Is September 2015 the start of a great Stock Market Crash? End of 7 year cycle, and September is worst month

After a seven year strong stock bull market in the U.S.A. since 2009 with hardly any stock corrections, is September 2015 the beginnings of a great Stock Market Crash?

September is seasonally the worst month of the year for stocks.

2015 is also likely the end of a surprisingly regular 7 year cycle.

An article from zerohedge.com points out this pattern:

1. 1973: Oil Shock/Stocks Crash
2. 1980: US Recession
3. 1987: Stock Market Crash
4. 1994: Bond Market Crash
5. 2001: 9-11 / Stocks Crash
6. 2008: Subprime / Stocks Crash
7. 2015 EM / Stock Crash???

Do you notice the seven year pattern?

The fact that the economy goes in cycles in not surprising, so any stock market cycle such as this won't be that surprising.

The Great Unwind and False Prosperity?

Regarding this most recent cycle, the case can be made that as a way to recover from the 2008 Stock Market Crash, the Fed started lowering rates to virtually zero and started printing money like crazy with many Quantitative Easing programs (QE). Yet for around 7 years, the Fed didn't raise rates, and only recently stopped the QE programs.

For seven years, "Follow the Fed" was profitable, and going long in housing and stocks was profitable, as the Fed's policies boosted those asset classes. However, recently, the Fed stopped the Quantitative Easing programs and may be on the verge of raising rates.

But what happens when the Fed starts to unwind its positions? Will we start to see the effects of The Great Unwind?

Over the last seven years, the Fed induced asset boosting policies create a form of an artificial prosperity that will eventually be undone. All the imbalances that have been accumulated will finally end, and in order to correct, a Stock Market Crash, or a even a multi-year time correction (sideways for many years) might be needed.

The risks are high for some sort of event or a multi-year time frame where imbalances will be corrected. Future stock market annual returns for many years are likely going to be below long term averages.

Housing Market Bubble?

Over the last seven years, we have gone from housing recovery to a potential housing bubble. The median income to buy a home in the Bay Area, Northern California is $142,448.33. 

And there is evidence that the housing bubble may be forming beyond California.

Public and Private Debt and too much spending:

Both government and consumer debt is increasing. Government Debt as a ratio of GDP is now 80% (and the total debt is around $18 Trillion). Private debt (including consumer debt and education loans) is approximating 260% of GDP.

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China:

China is also experiencing a stock market crash.

Also, China is holding a large amount of U.S. treasuries. There might be evidence that China is already dumping some of these?

Oil:

Oil and commodities have been crashing, and some people have said that commodities and oil are leading indicators of an economy and the stock market.

CNBC's Ron Insana says:

"We already have evidence that the commodity crash has ominous portents for the rest of the world:

* Japan’s recession is deeper than previously thought.

* China’s demand for basic materials, amid a glut of uneconomic construction projects, appears to be plummeting.

* Russia’s ruble has collapsed and the country is on the brink, if not already in, a recession.

* India’s economic recovery is beginning to look shaky.

* Europe’s growth rate and inflation rate, for the next two years, were just revised downward by the European Central Bank, suggesting that Europe’s economic crisis is far from over. In fact, at least one former European leader with whom I recently spoke, believes the crisis in Europe may just be in its early stages.

* Brazil and other emerging market nations are struggling with a variety of issues, from recessions at home, to the rising value of the dollar, which is complicating how emerging markets conduct economic policies at home, given how closely their currencies are tied to the greenback."

Former Advisor to Britain's Gordon Brown even warns of a Stock Crash and to be prepared for Civil Unrest and bank problems.

A former advisor to Gordon Brown has urged people to stock up on canned goods and bottled water as stock markets around the world slide.

Damian McBride appeared to suggest that the stock market dip could lead to civil disorder or other situations where it would be unreasonable for someone to leave the house.

“Advice on the looming crash, No.1: get hard cash in a safe place now; don't assume banks & cashpoints will be open, or bank cards will work,” he tweeted.

“Crash advice No.2: do you have enough bottled water, tinned goods & other essentials at home to live a month indoors? If not, get shopping.

“Crash advice No.3: agree a rally point with your loved ones in case transport and communication gets cut off; somewhere you can all head to.”

 “We were close enough in 2008 (if the bank bailout hadn't worked),” he said. “and what's coming is on 20 times that scale”.

Does this former adviser know something we don't?

Time to sell stocks?

Risk is definitely high now. Seriously consider your asset allocation and your goals. Consider taking some profits, and sell some equities if possible. Build up cash reserves. Use any potential rallies to sell.

The future down cycle will eventually end, and there will be great investing opportunities at that time.

Story of U.S. Stock Market in One Chart, 1975 to 2035

The Story of the U.S. Stock Market (S&P 500) in One Chart from 1975 to 2035:

The Chart above tells the story of the United States Stock Market (as represented by the S&P 500 index) from 1975 to 2035.

Baby Boomers are the largest demographic group in the United States born around 1946 to 1960, right after World War II.

In the 1980s and 1990s, the Baby Boomers were in their Peak Earning Years and they earned, consumed, spent, and invested for their retirement.  This was helped in 1995 by an increase in the Money Supply, and the Printing Money Started leading to Fed Chief Alan Greenspan to proclaim that there is 'Irrational Exuberance'.  This finally lead to the peak of the Tech Bubble in the year 2000.

The Tech Bubble and Dot-Com Bubble burst, and interest rates remained low, and with loans being very easy to get (including no downpayment loans, and no proof of income), the housing market started its ascent into the stratosphere ending in the 2007-2009 Housing Bubble Peak and Burst.

The market tried to recover, thanks to Fed Chief's Ben Bernanke policies keeping interest rates very low, and printing money with three rounds of Quantitative Easing (QE1, QE2, QE3).  This occurred in conjunction President Obama's increased spending and stimulus plans following the Keynesian way of spending government money to get out of a recession.

We are currently now in the Debt Bubble (consumer debt, state and local debt, international debt, and federal government debt where the U.S. Federal government owes $16 Trillion dollars amounting to over 100% of GDP, and this amount is continuing to grow), a Spending Bubble, and a Government Bubble.  These bubbles will eventually burst.

And starting in 2011, the Baby Boomers are starting to retire, and the Aging Population starts to put pressure on the economy.   The dependency ratio (65 years and older and 0-15 years old to the total population) is going to increase through the years, adding to the burden, and hindering economic growth.

In addition, since the United States Debt to GDP Ratio is now 100% and growing, there will be a long term debt overhang.  There is a study by Carmen Reinhart (Peterson Institute for International Economics, NBER,  CEPR), Vincent Reinhart (Morgan Stanley) and Kenneth Rogoff (from Harvard University and NBER) that shows those cases in history where debt to GDP exceeded 90%, experienced suboptimal growth lasting an average of 23 years.

There are many signs pointing to continued economic stagnation, decline, and possibly recession and depression over the next twenty to thirty years (2032-2042).

Does the U.S. have a Spending or Revenue Problem? US Debt and Deficit

Does the United States have a Revenue Problem or a Spending Problem?

Since 1960, the United States has been on a Spending Trajectory, and the annual deficit over the last four years has been over $1 Trillion Dollars.

The Current U.S. National Debt is around $16 Trillion, and it is now over 100% of GDP (Gross Domestic Product).

But is it a U.S. Spending Problem or a Revenue Problem?

In the chart above, we see Spending and Revenue as a Percentage of GDP. 

Revenue since 1960 has remained in a narrow range of GDP and averages 18.1% over that time.  In that time, even if tax rates vary significantly, the Revenue has stayed in this narrow range with an 18.1% of GDP average.

Spending, on the other hand, has averaged 20.2% of GDP.  Since the Government can continue to borrow (with the Federal Reserve printing money), and since Government can continue to spend without any solid limit, you can easily forecast spending to continue growing.  When you consider a bulk of those annual payments goes to Social Security, Medicare and Medicaid, and since the U.S. Population is Aging and the Baby Boomers are starting to retire starting in 2011, you can imagine spending to continue to increase as a percentage of GDP.

So with Spending continuing to increase as a percent of GDP, and Revenue remaining a relatively constant 18% of GDP, you can see how the U.S. Debt Problem can grow year after year to create a crisis economic situation possibly leading to long term decade or multi-decade economic stagnation, or recession or depression.

The Problem the United States is having is a Spending Problem and not a Revenue Problem.

The Data:

Charts were created by this site, and Heritage.org, and data from the Congressional Budget Office.
The Spending and Revenue Chart above is based on the CBO's 2012 Long Term Outlook report, using the Externded Alternative Fiscal Scenario, Table 1-2. 

Idea #6: AEA: Cash Advance Centers: Profit from Bad Times and Living Paycheck to Paycheck

Simple Idea #6: AEA: Advance America, Cash Advance Centers: Profit from Bad Times, Recession, Unemployment, and Living Paycheck to Paycheck

• TICKER: AEA
  
• SECTOR: Financial Services, Loans, Credit Services
  
• GROWTH THEME: Bad times are with us with risks of recession, continued high unemployment and people continuing to live paycheck to paycheck. AEA, Advance America, Cash Advance America provides short term loans, cash advances, and credit improvement services.
  
• MARKET CAP: $500 Million
  
• FORWARD PE: 7.75
  
• ESTIMATED 5 YEAR GROWTH: 15%
  
• FORWARD YIELD: 3%
  
• PEG+Y GROWTH: 0.43 (Very Good: < 1.0)
  
• PERCENT ABOVE 50 DAY MOVING AVERAGE: 3.8%
  
• PERCENT ABOVE 200 DAY MOVING AVERAGE: 35%
  

Anti-Recession Stocks that can survive a US slowdown.

Diversifying your portfolio is often a good idea. Whether we have a Recession in the US or not, each portfolio should have some stocks which hold up during a recession. Often, two sectors mentioned are Consumer Staples and Healthcare.

Here are a few interesting stocks that may be good stocks to hold even when the US experiences a recession.

1. Procter and Gamble (PG)

Everyone around the world knows and uses Procter and Gamble products. They make consumer staple products such as Gillette, Head and Shoulders, Pantene, Crest, Vicks, Oral-B, Pringles, Folgers, Downy, Tide, Bounty, Charmin, and Pampers. This $223 Billion company operates three Global Business units: Beauty, Health and Well-Being, and Household Care. PG has a forward PE of 18.37, 5 year estimated growth of 13, a PEG ratio of 1.41 (reasonable for a consistent growth company), has a yield of 1.9%, and is within range of its 52 week high.


2. Unilever (UL, and UN)
   
   Unilever is a well known and large company based in England and the Netherlands. They provide many well known products including fast moving consumer goods, food, home and personal care. They own the brands Knorr, Country Crock, Ben and Jerry's Ice Cream, Klondike, Posicle, Lipton Tea, SlimFast, Dove, Suave, Vaseline, Close Up toothpaste, Comfort, Snuggle, and Surf. Forward PE is 17.48 and its yield is 2.60%. The stock is within range of its 52 week high.
   
   
3. Pepsi (PEP)
   
   Everyone knows Pepsi brands including Pepsi, Doritos, Frito-Lay products, Ruffles, Quaker Oats products, Mountain Dew, Tropicana Juice drinks, Dole, Rice-A-Roni, and other products. Forward PE is 20, with a yield of 2%. The stock is within range of its 52 week high.
   
   
4. Altria (MO)
   
   Altria is a $158 Billion company that specializes in selling tobacco products (Philip Morris and related brands) and food products, and they used to produce products from Kraft (KFT). However, Altria has spun off Kraft (KFT), so Altria can concentrate on tobacco products. Altria (MO) has a forward PE of 16, and a forward yield of 4.0%. Kraft (KFT), makers of Oreo and Tang, has a forward PE of 16 and a yield of 3.40%. MO is within range of its 52 week high.
   
   
5. Gilead (GILD)
   
   Healthcare is also an important anti-recession sector and Gilead, a $43 Billion Biotech company, is a good company in this sector. They have a good pipeline and produce important products such as Tamiflu and medicines for AIDS related Kaposi's sarcoma. Forward PE is 24, a 5 year estimated growth rate of 17% for a reasonable 1.41 (under 2 is reasonable). The stock is also within range of its 52 week high.
   
   
6. Sun Healthcare (SUNH)
   
   Long term healthcare, especially those companies that cater to the growing population of senior citizens (Baby Boomers will be retiring), is another great anti-recession play. Sun Healthcare (SUNH), a $730 million company, does just that. It has a forward PE of 20, a 5 year estimated growth rate of 24%, for a very good PEG of 0.83 (a PEG under 1 is very cheap). The stock is within range of its 52 week high.
   

So even as the US slows, the companies above should stand to benefit. The companies above are good companies, and most of them are large companies with great international growth and presence. Some even have a decent yield to help cushion your portfolio.

Even if the US stock market does not experience a recession, your portfolio should still have a portion invested in good companies in Consumer Staples and Healthcare, two sectors that should be able to withstand a US slowdown.

Risks of US Recession may be Increasing

According to many sources, the risks and odds of a United States Recession may be increasing.

Here's an article from MSNBC.

Here's one from TheStreet.com.

According to the TheStreet.com article, different firms rate the odds of recession in the US:

1. Bill O'Donnell UBS 67%
   
2. Jack Ablin Harris Private Bank 65%
   
3. Kevin Giddis Morgan Keegan 60%
   
4. Greg Collins Fountain Hill Investments 60%
   
5. Robert Pavlik Oaktree Asset Management 45%
   
6. Tobias Levkovich Citigroup 40%
   
7. Fred Dickson D.A. Davidson 40%
   
8. Richard Sparks Schaeffer's Investment Research 20%
   
9. Neil Hennessy Hennessy Funds 0%
   

What are the Odds of Recession in USA Now (January 2008). Calculated Here.

Many people are concerned about the slowing economy and a possible US Recession.

Can we calculate the odds of a recession?

There are many models, but one of them is by the Federal Reserve Board's Jonathan Wright. It takes three items into consideration:

1. 10 Year Treasury Bond Yield
   
2. 3 Month Treasury Bond Yield
   
3. Federal Funds Rate
   

More information on this available here

Odds of Recession as of January 2, 2008

Current Numbers:

1. 10 Year Treasury Bond Yield: 3.91% (50 Day Moving Average: 4.17%)
   
2. 3 Month Treasury Bond Yield: 3.26% (50 Day Moving Average: 3.34%)
   
3. Federal Funds Rate: 4.25%
   

If we calculate using the current yields, the Odds of Recession as of January 2, 2008 over the next 12 months is 12%.

If we calculate using the 50 day moving average of the yields, the Odds of Recession as of January 2, 2008 over the next 12 months is 9.5%.

The Odds of Recession has gone down since we last calculated the odds on September 1, 2007 (23% odds of recession over the next 12 months from then).

Recession Odds: 23% and How to Calculate Odds of Recession

Is there a way to calculate the odds of a recession in the US?

There is one model which takes into account the spread between the 10 Year Treasury Bond Yield, the 3 Month Treasury Bond Yield and the Federal Funds Rate. This model was created by Federal Reserve Board's Jonathan Wright in The Yield Curve and Predicting Recessions.

Some general points regarding the Yield spread and the Fed Funds Rate:

1. The bigger the difference between the 10 Year Treasury Bond Yield minus the 3 month Treasury Bond Yield, the less likely a recession will occur within the next twelve months. This the the normal upward sloping yield curve. The bigger the difference between the 3 Month Treasury Bond Yield minus the 10 Year Treasury Bond Yield, the greater the chance of a recession within the next 12 months. This is the inverted yield curve case.


2. The higher the Fed Funds Rate, the greater the odds of a recession within the next twelve months.

To Calculate

To Calculate, use the calculator on this website. The calculation is based on Jonathan Wright's work mentioned above.

You will need these:

1. The 10 Year Treasury Bond Yield. Get the information from Stockcharts.com using $UST10Y. The value of the $UST10Y, is the Yield on the treasury. Currently, as of August 31, 2007, the 10 Year Yield is 4.54%


2. The 3 Month Treasury Bond Yield. Get the information from Stockcharts.com using $UST3M. Currently, the 3 Month Treasury Bond Yield is 4.01%.
   
3. The Fed Funds Rate. Go to Bankrate.com to get the current Fed Funds Rate. It is currently at 5.25%. You can also estimate the odds of a Fed Rate Cut Here.

Chance of Recession as of August 31, 2007: 23%

Now to do the actual calculation, go to the website with the calculator.

Using the values mentioned above, we find out that there is a 23% chance of recession within the next twelve months. If the Fed cuts rates by 0.50%, then the odds of a recession (let's assume that the yield spread remains the same) goes down to 18%.