Oct 072019

How to spot the warning signs of a looming recession

Last year I wrote a blog post explaining that a recession may not be far away. A recession is 2 consecutive quarters of negative economic growth. The indicators at that time were still questionable. But fast forward to today and wow, the signals have become much clearer! Here are 10 economic indicators that strongly suggest a U.S. recession could be imminent.

recession indicators to keep an eye on

  1. Inverted yield curve
  2. Unemployment rate reaching an inflection point
  3. The long term unemployment is flattening out
  4. Declining GDP growth
  5. Lower expectations for corporate earnings
  6. Manufacturing index PMI falls to 10 year low
  7. Global uncertainty index at all time high
  8. Declining Cass Freight Index
  9. The Fed Bank of New York drastically raised the likelihood of a recession
  10. Rising auto loan delinquencies

Additional breakdown of each of the 10 indicators below.

The yield curve has inverted

The graph below shows the difference between the 10 year treasury yield and the 2 year treasury yield. The yield curve tends to get flatter when the economy reaches the end of an expansion cycle. The vertical gray bars on the graph represent periods of recession. How reliable is this indicator? Over the last 50 years, every recession was preceded by a yield curve inversion. 😮 The graph dropped to below 0% earlier this year in March, officially inverting the yield curve. According to Credit Suisse, a recession occurs about 22 months on average after a yield curve inversion.

US 10 year treasury against 2 year treasury yields from FRED


The unemployment rate is bottoming out

A lower unemployment rate is good for the economy. But at the end of every full employment cycle is a sharp increase in the civilian unemployment rate, usually accompanied by a recession. When we last looked at this graph in 2018 the unemployment rate was at 4% and heading down. Today it is lower at 3.7%, a 50 year low in fact. Practically speaking it cannot drop much more than this. Historically we can see in the chart that after the lowest point in each employment cycle, the unemployment rate shoots up abruptly, usually coinciding with a recession.

Unemployment rate cycle against past recessions. The correlation is very clear.


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Apr 102019

The Dow Jones Industrial Average is one of the oldest stock indexes in the world. It tracks 30 of the largest U.S. stocks traded on the Nasdaq and the New York Stock Exchange, and for this reason is also sometimes known as the US30. These stocks are picked from a variety of sectors, including industrial material, financials, telecommunications, energy, information technology, and health care.

Like its rival the S&P 500, the Dow is a representative of the U.S. stock market. It’s often called the ‘blue-chip index’ due to the types of companies it contains.

Factors That Influence the Dow’s Movement

At the time of writing, the Dow has been in an uptrend for more than 9 years. This long-term bull market has been underpinned by the good performance of companies in the Dow, and the stable economic growth of the U.S.

So, what are the factors that can affect the Dow?

Well, we can’t continue this article without mentioning the important role of the Federal Reserve – the U.S. central bank. It’s responsible for maintaining the balance of the U.S. economy and keeping it growing. Interest rate decisions and announcements from the Federal Reserve, therefore, have a big impact on the Dow’s movement.

In addition, the Dow is also affected by U.S. economic data releases as they provide the indication of the current and future state of the U.S. economy. High-impact economic reports such as Employment Change, Consumer Price Index (CPI), Retail Sales, or Non-farm Payrolls can affect traders’ sentiment and make the Dow fluctuate.

Tips For Trading the Dow

  1. Keep an Eye on Economic Data Releases

As mentioned above, U.S. economic data and interest rate decisions from the Federal Reserve can influence the Dow’s performance. Therefore, remember to track them. Use a financial calendar to stay up to date with forthcoming news. Try not to miss any important events, because one second of distraction might cause you to miss a trading opportunity.

  1. Use a 200-Period Moving Average to Visualize Trends

Stock indices tend to move in one direction because they are based on price moves of the constituent stocks. Therefore, it’s a good idea to track their trends with a long-term moving average.

Professional DJIA traders often apply a 200-day simple moving average (SMA 200) to the Dow’s daily chart to measure its trends. When prices are above this line, they look for bullish trading opportunities on shorter-term setups. Conversely, when prices turn below the SMA 200, they prepare for bearish trading setups.

  1. Don’t Trade When You Are Emotional

Emotions may be good in love but are useless in trading. They negatively influence traders’ rational thinking and reduce their ability in making accurate decisions.

Sometimes, the Dow can strongly seesaw and you might react to this by changing your trades. But don’t let its fluctuations affect your long-term strategy. Keep in mind that indices tend to move in one direction, so the major trend should return soon.

Also, don’t trade when you are not fully alert or not feeling less than 100% physically or mentally. That’s not beneficial for your finances.

The Bottom Line

You have just discovered some useful tips to trade the Dow. Everything is up to you now. If you’d like to do some trading experiments, open a demo account. Or, if you are confident enough to get instantly into trading for real, go ahead and open a real trading account.

One important note: if you just start out, do it small. That will help you gain real experience trading the US30 at a low cost.

Jan 282019

“One man’s trash is another man’s treasure.” This time-honored quip can no better be applied to any other profession than the venerable American “junkyard.” Here in America, we all grew up within relative proximity to an auto junkyard. The auto parts heaven has always been a great source of certain, simple, or even critical components for any make or model in production. It’s a natural choice to make when money is tight, or even when it is not. It simply makes good sense to visit your local auto graveyard to find that part you need, and most of us have done just that.

The quintessential junkyard has indeed evolved. Today, technology and innovation have resulted in the modern parts powerhouses of today. The junk yards in Utah are no exception. Whether it is as simple as a lug nut, or as critical as a transmission, the auto parts yards of today have made it a simple task to find that elusive part, which would otherwise be a large expense.

Taking advantage of the junkyard has always proven to be a wise decision, otherwise, they wouldn’t even be around. The value of this classic business model has and will continue to stand the test of time.

The history of the junkyard can be traced back to the very early days of the advent of the horseless carriage. One of the more famous instances includes Henry Ford and his exploration of auto graveyards in his day. The observations concluded that some parts survive the life of the car itself and can be reused. The famous “Kingpin” story may be the beginning of the modern junkyard business model. Whatever the case may be, we all enjoy the availability of important car parts at a very affordable price thanks to our local junkyards.

These days, the make and model, no matter how exotic and/or rare, can be found in the auto-parts boneyard. The top yards no longer simply let autos sit and deteriorate in a large field. Every auto is thoroughly inspected. Every bolt of value is recovered and provided to the customer. The process has become very efficient, and more of everything for your car is becoming readily available. It’s a win-win scenario for everyone.

The used auto parts business model is not just an American phenomenon. It is, of course, worldwide. Millions of cars, trucks and other vehicles such as motorcycles, tractors, heavy equipment and other exotic and rare machines find their way to their ultimate demise, and they leave their precious internal parts to those who need them. It’s the equivalent of an organ donor. Many partnerships have been struck between junkyards and other businesses related to the automotive industry. It’s a natural progression, of course, and such relationships benefit everyone. It is a wonderful thing to see such evolution in business, and the success of such symbiotic pairings is a blessing to all, more often than not.

With more and more businesses pairing up and growing the used auto parts industry, more great benefits become available. It sometimes seems that cars are becoming almost disposable. Many people will choose to buy new cars rather than fix what they have. Or, some simply wish to keep getting the new models when there is nothing wrong with the old. There are many instances where perfectly fine cars wind up in the hands of the auto parts dealer. This makes higher quality parts available. Again, another benefit to us all! And now, with the wonderful Internet, finding what we need or want has never been easier. The digital revolution has not left the junkyard behind. Used auto parts businesses have embraced modern technology; naturally and efficiently.

When the need arises, and it will, your first and the wisest step is the mighty junkyard. There is no indication that the phrase “Junk Yard” will ever go away. That is another topic altogether. However, when that radio knob pops off for no reason, you now know where to go first. It stands to reason that there is no part you can’t find at your local auto graveyard. It may seem obvious to some, but you and I are but a few amongst billions, and some people may not be aware of the junkyard option. Avail yourself of it.

Jan 022019

Happy new year, everyone. 1999 was already 20 years ago. That was the year when The Matrix and Star Wars Episode 1 movies came out. Darn, I feel old. 😐

I think the financial markets are in for a very eventful year in 2019 as issues in the economy may expand and bleed into the real estate and bond markets. Here are a few things to consider as we kick off January.

  • According to hedge fund manager Stanley Druckenmiller, since 2010 actual corporate earnings have only climbed 27%. Yet somehow the S&P 500 index has doubled in price. If stock prices are meant to reflect corporate profits then something doesn’t add up. Druckenmiller attributes the gap to buybacks and mergers financed by corporate non-financial debt, which climbed 60% to $9.6 trillion from 2010 to the end of 2018.
  • High yield and leveraged loans are growing. In late 2018 Sen. Elizabeth Warren warned the Federal Reserve’s vice chair that leveraged loans pose an economic threat on scale with subprime loans from a decade ago. “The Fed dropped the ball before the 2008 crisis by ignoring the risks in the subprime mortgage market,” Warren said. Simon Macadam, global economist at Capital Economics, also said leveraged loans, which generally are issued to lower-quality borrowers that already have a substantial debt load on their balance sheets, pose a danger. This has not become a crisis just yet, but I would keep an eye on it.
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Dec 212018

Stock markets are down around the world in December. The Nasdaq Composite which is a barometer for tech companies has fallen 15% so far this month. Top economists and investors have been sounding the alarm for months on an economic recession. A New York Times survey discovered that 48% of business leaders at the Yale CEO Summit expected a recession to strike by the end of 2019. It said this finding was the “direst yet,” and shows just how worried companies are about an imminent recession. 😮

The S&P/500 is already in a bear market, which means it has dropped at least 20% from the last highest point. The Canadian S&P/TSX Composite index is only down 18% since its high point in July. But it could very easily enter bear market territory by next week.

Recently 82% of corporate CFOs surveyed in the Duke Global Business Outlook saw a recession starting before the end of 2020. But nearly half of them believe it will actually occur by the end of 2019.

A little pullback once in awhile is normal. When you have nearly 10 years of financial growth it shouldn’t be a surprise when growth finally decelerates. That’s why it’s necessary to always maintain a recession resistant financial plan. 🙂

The writing has been on the wall for a long time. About a year ago I explained how we are near the end of an economic cycle, and by using some charts, I predicted that the next financial downturn will probably happen sometime between 2019 and 2021. So I’m in agreement with most of the business people surveyed above.

Instead of choosing stocks that are largely recession proof, the best way to protect ourselves from a falling stock market is to own other types of investments such as bonds or prime real estate. Continuing to earn a steady stream of income also helps bolster one’s financial situation. Only 1/3rd of my assets are in stocks. So despite the double digit stock market pullback, my net worth is only down about 1% compared to July.

It is hard to know whether this current trend will continue to push stocks further down, or if we will see a bounce back soon. If I had to guess, I think there is still some time to prepare before things start to look really bad. Here’s a chart that shows the change in corporate income tax the U.S. government earned over the last 50 years. ~Notice how just about every time the line drops below the 0 point and reverses direction we see a vertical grey bar? Well those bars represent times of recession (or shrinking GDP.)

corporate income tax

At this moment the U.S. could already be in the beginning of a recession. We won’t know for sure until the economic data is released many months later. But what we can determine right now is that the line has crossed below 0, and it hasn’t reversed direction yet. That’s why I think the next financial downturn will not be this year. 🙂

But in the meanwhile I am being weary and staying away from buying new stocks. It’s not a good idea to catch a falling knife, as a stock market in decline is most likely to continue falling in the immediate future. So I will be enjoying the holidays sitting on the sidelines. At the same time I am also not selling any of my stocks. And lastly I am continuing to pay down debts, saving up cash, and looking at bonds. 🙂

Random Useless Fact: