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Chief Investment Strategist
Clarity Financial, LLC ________________________________________
[email protected]‐501‐1791
www.realinvestmentadvice.com
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THE US ECONOMY
• “Those that doubt the strength of the U.S. economy are peddling
fiction.” – 2016 SOTU
• “US Job Creation Hits Record Not Seen Since The 1990’s”
• “US Unemployment Rates Falls And Economic Recovery
Strengthens.”
• “An Improving Economy Gives Obama His Game Back”
• “In Case You Missed It…The Economy Is Back.”
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15.00%
16.00%
17.00%
18.00%
19.00%
20.00%
21.00%
2007 2008 2009 2010 2011 2012 2013 2014
Social Benefits
As
%
Of
Real
Disposable
Income
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$50,000
$51,000
$52,000
$53,000
$54,000
$55,000
$56,000
$57,000
$58,000
$59,000
Jan‐00 Jan‐02 Jan‐04 Jan‐06 Jan‐08 Jan‐10 Jan‐12 Jan‐14
Seasonally Adjusted
Median
Household
Income
(March
2013
$)
Gallup Poll ‐ Family Of Four Living Needs
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6 5 4
6 0 7
5 9 8
1 7 4
‐ 9 5
8 1 3 6
5 6
‐ 4 2 1
8 0 1
1 , 2 5 4
1 2 2
9 3 8
1 2 0
5 2 2
3 6 7
1 9 0
7 1 0 8
3 8
1 , 6 0 9
1 , 3 6 5
1 , 3 4 8
1 , 9 5 1
1 , 2
9 8
8 0 6
6 2 5
1 , 3 5 6
7 5 8
2 , 1 5 8
2 , 2 8 2
2 , 0 6 0 2
, 3 0 9
1 , 9 8 0
2 , 2 9 4
1981 1985 1989 1993 1997 2001 2005 2009 2013
Workers Not In Labor Force Soars
Annual Chg.
To
NILF
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• More Than 93 Million Americans No Longer Counted
•
Roughly
80%
Of
The
Population
Lives
Paycheck‐
To‐
Paycheck• 1‐in‐4 Americans On Some Form Of Government Assistance
• Highest Level On Record Of 70+ Aged Individuals Still Working
• Equity Ownership In Private Business At Lowest Levels Since 2000
• Household Net Worth Lower Today Than In 2007
• Household Investments
In
Financial
Assets
Lower
Today
Than
In
2007
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‐8000.0
‐6000.0
‐4000.0
‐2000.0
0.0
2000.0
4000.0
6000.0
8000.0
10000.0
2009 2010 2011 2012 2013 2014 2015 2016
Employment Gains
Since
2009
‐ Including/Excluding
B/D
Adj.
Cumulative Employment Since 2009 Cumulative Employment W/O B/D Adjustment
Cumulative Employment Adj For Gallup
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42.00%
44.00%
46.00%
48.00%
50.00%
52.00%
54.00%
56.00%
58.00%
1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012
Employment To
Working
‐Age
Population
(16
‐54)
Does This Really
Look Like A 5.0%
Unemployment Rate
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THIS LOOKS A WHOLELOT LIKE 2007
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The Same Things I Looked At In 2007 – Are Here Again Today…
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The Same Things I Looked At In 2007 – Are Here Again Today…
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THE STOCK MARKET
REVENUE
R E T
U R N
SALES
REWARD
DIVIDENDS
B U Y B A C K S
EPS
I N V E
S T I N G
EARNINGS
VALUE
P R I C E / E A R N I N G S
RISK C
H E A P
ESTIMATES
RATIO
CAPECAGR
GROWTH
R
E T U R N
D
O L L A R
INVESTING WITH A LACK OF VALUE
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500.0
700.0
900.0
1100.0
1300.0
1500.0
1700.0
1900.0
2100.0
2007 2008 2009 2010 2011 2012 2013 2014 2015
S&P 500
Index
QE1 QE2 Oper
Twist QE3
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32
64
128
256
512
1024
2048
4096
8192
16384
32768
65536
1965 1973 1981 1989 1997 2005 2013 2021 2029 2037 2045 2053 2061
S & P 5 0 0 I n d e x A c t u a l & P r o j e c t e d ( L o g S c a l e )
What Analysts Promise & What Happens Likely Very Different
Actual S&P 500 Projected S&P 500 Expon. (Projected S&P 500)
7% Annualized
Return
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Capital Not
Available,
25.00%
Capital Needed
For Other Things,
25.00%
Psychological
Mistakes,
50.00%
A recent DALBAR study shows that much of the shortfall in
investor returns are due to psychological factors such as Loss
Aversion, Narrow Framing, Herding or Optimism.
There are actually three primary causes for the chronic
shortfall for both equity and fixed income investors:
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‐6000
‐4000
‐2000
0
2000
4000
6000
8000
10000
32
64
128
256
512
1024
2048
4096
8192
16384
32768
65536
1965 1973 1981 1989 1997 2005 2013 2021 2029 2037 2045 2053 2061
A c t u a l V s . P
r o m i s e d R e t u r n s
T h o u s a n d s
S & P 5 0 0 I n d e x A c t u a l & P r o j e c t e d ( L o g S c a l e )
Impact Of Bear Markets Are Have Substantial Effects On Outcomes
Promised Growth Of $10000 At 7% Actual Growth Of $10000 Return Gap
Actual S&P 500 Projected S&P 500 Expon. (Projected S&P 500)
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0
10
20
30
40
50
64.00
128.00
256.00
512.00
1,024.00
2,048.00
Jan‐1871 Jan
‐1886 Jan
‐1901 Jan
‐1916 Jan
‐1931 Jan
‐1946 Jan
‐1961 Jan
‐1976 Jan
‐1991 Jan
‐2006
Real S&P 500 Index With Recessions(Robert Shiller Real Price Data)
Recessions S&P 500 (Real Price) Expon. (S&P 500 (Real Price))
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0
5
10
15
20
25
30
35
40
45
50
‐
5%
0%
5%
10%
15%
20%
25%
30%
C A P E
R o l l i n g 2 0
‐ Y e a r R e t u r n s
S&P 500 Real Rolling 20‐Year Annualized Returns CAPE Valuations
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64.00
128.00
256.00
512.00
1,024.00
2,048.00
1909 1919 1929 1939 1949 1959 1969 1979 1989 1999 2009
Real S&P 500 Index With Record Highs(Robert Shiller Real Price Data)
Real S&P 500 Index
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300.0
500.0
700.0
900.0
1100.0
1300.0
1500.0
1700.0
1900.0
2100.0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
S&P 500 Index Linear (S&P 500 Index)
Phase 1
Phase 1
Phase 1
Phase 2
Phase 3
Phase 2
Phase 2
Phase 3
Phase 3
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10 WARNING SIGNS
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Warning #1: Declining Profit Margins
32
64
128
256
512
1024
2048
3%
4%
5%
6%
7%
8%
9%
10%
11%
1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012
S & P
5 0 0 ( L o g B a s e 2 )
P r o f i t
s A s % O f R e a l G D P
Peaks In Real Profit Margins vs. S&P 500
Recessions Real Profits As % Of Real GDP
S&P 500 Stock Price Index Expon. (Real Profits As % Of Real GDP)
REALINVESTMENTADVICE.COM
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Warning #2: Price-To-Sales Expensive
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Warning #3: Economic Output Declines
0
10
20
30
40
50
60
70
‐15
‐10
‐5
0
5
10
1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 2014
S t r
e e t t a l k E O C I
L E I & G D P
Economic Output Composite Index
Recessions GDP (Quarterly Change at Annual Rate)
LEI ‐ 6 Mth % Change Economic Output Composite Index
REALINVESTMENTADVICE.COM
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Warning #4: Margin Debt Peaks
10000
60000
110000
160000
210000
260000
310000
360000
410000
460000
510000
‐200000
‐162000
‐124000
‐86000
‐48000
‐10000
28000
66000
104000
142000
180000
Jan‐80 Jan‐84 Jan‐88 Jan‐92 Jan‐96 Jan‐00 Jan‐04 Jan‐08 Jan‐12 Jan‐16
Margin Debt And Net Credit Balance
Net Credit Balance (lhs) Margin Balances Linear (Net Credit Balance (lhs))
June, 2007
March, 2000
Absolutely No Bubble Here
Sept, 1987
Crash of 1987
Dot.Com
Bubble
Credit Bubble
June, 2015
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Warning #5: Margin Debt/GDP History
0
500
1000
1500
2000
2500
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
1959 1963 1967 1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 2011 2015
R e a l S & P 5 0 0 I n d e x
M a r g i n D e b t A s % O f G D P
Margin Debt As A % Of The Economy
Margin Debt As % Of GDP Real S&P 500 Index
REALINVESTMENTADVICE.COM
87 Crash
Asian Contagion
Tech Bubble Bust
Financial Crisis
????
74 Bear Market
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Warning #6: Equity Ownership
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Warning #7: Momentum Overdrive
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Warning #8: Prior Peak Earnings
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Warning #9: Junk Bonds
5.0
7.0
9.0
11.0
13.0
15.0
17.0
19.0
21.0
23.0600
800
1,000
1,200
1,400
1,600
1,800
2,000
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Y i e l d s
‐
I n v e r s e S c a l e
S &
P 5 0 0
Falling "Junk Bond Yields"
S&P 500 BofA Merrill Lynch US High Yield Master II Effective Yield©
REALINVESTMENTADVICE.COM
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Warning #10: Topping Processes
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I n t e r
n a l s S
i g n a l C
a u t i o n
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MANAGING FOR UNCERTAINTY
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20000
40000
80000
160000
320000
640000
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
MISSING THE
10
‐Best
vs
10
‐Worst
Days
$100,000 Missing 10 Best Days $100,000 Missing 10 Worst Days $100,000 Invested In Index (Buy and Hold)
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0
10000
20000
30000
40000
50000
60000
70000
80000
1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
Compound REAL Return Of $1000 Plus $100 Monthly Contributions (DCA vs Lump Sum)
Compound Value Of $1000 plus $100 Monthly Contributions (DCA)
Compound Value Of $1000 + $100 Mthly Cont. (Lump Sum)
RETIRE
OR NOT…
Missed The TopAnd The Bottom
Missed The TopAnd The Bottom
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(20)
(15)
(10)
(5)
‐
5
10
15
20
25
30
32
64
128
256
512
1024
2048
4096
8192
1 / 1 / 1 9 0 0
1 / 1 / 1 9 1 0
1 / 1 / 1 9 2 0
1 / 1 / 1 9 3 0
1 / 1 / 1 9 4 0
1 / 1 / 1 9 5 0
1 / 1 / 1 9 6 0
1 / 1 / 1 9 7 0
1 / 1 / 1 9 8 0
1 / 1 / 1 9 9 0
1 / 1 / 2 0 0 0
1 / 1 / 2 0 1 0
C A P E R a t i o , I n f l a t i o n
I n f l a t i o n A d j u s t e d
R e t u r n O f $ 1 0 0
The Real Value Of CashMonthly Compound Real Return Of $100Valuation Adjusted Return Of $100 (23x = Cash, 6x = Stocks)P/E Capped At 25xAnnual Change In Inflation
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200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
1990 1994 1998 2002 2006 2010 2014
S&P 500 Stock Price Index
SELL IT ALL…SELL IT ALL…
???
Not Here
Either...
Absolutely
Not Here...
Liquidity Bubble
Credit/Real Estate
Bubble
Nope...No
Bubble Here.
Tech Bubble
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$99,566.39
$99,008.24
$99,583.97
8800089000
90000
91000
92000
93000
94000
95000
96000
97000
98000
99000
100000
101000
102000
103000
104000
Dec‐14 Jan‐15 Feb‐15 Mar‐15 Apr‐15 May‐15 Jun‐15 Jul‐15 Aug‐15 Sep‐15 Oct‐15 Nov‐15 Dec‐15 Jan‐16 Feb‐16 Mar‐16
60/40 Benchmark
vs.
Risk
Adjusted
60/40
Allocation
$60k Invested In VFINX (stocks) & $40k in VBTIX (bonds) ‐ Capital Appreciation Only
60/40 Model Risk Adjusted 60/40 Allocation Model Performance S&P Index
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50000
6000070000
80000
90000
100000
110000
120000
130000
140000
150000
160000
170000
180000
190000
200000
210000
220000
230000
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
60/40 Benchmark vs. Risk Adjusted 60/40 Allocation$60k Invested In VFINX (stocks) & $40k in VBTIX (bonds) ‐ Capital Appreciation Only
60/40 Model Risk Adjusted 60/40 Allocation Model Performance
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OIL, GOLD & INTEREST RATES
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0
500
1000
1500
2000
2500
4000
5000
6000
7000
8000
9000
10000
1991 1996 2001 2006 2011 2016
R i g C o u n t
S u p p l y
Plunging Rig Count Not Affecting Supply
U.S. Field Production of Crude Oil (Thousand Barrels per Day) OIL PRICE / BBL
REALINVESTMENTADVICE.COM
source: EIA
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1.4
1.5
1.6
1.7
1.8
1.9
2.0
2.1
2.2
2.3
‐5.0
‐3.0
‐1.0
1.0
3.0
5.0
7.0
9.0
11.0
13.0
15.0
1959 1964 1969 1974 1979 1984 1989 1994 1999 2004 2009 2014
M o
n e t a r y V e l o c i t y
I n t e r e s t
R a t e s , G D P , I n f l a t i o n
Interest Rates A Function Of Economic Growth, M2 Velocity & Inflation
Gross Domestic Product Inflation (CPI) 10‐Yr Treasury Rate Velocity of M2 Money Stock
REALINVESTMENTADVICE.COM
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Q&ALance Roberts
Chief Investment
Strategist
Clarity Financial, LLC ________________________________________
281‐501
‐1791
www.realinvestmentadvice.com