Update for December 2007
Model Is in Red Light Mode
Van K. Tharp
for these monthly updates in the first issue of each month. This
allows us to get the closing month’s data.
In these updates, we’ll be covering each of the major
models mentioned in the Safe Strategies book: 1)
the 1-2-3 stock market model, 2) the five week status on each of the
major stock U.S. stock market indices, 3) our four star
inflation-deflation model, and we’ll be 4) tracking the dollar.
I’m also going to show you the five strongest and weakest
areas of the overall market.
I: Market Commentary
2007 was an up year for the U.S. markets with the DOW 30 rising
6.4%, the S&P 500 rising 3.5%, and the NASDAQ 100 rising 18.5%.
However, that has to be tempered by looking at some relative
statistics. First, the
dollar fell 8.9% on the year versus the world’s major currencies.
So in relative terms you were only up if you held the NASDAQ 100.
In addition, according to John Williams’ shadow statistics
(i.e., tracking the CPI as it used to be calculated in 1990),
inflation ran 11.7% in 2007. Thus,
no U.S. markets kept up with both inflation and the fall of the
dollar, which, in combination, totaled a negative 20.6%. Did
you make over 20.6% in your investments (i.e., calculated in
dollars) in 2007? If
not, then you didn’t really make money in 2007.
But this is what we have to put up with in a secular bear
market. You certainly
didn’t want to be in cash where you would have lost 20.6%.
This secular bear market is clearly an INFLATIONARY BEAR
market, but few people seem to be aware of it.
look at what you could have been in 2007 and see what would have
First, inflationary periods are good for commodities.
The CRB went from 394.89 to 476.08, an increase of 20.56%.
This is what you lost being in the dollar and with real
inflation. However, the
futures market is highly leveraged, so smart futures players did
very well in 2007.
Next let’s look at the traditional store of wealth during such times:
GOLD. If you’d
bought GOLD at the beginning of the year at $635.50 and sold it at
the end of the year at $833.20, you be up 31.1%.
You’d have a positive gain in wealth of about 11%.
also could have put your money in some of the emerging markets.
Let’s look at three of them – China (represented by PGJ),
India (represented by IFN) and Brazil (represented by EWZ).
First, the India fund went from 46.01 to 62.26, which
amounted to a gain of 35.32%. Thus,
investing in India would have been slightly better than gold.
went from 21.95 to 34.35 in 2007.
This represents a gain of 56.49%.
So investing in China would have given you a gain of two
times over what you lost to inflation and the decay of the dollar.
lastly, the Brazil ETF (EWZ) went from 47.5 to 80.70.
This amounted to a gain of 69.89%.
Brazil represents both a booming emerging market and a
commodity based economy. You
could have made about a 50% gain in real wealth investing in Brazil
the way, I’m not an advocate of buy and hold as most of you know.
What I am advocating is an understanding of the big picture
to shape your investments. And,
at least in hindsight, the big picture for 2007 was obvious.
let’s look at what the market did in December.
1-2-3 Stock Market Model Is in RED LIGHT MODE and That’s Bad for
1-2-3 Model is in red light mode!
The Fed is not in the way and has actually started to lower
interest rates. That’s
positive. The market is
not acting well, and that’s negative.
In addition, the PE ratio of the S&P 500 is above 17,
which is not positive. Thus,
we are in red light mode.
look at what the market has done over the last five weeks and
compare that with where the averages were December 31st
last year. These
data are given in Table 1.
that December was a fairly neutral month.
Part II: The Five Strongest and Weakest Areas
started a new feature here, listing the five strongest and the five
weakest components in the market at the time of this update.
These can change daily, but the information will be accurate
as of the publication of this update.
are the five strongest components, in order, with the relative
strength of each component given in parenthesis:
Indian Stock Market (94)
Brazilian Stock Market (50)
though this is just a snapshot and can change daily, doesn’t this
look pretty much like the strength of the market in 2007?
It certainly does to me.
Real estate (5)
U.S. Small cap value (17)
U.S. Small cap blend (18)
that the strong and weak components are still pretty similar to what
they were last month.
III: Our Four Star Inflation-Deflation Model
I’ve stated many times in these monthly updates and already in
this one, we are in an inflationary bear market.
The bear market is not necessarily reflected in prices, but
in PE ratios. PE ratios
will continue in a downtrend even though the Dow is making new
highs. And the inflation
is obvious, but simply masked by government statistics.
Okay, so now let’s look at the results for the last six
months. And remember
that the Fed has now chosen to produce inflation and a strong dollar
devaluation over the pain of the subprime crisis.
We’ll now look at the
two-month and six-month changes during the last six months to see
what our readings have been.
The results of this model are
much more sensitive (I believe) than the model I presented in Safe
Strategies for Financial Freedom.
The model once again shows that inflation
is winning slightly.
Click here for
more information on the model.
IV: Tracking the Dollar
the Federal Reserve lowering interest rates, I would now expect
currency traders to start selling the dollar and moving to
currencies that pay a better interest rate.
Look at the data in the chart because it really says it all.
mentioned earlier that there was historic support at the 80 level
and that a drop below the 80 level could signal a plunge.
We’ll that’s clearly happening.
This tells me that the dollar’s status as the world’s
reserve currency will be very much in doubt in the near future.
And that’s one reason that oil is above $90 per barrel.
What Can We Expect From the Market in 2008?
2008 is an election year. The
Republicans will do whatever they can to stimulate the economy this
year in an attempt to win the election.
However, the question becomes how much can they do in the
face of several issues:
a secular bear market,
huge deficit spending (with the
debt and deficit spending both masked by fake statistics), and
an economy that is bankrupt,
according to a study
commissioned by the Federal Reserve.
In addition, we are facing a subprime crisis which is
much more significant than most people realize.
these conditions, the government can do very little except to
manipulate the statistics some more.
And I expect that will happen.
I seriously doubt that they’ll allow their statistics to
show that we’re in a recession.
a recession is defined by a negative GDP for two consecutive
quarters. However, the
government is manipulating the statistics.
According to John Williams (who keeps real statistics at
www.shadowstats.com), the United States has been in a recession
since the 2nd quarter of 2004.
In fact, the first quarter of 2004 was the only positive GDP
quarter (based upon real data) since the inflationary bear market
started in 2000.
what can you expect in the stock market in 2008.
It’ll probably be up because it is an election year.
The government wants to tell you that the market has gone up
five straight years and that everything will be fine.
But will the market increase be enough to cover real losses
to your wealth from a decline in the dollar and from inflation? By
the way, DR Barton was right about the dollar last month.
Short term it went up. As
a currency trader with leverage, you could have made money.
But I wouldn’t bet on it being up over the next 12 months.
think Gold and Commodities will again be the place to be in 2008.
And Gold started the new year hitting a high of $861 (up 3.5% in one
day). In addition, emerging markets will probably do well.
However, the question to ask yourself in 2008 is whether or
not the subprime crisis has the potential to pull enough money out
of the markets to impact the booming emerging markets in 2008.
Stay tuned for the answer.
been invited to speak before John Templeton’s group in Brazil at
the end of this month. I’m
giving them a full one day workshop on position sizing and risk
control. And at the same
time, I’m going to get a good flavor for what’s going on in
Brazil, including catching part of the Carnivale in Salvador
(that’s where the Brazilians go, not Rio).
Stay tuned for the next market update to hear about what’s
going on in last year’s hottest country.
Until the January update, this is Van Tharp.
Tharp: Trading coach, and author, Dr. Van K. Tharp is widely
recognized for his best-selling book Trade Your Way to
Financial Freedom and his outstanding Peak Performance Home
Study program - a highly regarded classic that is suitable for all
levels of traders and investors. You can learn more about Van
Tharp at www.iitm.com.