Please note that Portnoff Financial has joined with Tempus Wealth Planning and some information here may no longer be applicable. Please contact Jeremy Portnoff at 949-226-8342 (CA) or 732-226-3113 (NJ) for additional information.  We apologize for any confusion while we are in transition. 

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Real Estate

Economic Update for the Week of 5/16/2014

Inflation as measured by the CPI was up 0.3% in April, up 2% for the year. Most of this was from rising food and energy costs which does not help economic growth.

Housing starts moved up to 1,702,000 units per year on expectations of 980,000 and was mostly from multi-family housing; single family housing starts barely moved. This surge is likely from a return to building after the Winter and given other statistics on housing such as mortgage applications for purchase, there is not much to be very optimistic about here.

New Federal Housing Finance Agency (FHFA) Head Eases Mortgage Rules. The new FHFA head Mel Watt outlined his view that FNMA (Fannie Mae) and FHLMC (Freddie Mac) should encourage lending to less-qualified borrowers by easing recently tightened lending restrictions. Watt wants them to accept lower down payment loans and take other measures aimed at making it easier for people to borrow money to buy homes as if this strategy worked out well the first time. Sure, why not make it easier for less qualified buyers to purchase a home AFTER the market has rebounded over the last few years! This is not going to end well...

Household debt climbs to $125 billion in Q1 of 2014. Mortgages accounted for $116 billion, auto loans $8.2 billion, and student debt increased $31 billion while credit card debt declined. The increase in mortgage debt reflects less foreclosures rather than new mortgages and we all know that student debt is exploding having doubled since 2007. The decline in credit card debt reflects consumers reluctance to spend which will keep economic growth stymied. 

I am planning to host a FREE Educational Seminar about Social Security benefits and Advanced Claiming Strategies in the coming weeks. Topics would likely include: 

  • The Role of Social Security in your Retirement Plan
  • How Social Security Works
  • Boosting Benefits
  • When to Apply: Strategies for Maximizing Lifetime Benefits
  • Coordinating Spousal Benefits
  • Women & Social Security
  • Taxes on Social Security Benefits
  • Other Social Security  Programs (Dependents' Benefits, Maximum Family Benefits, Disability Benefits)
  • How Medicare & Long-Term Care integrates with Social Security
  • How and When to Apply for Benefits
  • History and Financing of The Social Security System

Please help me by taking the following anonymous survey so that I can plan a great event for you:

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eNewsletter for 5/17/2014

The unemployment rate has been declining however we have to look beneath the surface to understand why. I've been saying for quite some time now to expect declining unemployment but it's not because we are adding all that many jobs. There are two reasons; long-term unemployed are simply not being counted and Baby Boomers leaving the workforce at increasing rates (5.5 million over the last 6 years). With less people in the workforce, the rate goes down. The declining unemployment rate also does not consider under-employment. If you were making $120,000, lost your job and all you could find was a $75,000 job, then you are counted as employed even though the economic value of what you are making is substantially less. This also extends to all of these "jobs" that have been created over the last 5 years. Are these jobs high paying or low paying? If a job paying $100,000 is lost and replaced with a $30,000 job that was created, the unemployment rate doesn't change yet the economic value of that net job creation is less. Of the 273,000 private sector jobs that were created in April, nearly 55% were below the median wage, and a full 43% were in the three lowest income tiers.

Housing prices are moving higher but mortgage applications have been declining. Mortgage purchase applications were up 9% for the week of 5/9/2014 but down 16% from same time last year. Existing home sales were down for the 7th time in 8 months by 7.5% continuing this downward trend. Prices however have increased about 7.9% over the past year. This movement seems to be dominated by investors as about 50% of all purchases were made with cash. As prices rise, the investment aspect becomes less profitable and we'll see a slowdown in these investor purchases. Meanwhile new home sales dropped 13.3% for the year while new home prices increased 12.6% for the year. This is not a good outlook as a decline in new home purchases means less middle class jobs in the housing market and less demand for related professions such as carpenters and plumbers. Now that Spring is here, it is difficult to continue to blame the Winter especially given that this has been a weak trend for some time now. Don't expect any rebound anytime soon.

Fed Chair Janet Yellen reiterated her stance that the US economy is on track for recovery but that further weakness could hold it back. She also continued that short-term interest rates would remain low for a long time. FED stimulus has the intended purpose of reducing short and long term interest rates to encourage spending. By reducing interest rates on mortgages for example, the expectation is it will convince people on the fence of buying a home to do so. The problem is two-fold; first this is bringing future purchases into the present which leaves fewer people to purchase later and it only encourages people who are at the margins to move forward. This is why housing will continue to struggle.

A reasonable guide to the direction of the housing market lies in the difference between buyers and sellers. Someone who is selling a home to purchase a new home creates little demand as such moves are mostly lateral or because of a home upgrade. The biggest driver is new home buyers which are young people forming their own households which has been on the decline for reasons such as lack of jobs and high student loan debt. Net sellers of homes are generally older people who become sellers when they either move into a child's home, nursing home, or they die. Either of these events usually is followed by the house sale. So if we want to get a sense of net demand, we look at buyers who peak at age 42 on average and di-ers who sell on average at age 78 in the US.  

As we can see there was a peak around 2001, a decent  bounce from 2009 to 2013 and then a clear trend downward for years to come. In other words, past 2013 we should expect to see more people selling their homes than there are people to buy homes and when you have more supply and less demand, prices go down. And no amount of stimulus is going to create people that will need, want, and be able to buy homes. Its demographics, its baked in the cake, and we just need to be prepared for it and have reasonable expectations when it comes to home price appreciation.

Another warning sign: Margin Debt.

Margin debt (borrowing) to buy stocks spiked to new highs recently which also happened just before the 2000 and 2007 crashes. Stock market peaks seemed to correspond to peaks in real margin debt as we see here in 2000 and 2007. Currently the real margin debt is nearly at the level it was in 2007 just before the market started coming down. Those peaks seem to come after a sharp acceleration in margin debt which we are seeing recently. Definitely cause for concern.

Also it is interesting how the S&P 500 has been closely following a Theoretical Bubble Progression Model. We keep bouncing around these historical highs; the market hits the upward resistance, drops down a bit, comes back up to slightly new highs, but the progression of this is narrowing meaning that the dips are smaller and smaller and the new highs are also smaller and smaller. At some point in such a model it breaks down and that's when the bubble bursts. Unfortunately most people don't see bubbles until it's too late and these bubbles tend to burst much faster than they build. Trends like this simply cannot continue forever because eventually prices get excessive, demand dries up, and then prices come down. There is no exception in history! How long it can continue is another matter. Look at how the DOW ran up from November 1994 to January 2000 which no one debates was a bubble, and compare how the DOW has risen from March 2009 to April 2014 yet few seem to think we are in a bubble now? 

(Source: Yahoo! Finance, 2014)

Just remember that the bigger the bubble the bigger the burst. When we zoom out and look the DOW since the mid-90's, we see what is called a "megaphone" pattern marked by higher highs and lower lows. 

(Source: Yahoo! Finance, 2014)

If this pattern holds, it predicts the DOW going to around 17,000 by mid-2014 and then a drop to somewhere lower than 6,000 by around late 2016. So it is possible to have a few more good years with stocks but being prepared and braced for the worst case scenario is the prudent strategy.  

Chinese Purchasing Managers Index (PMI) came in at 48.3 showing continued contraction. AS China slows, they are letting their currency begin to devalue which makes exported good cheaper to the rest of the world. Just another sign that China is slowing and as they slow, supply chains in other countries will be affected.

You can't solve a debt crisis by adding more debt and hoping that the economy will improve and that the market will keep going up is not a strategy. We need to consider all of the warning signs and decide for ourselves how we will act and protect ourselves from the possibility that our hopes don't play out as we would like them to. 

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eNewsletter 5/2/2014

I was recently quoted in MarketWatch, a Wall Street Journal online publication in the article, "Beware these IRA rollover mistakes" by Robert Powell. You can read the article at

Market Update

Stocks have been overbought for some time now and the recent sharp decline in January may be only the beginning of this massive bubble bursting. People, government officials, and economists alike are simply in denial about how bad things are and there will be an end to this craziness eventually. Year to date stocks have not really done much over all except the bounce around record highs. The trend has clearly shifted from an upward market to sideways. Typically after a run up the market will "consolidate" and level out until it either breaks up or down. This recent change in the trend could just be a pause on the way to more record highs or we could be setting up for a downward change in direction.

We've all been to a social gathering where after a while the first person decides to leave which causes other people to feel comfortable to leave and then shortly thereafter everybody clears out except for the usual stragglers. This is basically a description of "The Minsky Moment" named after Hyman Minsky, an economist who suggested that markets are inherently unstable. This is based on the idea that long periods of speculation tend to lead to crises and the longer the speculation the worse the crisis gets. So we can see markets going up until the first start to leave which is usually the "smart money" which causes others to leave and then we get a "Minsky Moment" like 2008.  If we look at past bubbles of almost any kind, we see two results: first, bubbles always burst, and second they tend to return to about where they started.

The U.S. Government has been putting in $2 Trillion in stimulus annually; $1 Trillion in deficit spending and another $1 Trillion in monetary stimulus (QE). Stimulus has been a huge tailwind in keeping the economy afloat and causing the financial markets to rise to all time highs. These tailwinds will become headwinds at some point when the stimulus is stopped and the deficit spending becomes unsustainable and our debt burden too high. For now it seems that Quantitative Easing has been working but may be showing signs of fizzling out as the stimulus is tapered.

Interest rates have finally began a meaningful rise from a low of 1.38% to over 3% and recently hovering around 2.6%. As the stimulus continues to be tapered, we are likely to see bond rates rise which is not good for long-term, intermediate term, and high-yield bonds. As the FED continues to taper, this means they will purchase few bonds which will likely mean a decline in demand. As the demand declines prices go down and yields go up.

Increasing rates will hurt the housing recovery, large purchases using debt such as cars, consumer spending on credit, etc. Once this happens, expect to see significant economic slowdown. Increasing rates will also make our ability to pay government debt more difficult. Then what does the FED do? Stimulate again to juice the economy again? The problem is the law of diminishing returns which says that the more you have of something (in this case stimulus), the less value we get from it. Think about that first cup of coffee in the morning; it wakes you up but you eventually get tired so you take another cup, but the second cup doesn't have the same effect as the first. I think we are getting closer to a point where it will be evident that the stimulus didn't work long-term and our ability to stimulate more will be hampered and the deleveraging and deflation will commence.

For bond investors this creates some problems. The stock market is risky so the conventional alternative is bonds however rising rates will hurt bonds. A typical intermediate term bond fund has a duration of about 4-5. Duration is a indicator of sensitivity to interest rates. A duration of 5 means that for a 1% increase in rates, you would expect a decline of about 5% in your bond fund. The conventional way to reduce this risk is to shorten your duration by going to shorter term bonds. Unfortunately the yield on short-term bonds is quite low and are still negatively affected by interest rate increases. The real question continues to be what the markets will do when rates start rising again and we see even lower or negative growth with this stimulus.

Recently housing has shown some positive price gains however it appears that almost half are cash sales which implies that it is speculators, investors, and financial institutions are behind these purchases. These positive gains could explain the recent surge in pending home sales last year. It's clear that sales have been going up and inventory has been going down which is typically a healthy sign for housing.

To understand where housing is going we need to look at demand; who is buying versus who is selling. When a person goes into a nursing home or dies, they become a seller by default. Therefore a great way to get an idea of where demand is headed is by looking at the number of buyers vs. dyers. People tend to buy their trade up home in the US around age 42 on average and die at age 79 on average. The projection clearly shows a greater number of dyers than buyers and thus the net demand for housing should begin to decline again starting next year. The decreased demand and increased  supply will push housing prices down. This is not for all housing however and does not apply to all regions. For example, those in the northeast tend to migrate to Florida as they age which could cause a net decline in demand to happen sooner than expected.

People don't buy homes based on prices or interest rates, rather they purchase a home based upon a payment which is determined by both prices and interest rates. With interest rates beginning to rise and if prices stay the same, payments rise thus housing will become less affordable unless median incomes rise substantially which doesn't seem to be likely anytime soon. US real (inflation adjusted) disposable income fell 9% in the past 12 months (as of June 2013). Consumer spending typically drives about 2/3rds of our economy. With disposable income falling, this means less money to spend, especially on discretionary items. Another warning sign. This certainly will not help housing. An increase in supply coupled with increasing interest rates is a recipe for declining prices which we will probably start to see in the not too distant future. In addition, the shadow inventory of homes continues to be the biggest hidden threat to the housing market. If the economy begins weakening again, the institutions that have been holding out for higher prices may finally begin to sell that inventory if prices start declining. Increased borrowing rates should also have negative impacts on car loans as well.

Traditional economists don't seem to understand why we are not seeing inflation despite the massive amount of money being pumped into the economy. The reason is that when an economy is at this stage of the cycle after a credit crisis, people don't borrow as much and banks don't lend as much. This slowdown in the fractional reserve system means less money in the economy which is the offsetting deflationary force to all the money printing.

The average bull market lasts nearly 4 years. If you take out the one extremely long bull market which lasted about 12 years and the shortest from 87. These bull markets are followed by an average 36% decline. The current bull market is over 5 years long. Volatility tends to increase at major long term tops such as 1966 - 1974. The first decline after 1965 saw a 26% decline, the second after 1968 was 37%, and the third after 1972 was about 50%. Take notice of the current secular bear market since 2000 which saw a 51% decline after 2000 and a 58% after 2007. So if the pattern continues and we see a third decline, it could easily be 65% or more.

Warning signs we're near a top:

  1. Margin Debt at $400 Million: Margin debt is approaching the 2007 peak at $430 Million and higher than the $390 million at the peak of the Tech Bubble in 2000. This suggests we are seeing more speculation and leverage in this bubble.
  2. Stock Buybacks close to 87%: Companies are aggressively buying back their own shares using super low interest rates. This has the effect of artificially boosting Earnings Per Share (EPS) because the number of shares outstanding has been reduced. Currently 83% of S&P 500 companies are buying back their own stocks which is getting close to the 87% it was in the 2007 peak.
  3. Corporate Profit as a percentage of GDP is above 11% and is at record levels. Fed stimulus via low interest rates has boosted corporate profits more than any boom in history. At the 2007 peak, corporate profits/GDP were 10%.
  4. P/E Ratios between 24 and 27: Most major stock peaks happen when P/E (Price to earnings) ratios are between 22 and 27 except for the extreme tech bubble when they reached about 45 and the peak in 1929 at 32 and these periods had the advantage of strong demographic trends and accelerating productivity from new technologies which we do not currently have. At the 2007 peak P/E's were 27. We're currently about 24 and moving higher.
  5. Market value of non-financial stocks divided by GDP ratio above 1.3: During major market peaks, this ratio tends to be between 1.0 and 1.5.
  6. 62% Bulls vs. 20% Bears: Many of the people that got scared out of the markets in 2008 have been returning since 2012. When Bulls vs. Bears gets to this level, that tends to suggest peaks although we did reach this level in 2010 before backing off back to about 40% Bulls. As everyday investors continue to pile in, we watch for the "Smart Money" to start exiting and when that happens, watch out!
  7. As January goes, so goes the year: When January is a negative month often that forebodes a negative year. After 5 years of a stimulus led bull market that is long overdue for a correction, this saying may be true this year.
  8. The second year of a 4 year presidential cycle tends to be bad for stocks.

Governments keep borrowing at below market rates to run budget deficits by purchasing their own bonds, companies buy back their own stock with super low interest rates to boost earnings per share, banks take QE stimulus money to boost their reserves in anticipation of the massive losses they expect when the economy turns back down and to speculate in financial securities with 30-50 times leverage causing margin debt for stocks to near and all time high; You tell me, are these signs of a bubble? Looking back I suspect all the "experts" will say we should have seen this coming. 

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Reecnt Economic News

Our economy created 117,000 jobs in July however this is within the 129,000 statistical confidence interval which means that the jobs that were "created” are indistinguishable from a decline. Still we have no meaningful and statistically significant increase in jobs creation. Meanwhile the unemployment rate dropped to 9.1% which is simply reflecting additional people not being counted because they have given up looking for work which is indicated by workforce participation rate falling from 64.1% to 63.9%; the lowest level since 1984. Even if the jobs number were accurate, it is not enough jobs to keep up with current labor force growth let along decrease unemployment. Expect jobs numbers to continue to be weak. As the economy weakens further, we will likely see the unemployment rate increase.

The US debt rating was downgraded from AAA, the highest by S&P to AA+ the next level down. This doesn't come as much of a surprise considering the state of our country's finances including massive deficits and debt. There is no doubt that the US will be able to pay back its debt; the issue centers more on our willingness to pay (politicians arguing over the debt ceiling) and the likelihood that US Debt is paid back in less valuable Dollars due to weakening of the Dollar through printing. The credibility of the major ratings agencies is being called into question because they were all part of missing the credit crisis in 2008 and were part of the problem in putting "AAA” status to junk mortgage derivatives.

In the wake of this downgrade, the markets have continued to slide rapidly however interestingly enough, Treasury bond rates did not rise which would typically be expected under a downgrade situation. Since the other two major rating agencies have not downgraded US debt this may be why Treasuries yields have not spiked (prices going down) or it could simply be the markets are work reaffirming their faith in the US Government to pay its bills. Ratings agencies and analysts do not set prices; markets do.

The US Dollar has maintained value relative to the S&P 500 and Gold has shot to new highs. I would caution current holders of Gold as well as would be Gold investors that prices will not go up forever and while Gold is considered a safe haven, it can drop faster than it has risen which is what we saw in the 2008 crisis. Those who have profited from Gold should consider significantly reducing exposure to Gold. Those who are considering purchasing should probably avoid doing so as risk is very high.

The selling that is occurring in the market now is mostly fear based on the recent downgrade of US debt and the continued and intensifying crisis in Europe. Investors are selling their mutual funds indiscriminately which causes the funds themselves to be forces to sell good assets to meet redemptions which is what we saw in the 2008 meltdown. This is a good reason not to buy Gold; as funds/institutions/hedge funds have to sell good assets such as Gold holdings just to meet redemptions causes the prices of those good holdings to drop. This is a negative feedback cycle which continues until some good news comes out. There is no doubt, as I have been stating for some time now, that I believe the markets are have been artificially inflated and should come down, however I would not expect this kind of meltdown so quickly. Usually the beginnings of a decline are more moderate and then begin to accelerate as the slide progresses. The trend will likely be down however I'm sure we'll see plenty of large bounces following declines. It's going to be a bumpy ride, so hold on; we'll get through this.

Recently, Dan Gross, economist for Yahoo Daily ticker made a remark about housing and demographics. He referred to a "impending housing boom simply as a matter of demographics” under the assumption that a number of homes are demolished each year, people have babies, people get older, young people form their own families and as this occurs it will lead to a shortage in housing down the line. I was quite surprised to hear an economist talk about demographics because it is rare. Economists tend to extrapolate current figures into the future as well as being overly optimistic instead of using tools such as demographics to attempt to look around the corner. While it is true that there is a demographic wave of young people who are beginning to form their own households, there is still way too much housing supply and it will take years to use up the excess supply until we see supply pressure that would drive prices up. To watch the video, click on

Many market Pundits and economists alike seem think it is uncertainty that is preventing businesses from growing/hiring. Business is always uncertain. Taxes are always uncertain. A business never knows when the next downturn is lurking around the corner. I think the reason that businesses are not growing and hiring is lack of demand for their products and services. Then I hear some of these same pundits discuss how to create demand. While demand can be created to some small degree at the margins, aggregate demand is more a function of total available income to spend. A new and better product can come out that entices people to buy it, but that only means those consumers will spend less on something else. Incomes have not rise in over the last 10 years and the baby boomers are passing their peak spending years.

We will not be able to all of a sudden get a generation to start spending more money when they are focusing on paying down debt and saving for retirement after their children leave the nest. It is a natural process that will just take time to come back. The good news is that it will come back and come back strong unlike many other demographically plagued countries in the world.

Meanwhile with the recent rash of sour economic news, the discussion of QE3 (Quantitative Easing) has been increasing. While The Fed may be force to do some type of QE3, more stimulus will be less effective than the previous due to law of diminishing returns. It is powerful at first, but each round has less and less effect. We are better off in the long run to deal with the pain of contraction so that we can emerge healthier sooner rather than continually stimulating which has less effect anyways yet will weigh us down with the excess debt in the future.

Fed stimulus has not led to economic recovery, rather it has cause asset inflation which was certainly part of their plan; re-inflate the housing market and stock market in hopes people would spend again. The stimulus did not re-inflate the housing market however it did re-inflate the financial markets to a large degree. What happens if the markets tank again? Then we would have stimulated for nothing. Simply piled on more debt, lowered the value of the Dollar, and received nothing for it. Perhaps the economy would have been worse off without this stimulus, but we will never know.

I also find it laughable when economist and other market pundits say that the chances of recession are unlikely. How can anyone say that a recession is unlikely? The recent GDP numbers are a hairsbreadth away from tipping into contraction. In fact it is very possible we are already in recession and we just don't know it yet because it takes about 6 months or so for the official call that we're in recession to come out.

President Obama recently stated that he thinks it will take a year to 18 months before the housing market picks up; convenient that this time frame is right around his re-election. Also along these lines, The Fed has indicated intent to leave rates at this level until mid 2013. This is also convenient in that it would be after the election.

On a positive note, Jobless claims fell below $400,000 for the first time since April. Although this is a small positive signal in a sea of negative data. It is important to remain cautious and not get caught up in fear and bubbles.

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Are we Surprised? Part 2

This is a follow up from yesterday's comments about existing home sales dropping after expiration of the $8,000 bribe (I meant to say tax credit) to buy a home. Today the Associate Press reports that new homes sales have declined 33% after expiration of the tax credit (or did I mean to say bribe again?).

"Analysts were startled by the depth of the sales drop.” -

Really? They were startled?

Again this is not a surprise at all. The credit brought in the marginal buyer and now that the credit is gone, those marginal buyers have become homeowners leaving a vacuum in marginal buyers. We went from a borrowing multiple of about 3.3 times pre-tax income before the housing boom to 9.2 times pre-tax income at the peak of the boom; an increase in the borrowing multiple of 2.8 times! That is one of the major causes of the bubble. The bottom line is that no amount of tax credits will bring back the same housing demand when the borrowing multiple was 9.2 times pre-tax income. It's just not going to happen.

So what will the Government do now that the housing market is already showing weakness? Are they going to expand the credit? Gee I hope not. Instead of more tax credits, the Government needs to get out of the way and let this real estate market do what it should naturally do after a major bubble and that is deflate. There is no other solution than deflation of housing prices.

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Are we surprised?

An article from the Associate Press on (Stocks slide on new concerns about housing, banks) stated that the National Association of Realtors data showed existing home sales fell 2.2% in May and that they were surprised. Surprised? What is surprising about this?
So the Government hands out a bribe of $8,000 to entice you to buy a home. The effect for that credit is to bring in homebuyers that were on the fence; marginal buyers who might otherwise have waited but the bribe was too good to pass up. When you offer such a bribe, the result is leaving a vacuum of demand in the future becuase you have already pulled the future buyers into the present. No wonder that home sales have declined now that the credit expired.
You could see this one coming the minute they offered the credit yet analysts are going to claim to be "surprised" because thought sales would go up? Sales did go up initially however it does not seem unexpected that sales in the month AFTER the credit expired would drop. Even for the home that had to close by June 30 to get the credit, the buyers too close to the end of the April deadline probably just decided to wait hence we see sales decline.
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