results. I pulled the trigger and I have to live with what happened. There are no tears or do-overs.

As a way of correcting my misfortune, I am first of all writing about it. I am not perfect and trading is a pretty humbling profession. In order to stay on top of my game, I need to understand what went wrong and why.

Stocks

I am reviewing each and every position today. I am either going to own it on Monday morning or I am not. It’s time to clean out the nest. The 2^nd thing is that I am going to get into the positions that I have been meaning to for some time. I am also going to review each stop and make sure that each position has at least one profit target and a definitive get-out price.

Currencies

I am going to print out the daily charts for the euro, yen and Aussie dollar and determine the overall trend of each. This will be my direction of trade for Monday. I have been trading against the trend lately and I need change that habit.

Second, I am going to determine support and resistance levels for each of the above currencies on the 4 hr., 60 min, and 15 min charts. This should give me some pretty good set-up entry levels.

Third, I am going to read through everything that happens this weekend in Jackson Hole. Bernanke is speaking again today (Saturday) and all eyes and ears will be on what he has to say about quantitative easing. The world knows we are in a bond bubble and one day it has to end. The question is whether the balloon simply loses air or if the whole thing bursts.

The last thing that I am going to do is to buy an egg timer. I am going to use it to time my trades. My average winning trade lasts a certain number of bars. Once beyond that, my chances of having a winning trade go down measurably. I am going to begin using a time stop in addition to my regular stops.

Trading is my lot in life and in order to stay in the game, I need to keep striving to get better. And get better I will.

Bernanke Jackson Hole Speech

Yahoo Finance 082710

JACKSON, Wyo. (AP) — Federal Reserve Chairman Ben Bernanke said Friday that the Fed will consider making another large-scale purchase of securities if the slowing economy were to deteriorate significantly and signs of deflation were to flare.

Bernanke acknowledged that the recent pace of growth is “less vigorous than we expected.” He described the outlook as uncertain and said the economy “remains vulnerable to unexpected developments.”

At the same time, he said growth is likely to pick up next year. He downplayed the odds of another recession, even after a series of dismal reports on housing and manufacturing this week stoked fears that the economy may be on the verge of another downturn.

His remarks came 90 minutes after the government said the economic growth slowed sharply in the second quarter to a 1.6 percent pace.

Bernanke stopped short of committing to any specific action. But he raised the prospect of another Fed purchase of securities, most likely government debt or mortgage securities, to drive down rates on mortgages and other debt to spur more spending by Americans.

“I believe that additional purchases of longer-term securities should the FOMC choose to undertake them, would be effective in further easing financial conditions,”he said. The FOMC stands for the Federal Open Market Committee, the group of Fed policymakers that makes decisions on interest rates and other steps to aid the economy.

The other two options he laid out are:

–Providing more information in the Fed’s post-meeting policy statements about how long Fed policymakers would continue to keep rates at record lows. For more than a year, the Fed has been pledging to hold rates at ultra-low levels for an “extended period.”

– Cutting to zero the interest the Fed pays for banks to keep money parked at the Fed. That rate is now 0.25 percent.

“The issue at this stage is not whether we have the tools to help support economic activity and guard against disinflation. We do,” Bernanke said. “The issue is instead whether, at any given juncture, the benefits of each tool, in terms of additional stimulus, outweigh the associated costs or risks of using each tool.”

Investors appeared to be pleased by Bernanke’s remarks. The Dow Jones industrial average rose 114 points in early trading. Broader indexes were also up.

Brian Bethune, economist at IHS Global Insight, said the Fed is right to hold off until it becomes clear that the weakening trend in the U.S. economy is persisting. If the economy shrinks in the third quarter, he said, the central bank’s hand would be forced.

“I think they’d have to make a move,” he said.

The Fed’s strategy carries no guarantees. Short-term interest rates near zero have yet to rejuvenate the economy. The benefits of federal stimulus programs are fading, and Congress has declined to pass any major new economic aid. That is putting immense pressure on Bernanke to provide relief, and he has no easy options for fixing the economy.

At a Fed meeting earlier this month, Bernanke persuade his colleagues to use a relatively small amount of money generated by its portfolio of mortgage securities to buy government debt. The goal is to further ease rates on mortgages and other loans.

The economy, which has been losing momentum all year, slowed to a near crawl in the second quarter.

At such a weak pace, the nation’s 9.5 percent unemployment rate could climb and pass 10 percent later this year or early next year, some analysts say. With economic conditions worsening, there’s the danger that consumers and businesses will turn even more cautious in their spending, causing the economy to stall, or worse, slip into reverse.

Bernanke said the prospect of high unemployment for a long period is a central concern for the Fed. He also made clear that he is determined to prevent the United States from slipping into a deflationary spiral.

Deflation is a widespread and prolonged drop in wages, the prices of goods and services and in the value of stocks, houses and other assets. The country’s last serious episode of deflation was in the 1930s. Keeping interest rates super low and taking unconventional to lower rates on mortgages and other debt is a way to nip any deflationary forces.

Japan’s deflation problems and stagnant growth caused the country to suffer what many refer to as a “lost decade” in the 1990s. It is still fighting deflation now even as it has kept its key interest rates near zero like the Fed.

Although most economists believe the odds are relatively low that the United States will slide into deflation, it can’t be ruled out given the economy’s weak growth, they say.

Despite the economy’s recent slowing, Bernanke, however, continues to believe there will be “some pickup” in growth in 2011, but not enough to substantially drive down unemployment and reduce the vast ranks of the unemployed.

“We have come a long way, but there is still some way to travel,” Bernanke said.

AP Business Writer Alan Zibel contributed from Washington to this report.

At the Crossroads

Blog At the Crossroads 082710

The ‘flash crash’ that occurred a while back unnerved many investors. What unnerves me is that the powers to be haven’t yet figured out what happened. Or worse, do know what happened and aren’t telling us.

This I do know – the flash crash started in the currency market. The suspect currency pair that triggered all this was the EUR/JPY (Euro/Yen) cross currency pair.

I had a front row seat that day and I had that pair (1 of 4) on my primary trading screen right in front of me. The speed at which everything happened was frightening. I have my own opinions as to what happened that day and why.

Since then, all eyes have been on the economy and with the bulls and the bears split pretty much down the middle. Half think the economy is slowing improving and that low interest rates will spur us onto new highs in the market. The other half thinks that we will sink lower and wallow in the muck of economic largesse that the politicians heap on us.

So what gives? Was the early rally just a sucker’s bet and that the bottom falls out in September? Will the market crash and take our hopes with it?

Facts are facts. We have an economy that is trying to improve and grow at a time when debt is simply too high. Instead of fueling growth and more credit expansion, the growth is being used to increase savings and pay down debt. This is the exact opposite of what the Obama administration told us would happen.

I don’t have a clue what will happen next with the stock market. I just do what the indicators tell me to do. From my perch, the indicators this week came are in and are as follows:

• NYSE Bullish Percent Os at 48%
• OTC Bullish Percent Os at 38%
• S&P 500 Bullish Percent Os at 44%

The indicators have flipped since Tuesday. We have moved from OFFENSE to DEFENSE. We are now in the CAPITAL PRESERVATION phase and will work to deploy our assets accordingly.

I will be making a few short sales and put purchases over the next couple of days. Members should be on the look out for trade recommendation. I will send an email and post the trade to the board before I make the trade in my own account.

The market is acting like it wants to probe the downside. I am going to fade the current trend. When the indicators send the OFFENSE back onto the field, we will press the long side at that point. Not until.

We are in a debt deflation economy where consumers are saving and not spending. My key to all of this is the employment numbers. If these numbers do not rise, we will not see any meaningful rebound in consumer spending.

As a trader, I look at risk and asset allocation through a unique set of glasses. A lot is said about diversification, buy it doesn’t come from the number of positions that you hold or the number of managers that you have managing your money.

True diversification comes from the different return streams that you have that are fundamentally different from one another.

I think investors should have their portfolios spread across 4 different asset classes. The mix is up to each individual investor’s risk appetite. They are ‘STOCKS’, ‘TREASURIES’, ‘MANAGED CURRENCY’ AND ‘PRECIOUS METALS’.

The stock component should be made up of quality stocks and equity ETFs. I would be a wholesale seller of just about any equity mutual fund. Second, I would SELL any bond fund that I owned. Your fixed income component should be comprised of Short-term Treasuries with a maturity date less than 2 years. We are in a bond bubble and my concern is the return of my money versus the return of my fixed income assets.

Managed Currency is a new to many investors and one that I can’t stress enough. I have been managing currencies for the past 4 years and this is where the action is going to be. The US dollar is under assault on all fronts and has dropped 15% against the euro so far this year. Returns from currency portfolios are not dependent on the stock market going up or interest rates coming down. In my mind, it’s the perfect investment for this environment.

The last component to your portfolio should be precious metals. In addition to gold and silver, I would also include palladium and uranium in this mix. I like the ETFs here because it gives you the breadth and depth of exposure to hedge your portfolio.

That’s about it for now. Give me a call if you have any questions.

RAC

What Makes Me Different

I’ve had a number of calls lately and the number one question people are asking is this:

What makes you different from all the other advisors,
brokerage firms and financial planners?

This is a good question and here is the answer.

First, ‘The Intelligent Trader’ and the Christy Investment Group aren’t for everyone. I make no bones about this. I am not all things to all people. My programs are for people who:

1. KNOW THEY NEED some help
2. KNOW THEY WANT some help
3. KNOW THE DIFFERENCE BETWEEN DELEGATION AND ABDICATION OF RESPONSIBILITY. It’s your money and if you don’t know how to manage it to your benefit you’re toast.
4. AND KNOW THEY WANT TO LEARN TO DO IT THE RIGHT WAY FROM SOMEONE WHO’S ALREADY DONE IT.

Second, my approach is unique:

1. First, I assess your overall level of risk. I rank everyone from 1-6. I’m a 7. No matter what anyone has told you – you will live longer than you think and it will cost exponentially more than you can imagine. You need to have your money in equities and other non-correlated asset classes like currency funds and hedge funds. Gold and Silver need to be core holdings in your portfolio.

2. Next, I insist that you read the Intelligent Trader and the Daily Notes section which is for clients and subscribers.

3. After that, you will learn about my 5 Step Process which is designed to put you in the right place at the right time. Most investors do not have a process which is why they struggle. I guarantee you that this will be an eye opening experience.

4. I’ll work with you and show you how to use these tools and together we actively seek out the best investment opportunities.

5. I insist that you trade along beside me. I’m not a wizard hiding behind a curtain throwing money at 3rd party managers or mutual funds. This is important – I put my own money on the line each and every day. I have skin in the game. My client’s positions are the same as mine. Ask your broker or financial planner to show you his portfolio. Chances are it is a lot smaller than yours is. In reality, he should be paying you for advice.

6. If I had to boil it down to one thing that truly sets me apart from others, it would be this – my approach to risk and trade management. This is where the pros separate themselves from amateurs because this is the most important AND THE MOST OVERLOOKED ASPECT OF INVESTING. To be successful in today’s market, you must have a specific and pre-determined plan of action to manage all forms of risk.

I take risk seriously. I do not like to lose money.

I protect my grubstake as if my financial life depends on it BECAUSE IT DOES.

The bottom line is this – the results I achieve are tangible, measurable and real.

More on this subject later.

A High Batting Average Does Not Assure Success

I am a baseball guy. Just ask anyone who knows me. I spend a lot of time talking baseball with just about anyone who will listen. Baseball is a game dominated by numbers and there are statistics to measure every facet of the game. The average fan believes that a player’s batting average is the most important statistic in the game.

I’ve been reading about a trading system that guarantees a .950 (95%) batting average. It sounds good, but the reality is that it can lead to cataclysmic failure if you’re not trading with both of your eyes open. Most traders would jump at the chance to have this kind of batting average because they falsely assume that they have an incredible edge.

Currency traders trade with leverage that ranges from 10:1 to as much as 100:1. If you risk 2% of your account value on every trade and use just 10:1 leverage, you can destroy your trading account in as few as 5 trades.

People think I am successful because I have an edge. I don’t have any discernible edge because I don’t think there is such a thing. Trading is a social science with roots in both sociology and psychology. It’s not a traditional science like math or statistics. It’s more art than science.

Successful traders understand human behavior and the impact that emotions (behavioral psychology) has on price. A science like math or statistics deals with absolutes that can be duplicated time and time again like a lab experiment.

On the trading desk, the first thing I want to be is consistent. I work on this each and every day and believe me, it’s a struggle.

The second thing that I do is leave my emotions at the door. My trading desk is no place for emotion. My performance suffers when my emotions get the better of me. One of the most frustrating things about trading is reacting differently each time I see a familiar chart pattern.

The last thing that I do is to pace myself. Currencies trade 24 hours a day. I can’t trade every minute of every day. I tried when I first started trading and I was fried in no time. There is a pace to the market that can’t be replicated in a lab. You have to experience the market and get in synch with the flow.

Trading is a tough way to make a living and that’s why so few are successful. The bottom line is this – a high batting average is nice, but it’s the number of runs that score that determines the final outcome.

Head or Heart

I am not much of a soccer fan, but I did manage to catch a few minutes of one World Cup game. I am a fan of ESPN’s Sport Center and one of their analysts commented on the upcoming final between Spain and Germany.

Here’s what he had to say – “At this point,” he noted, “strategy doesn’t matter”. It all come does down to emotion. Who has the bigger heart? Who has the stronger desire to win?”

I wrote down the comment and have been thinking about it for some time. Athletics is about emotion. Trading is not.

As a trader, emotion is my arch enemy. I find that when I let my emotions enter the fray bad things happen – really bad things.

I’ve been trading since I was a college student. The professor who taught me how to trade was of German ancestry and was about as dispassionate as they come, especially when it came to trading.

Dr. Sennholz stressed time and time again that emotions and trading mixed about as well as oil and water. Successful trading was the end result of executing a pre-planned strategy. You enter when you are supposed to and you exit when your system says to. Anything else is tantamount to disaster.

The market is a humbling place where anger, fear, frustration, joy, exuberance and boastfulness cause you to lose money. This month has been a rough one on the trading desk and I have had my head handed to me on a silver platter. I’ve been going through an emotional period in my life and my bottom line has suffered because of it.

Trading boils down to two things.

First, you have to be creative and creative people are emotional people. You have to be passionate about the markets and trading. You have to transcend the surreal to come up with the ideas that work. It takes a lot of hard hours finding the right strategy that works in the environment that we are in right now.

Second, when it comes to the trade itself, you have to leave the emotions in the other room. The only thing that is important is to execute the plan that before you.

This is easier said than done. It’s the reason that I love trading. The day to day challenge is what keeps me coming back day after day and year after year.

No Home Cooking Here

The Summer of Recovery isn’t turning out the way that PresBo and Vice Liar Biden had envisioned. Using Biden’s words, this is a big effing deal.

I read in the paper that the last U.S. “combat brigade” has left Iraq, and “combat operations” there are over. Of course, 56,000 U.S. troops remain there. Most of them used to be “combat troops,” in fact. But now they’re “transitional troops.”

Doesn’t seem like much has changed!

The numbers supporting the recovery have been coming in and are disastrous. PresBo’s puppet handlers have the teleprompter telling us that this was all George Bush’s fault.

Two years into his Presidency and he still hasn’t taken responsibility for reverting us back to the economic Stone Age or as he sees it to the brink of Nirvanna.

One of the puppet masters, George Soros, is bailing out of U.S. stocks. Soros Fund Management, with $25 billion in assets, slashed its equity holdings 42% during the second quarter — from $8.8 billion to $5.1 billion. His once-sizable holdings of Wal-Mart, JP Morgan Chase and Pfizer now amount to only a few token shares each.

It sounds like he knows something that we don’t know. If he thought the economy was recovering, he would be buying stocks right and left.

Like John Paulson, his biggest holding is GLD, the giant gold ETF.

Where he’s shifted the money is harder to tell from the 13-F he filed with the SEC, since the document tracks only U.S.-traded shares and related derivatives.

Another hedge fund manager who is concerned is Hayman Capital’s Kyle Bass. “I don’t know how I can be long stocks,” Bass said this week in one of those moments when CNBC goes suddenly off-script and the anchors’ faces turn white. (Memo to CNBC producers: If you book someone who called BS on subprime anytime before August ’07, you have poorer-than-usual odds he’ll say things are hunky-dory now.)

And his reasons don’t even have that much to do with the U.S. recovery, or lack thereof. Bass (no relation to the Texas billionaire Robert Bass, in case you’re wondering) is worried about European bank leverage, European government debt and a deadly combination of debt and demographics in Japan.

Everyday, the Summer of Recovery looks more and more like the Summer of Sam.