Elliott Wave 5.0 "Reboot"

Tuesday, March 29, 2016

True Contrarian Mentions Elliott Wave 5.0 "Reboot"

  In the last few weeks or so Steven Jon Kaplan has put my blog on the bottom of one of his 
Newsletters. This was a bit strange as I know how anti EWP he has been in the past. We chit chatted in email many times as in 2008 he was calling for the biggest bull market since the depression. While EWP practitioners were still digging around in finding a wave 1 in Primary degree. I new wave 2 would never come . He sent me a copy of his Newsletter and has given me permission to post it. 

He has also put my blog on a more visible front page location, which is all good for more exposure.


                                                                 True Contrarian
                      Update #2153:  Monday early evening, March 21, 2016:  Robo bozos.

Now I'm not saying you should forget stocks and put all your money in bonds.
But there is a wonderful case to be made for diversifying across a variety of asset classes.
Wealthfront makes it appear as if it's doing so.
It's not.
In fact, it would just put all my money in the stock market and say, "good luck!"
True diversification is something very, very different and also something far more valuable.
Sadly, it may take another painful bear market in equities before the robos learn this important lesson.
--Jesse Felder, "Robo-Advisors Are Desperately Clinging to a Dangerous Dogma", www.SeekingAlpha.com, March 17, 2016.

Dear subscri

This is update
#2153 for Monday early evening, March 21, 2016.

VIX slumped to 13.82 on Thursday, 13.75 on Friday, and 13.79 on Monday, thereby finally satisfying the necessary condition for initiating additional short-selling of various U.S. equity funds. Earlier this week, I recommended shorting XLU, IYR, and XLP, and interestingly all three have since been modestly underperforming. VIX at 13.75 indicates that investors have lost all their fear which had accumulated during the previous several months and which caused the Russell 2000 to retreat to a 2-1/2-year low in January with higher lows for many U.S. equity indices during the second week of February. Additional downside potential for VIX still exists, but is quite limited, and VIX will probably now begin to form higher lows as it usually does prior to any U.S. equity index correction.

Many analysts, advisors, and those featured in the media had been gloomy just two months ago. We don't have quite the optimistic consensus that had existed in the spring of 2015, but negative commentary has been diminishing rapidly while the ratio of insider selling to insider buying has been climbing. We are also more frequently experiencing intraday retreats as the most knowledgeable investors have been repeatedly selling into strength instead of buying into the most extended weakness as they had done in January-February 2016. Meanwhile, ordinary investors are far more upbeat about the U.S. stock market, with a dramatic surge of inflows into U.S. equity funds in recent weeks after the same funds had suffered their heaviest outflows of 2013-2016 earlier this quarter. Investors are also piling back into junk bonds and most other categories of U.S. risk assets. Whenever investors are excitedly buying when we are probably already in a bear market, the biggest percentage declines tend to occur relatively soon thereafter.

After having deteriorated for several consecutive weeks, gold and silver's traders' commitments both modestly improved during the past week, likely indicating that commercials are content to mostly watch and not take much action near current levels. Unfortunately, while the traders' commitments are very useful in telling you when to buy precious metals and related assets, they don't tell you when to sell. The situation is somewhat different for the commitments for the 30-year U.S. Treasury which have continued to deteriorate and which are much more symmetrical in their significance. I would avoid purchasing any U.S. Treasuries for the time being because the likelihood of a meaningful price pullback (meaning notably higher yields) has been increasing. If TLT eventually goes below 100 within a year or so then it could become one of the best bargains of 2017.

If you are trading in the University of Iowa Electronic Markets, I had been buying contracts for Hillary Clinton on the Democratic side and just today for Donald Trump and "other" on the Republican side, for which "other" includes John Kasich. Most likely, Clinton and Trump will prevail, although there is the possibility of a brokered convention. Trump was available for exactly 75 cents, while "other" has ranged from 10 to 12 cents. Unfortunately, my preferred choice of Marco Rubio has proven to be much less successful than I had hoped. For Congress, I have been buying all choices except for the consensus expectation of a Democratic Senate and a Republican House of Representatives. While many political observers believe that Trump as the Republican Presidential nominee will spill over into voters selecting Democrats for the Senate and House, I think it is more likely that many voters will pick Hillary Clinton solely to defeat Trump and then all Republicans for everything else, in order to balance out their anti-Trump feelings with a desire not to have the Democrats regain control of either branch of Congress.

Some media outlets follow commodities, but not as many pay attention to the shares of commodity producers. These have become more resilient in often increasing in price even when their respective commodities are declining. This is a notable departure of their typical behavior after April 2011 and could be confirming that these and related sectors began important bull markets around January 20 with mostly higher lows being registered around February 11, 2016. I still expect the eventual peaks to occur mostly during the first half of 2017, although we will get better clues as the year progresses.

Worldwide equity indices began to rebound sharply around January 20, 2016, partly because the media had become so relentlessly gloomy at that time. As fund managers and advisors for most non-U.S. assets remain pessimistic, it is likely that the rebound for most risk assets will continue until we finally have lots of bullish pronouncements by analysts, advisors, and asset managers again. While U.S. equity indices will likely continue to form bearish sequences of modestly lower highs after having become absurdly overvalued in the second quarter of 2015, most global equity indices have barely begun to recover from multi-decade lows and will thus likely continue to climb strongly for another year and probably longer than that:

The mainstream financial media have responded to the rebound for commodity-related and emerging-market assets by primarily ignoring it, occasionally stating that there has been some kind of bounce but concluding that it won't last and that these assets remain in multi-year bear markets. It is useful to remember that there was similar skepticism about the sustainability of the U.S. equity bull market after it had surged by 50%:

We are finally getting the kind of get-back-into-the-market stories which must accompany any intermediate-term lower high for U.S. equity indices. When optimism becomes even more widespread, we will likely experience a subsequent "surprise" retreat which will at first approach and later slump below the intermediate-term bottoms from January and February 2016:

Brooklyn has a higher ratio of real-estate prices to household incomes than any other part of the United States, ahead of both San Francisco and Manhattan which are second and third respectively. The top can only happen if there are coffee-table books about Brooklyn homes--and that is now exactly what is featured in the following Bloomberg story. I remember when you could purchase an entire block of houses in Bushwick for the price of a single building today--long-time residents of Vancouver know what I'm talking about:

Global real estate has become so overvalued that a even burned-out house will likely sell for an absurd price:

This house in Vancouver sold for merely one million dollars over the asking price--and will be torn down:

The premise of the following article is directly contradicted by its content. As the article states, the average U.S. survey respondent expects U.S. housing prices to climb by an average of 1.7% during the upcoming year. While this is down from a 2.5% expected increase a year ago, it means that most people still believe that real estate will continue to rise in price as it forms its second all-time bubble (the first was in 2005-2006). Almost no one imagines that prices will drop by an average of 34% nationwide as they had done in 2006-2011, or that more than 20% of homeowners will experience losses of more than 50% as had occurred during the previous bear market. As housing prices begin to retreat in more areas and as this decline accelerates, inventory will surge and prices will slump further as people will compete with each other to get out ahead of everyone else:

Here are some fascinating photographs from Obama's Cuba visit--although they stole the ubiquitous photo of Air Force One flying over some ancient American vehicles:

These are other photos of Cuba taken in recent months:

Two comets are approaching:

Today's main topic is robo bozos. Credit goes to Danielle Kerani Oberdier for thinking of this idea.

There has been an explosion in the popularity of robo-advisors during the past few years. These are web sites which can perform various tasks depending upon the intentions of their creators. One of their roles, the one I personally find to be most useful, is being able to enter all of your bank, brokerage, and other accounts so that you can see your entire net worth being updated in real time. Naturally, those designing these sites, as with all web site creators, couldn't resist adding additional "features" to their products. I will now discuss which ones I like the most and why they have a long way to go before they are truly useful.

Robo-advisors: the good

Let's begin with what is positive about robo-advisors, which is the ability to consolidate up to dozens of accounts in a single place. This is especially useful if you sometimes tend to forget that you have certain accounts, so that when it is time to buy or sell in those accounts you don't remember them until it is too late. Examples of robo-advisors which allow you to aggregate your accounts and to watch them being updated are SigFig.com, JemStep.com, Wealthfront.com, Betterment.com, FutureAdvisor.com, and many others. Here is a somewhat outdated article which has some useful information in this regard:

The real question is: who should be using a robo-advisor? And what is their real purpose?

Robo-advisors: the bad

In my opinion, any web site which gives you useful information about the components of your portfolio can be valuable. I often want to know which of the assets I own have been performing the best in recent months after having been in extended bear markets, or which ones have been among the worst recent performers after having been in multi-year uptrends. I want to know the percentage of my net worth in any given security, especially since subscribers keep asking me about it. I also want to know how I am concentrated in various sector categories, such as the total percentage in emerging markets, the percentage in commodity-related assets, how much is invested in short-selling bets, and similar breakdowns. I want to know what percentage is in stocks, what percentage in various kinds of bonds, ideally with pie charts showing the bonds broken down by government securities, zero-coupon holdings, high-yield corporate bonds, and related subdivisions. I might also want to include real-estate holdings and collectibles so I can have my entire net worth in a single place.

Unfortunately, I have yet to find one of these sites which has any of the above features except in the most rudimentary, barely useful, difficult-to-process form. Perhaps this is all set to radically change during the next couple of years, or perhaps not. Before I make any decisions about my asset allocation, I want to know more about my asset allocation using various tools to examine it from different angles. Either I'm strange and no one else wants to see similar information, or these robo-advisors only provide it with a premium service which isn't well advertised, or there is so much demand for the least-useful part of robo-advisors that no one seems to care about this aspect.

As I mentioned at the beginning, it's great to see my entire liquid net worth being displayed in one place and being updated in real time. But this is 2016, so I have much higher expectations for these sites which presumably will take time to be realized.

Robo-advisors: the ugly

Now we get to the worst aspect of robo-advisors, which is how these web sites are not only used but are horribly abused. If you see a cow starting to speak English, then at first you are amazed and keep watching. Eventually you become less enthralled and you begin to correct its grammar and syntax and you become upset when it can't speak just like a well-educated human. As long as robo-advisors are merely giving you information, they are very useful. As soon as they start telling you what to do--or, worse yet, actually start making their own portfolio reallocations--then the real problems begin. Here is an appropriate article on this topic:

Why do people want computers to make financial decisions for them? In my opinion, it is mainly because of the diminished role of financial advisors in most people's lives. If we go back a century or more, then financial advisors were generally called brokers and made recommendations for their clients to purchase or sell various assets at different times. Those who were especially knowledgeable would know all about different stocks and bonds and their relative merits and disadvantages. They would usually receive a fixed commission for all trades which would be set by the New York Stock Exchange and which wasn't negotiable (prior to 1973). Thus, the reason for selecting one advisor over another was based entirely upon ability and knowledge and judgment, not upon price. Of course affability and other personal characteristics played a major role then just as they do now.

The world has changed dramatically in recent decades. Most brokers now call themselves financial advisors, wealth consultants, or something similar. The problem is that, whereas they used to give varying recommendations, for legal and other reasons they almost all currently recommend exactly the same advice. Regardless of whether the S&P 500 is above two thousand or below one thousand, they suggest that you put 20% of your assets into funds based upon the S&P 500, the Nasdaq, or something similar. If emerging markets and commodity producers are out of favor from having previously been in multi-year bear markets, then they recommend a tiny weighting or none at all. If utilities and real-estate investment trusts and private equity funds are the latest hot securities, then they recommend overweighting portfolios in those areas even if they are near all-time record overvaluations.

In other words, these so-called advisors don't know or care about Graham and Dodd except perhaps as the correct multiple-choice answer on a standardized exam. The idea is to own the same as everyone else owns, so if the market collapses they are litigation-proof since they lost money along with everyone else. It is the ultimate casino attitude, in which you should put your dollars in the slot machine where someone else just won a jackpot a few minutes ago and where it's supposed to be mostly random anyhow. Most of these advisors don't care because they're charging based upon a percentage of the assets under management, instead of how well the portfolio actually performs. In many cases, they are receiving kickbacks from various unscrupulous institutions, so they put their clients into dubious unlisted securities and funds with huge fees of which a percentage is paid directly to the advisor. If the client doesn't make money--no one knows or cares.

The problem with this kind of arrangement is that it provides almost no value. Therefore, if you can mimic this human model with a computer algorithm which is even more efficient at picking assets which have been in the longest bull markets regardless of overvaluation, and which can charge less than human advisors, then it is only natural that they should proliferate. If human advisors had been more attentive and concerned with their clients' welfare, then there would be little demand for having this kind of automated momentum-chasing software. As with everything in life, people don't usually get what they want with investing, but they often get what they deserve.

After I set up my account on JemStep and SigFig--I will try the others sooner or later--I decided to run their free software which they designed to encourage me to add various paid premium services. The software told me to sell almost all of my commodity-related and emerging-market funds, and to use the money to buy their recommended portfolio of utilities, real-estate investment trusts, some Fang-style technology funds, and a few other trendy selections. It told me to the dollar how much "extra" money I would have "for retirement" and how much more I would be able to spend each year, also calculated to the exact dollar.

It is easy to see how an unsophisticated person would be easily deceived by this kind of approach. Not everything is irrational; the program did tend to select funds which had lower annualized fees than many of its competitors, so that at least I would be losing money in a low-fee fund of utilities or REITs or tech shares rather than a high-fee alternative. When fees were relatively similar among competitors, it tended to strongly favor those funds which had outperformed its competitors during recent bull markets. So the program is not just random: it does have some kind of algorithmic intelligence which apparently appeals to many users. I will keep running this software periodically, partly because I want to see when it begins to more strongly recommend funds of commodity producers and emerging markets and when it finally gives up on its current preference for those funds which have rarely been more overvalued in their history. I noticed that when global equities were near multi-year lows in January and February, the software notably increased its recommended holdings in the safest categories of bonds--although decidedly not emerging-market government bonds, only U.S. dollar-denominated ones, and not any high-yield corporate bonds at that time. Lately, it has jumped aboard the high-yield corporate bond bandwagon. I assume it uses some kind of moving-average crossover or momentum strategy combined with certain other parameters regarding cost and previous performance.

Robo-advisors: the hope

If the recent past could be accurately projected into the indefinite future, then these programs would excel at telling me exactly how much money I will have on May 5, 2020 or any other future date. Perhaps one day these programs will allow the user to specify his or her favorite investing criteria, including implementing Graham and Dodd or other value and contrarian investing philosophies. Computers are best when they are used as rapidly calculating time-saving tools to assist you in your task, such as is currently the case with TurboTax which I love because it saves me time and ensures that I don't leave out anything. Robo-advisors are still in their infancy, so as an important minority of traders request these kinds of features they might eventually become available. I would gladly pay money for something which allows me to more quickly sort and rank the criteria which are most important to me and which I discuss frequently in my updates. Instead of picking the latest momentum favorites, I would want to see the heaviest insider buying in a given sector, the most intense investor outflows, and similar signals which I use when deciding to make additional purchases. I would use heavy insider selling and multi-year investor inflows as a sell signal. If these could be automated and integrated with my current portfolios, then these web sites could indeed become quite valuable as tools in helping me to make decisions. I still may not trust them to do the actual buying and selling, but at least they would point me in the right direction rather than having me effectively copying Jim Cramer's ideas in a computer algorithm.

Not surprisingly, the people who seem to like these robo-advisor programs the most are financial advisors who apparently are increasingly relying on them to make their decisions for them. If financial advisors are merely going to repeat each other's ideas, then they may as well have more precise useless data from a reliable source to back it up instead of creating their own questionable useless data. If clients of that advisor are equally clueless or don't care about long-term performance, then in a sense these advisors are giving their clients exactly what they want. One irony is that people tend to rely on financial advisors the most near the end of a bull market, and tend to distrust advisors near the end of a bear market. Thus, they end up chasing performance in both directions, making the biggest inflows just before the greatest declines and the most significant outflows just before the strongest uptrends. Investors will emotionally do this anyway, but with so many people encouraging them they are more certain to do the wrong thing than if they are acting on their own where by luck they may occasionally make a good decision.

I will continue to monitor these programs. If you think you have identified one which is especially useful for any reason, such as giving precise details which are not usually found in most of these web sites, then please let me know. I will be sure to pass the information along to other subscribers.

Question: Have you had any personal experience with robo-advisors?

Take care.

P.S. The following web site provides the most useful Elliott Wave interpretation I have seen so far:

TrueContrarian.com, P.O. Box 1894, New York, NY 10008-1894, USA

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