Friday, December 05, 2014

The Only Two Charts You Need to Understand the S&P 500

As long as corporations continue borrowing money to buy back their own stocks and the yen keeps dropping, the SPX will continue lofting higher.


Why is the S&P 500 rising, even as valuations are getting stretched, profit growth is declining and sales are stagnant? Two charts explain it all. Here is a chart showing the S&P 500 companies that have been buying back their own stocks (often by borrowing cheap money to do so) and companies that haven't bought back hundreds of billions of dollars in their own stock.

The unmanipulated sector rose a bit, while the stock buyback crowd soared:


Here is the S&P 500, with red lines marking its recent lows:


Here is the Japanese yen ETF FXY, with red lines marking its recent highs. The correlation is near-perfect: when the yen drops, the SPX rises.


This is a function of the carry trade, in which speculators borrow money in near-zero interest-rate yen and buy U.S. stocks with the cash. The financiers make money in two ways: the buying pushes the U.S. stocks up and the decline of the yen means they can pay back their loan in cheaper yen.

But the correlation isn't caused by just the carry trade: it's also a function of trading computers keying on the carry trade for momentum and direction.

The correlation is also visible in two ratio charts: SPX-FXY, and FXY-SPX:


As long as corporations continue borrowing money to buy back their own stocks and the yen keeps dropping, the SPX will continue lofting higher. If either of these drivers fades or reverses, the rally in SPX will reverse, too.



Get a Job, Build a Real Career and Defy a Bewildering Economy(Kindle, $9.95)(print, $20)
go to Kindle editionAre you like me? Ever since my first summer job decades ago, I've been chasing financial security. Not win-the-lottery, Bill Gates riches (although it would be nice!), but simply a feeling of financial control. I want my financial worries to if not disappear at least be manageable and comprehensible.And like most of you, the way I've moved toward my goal has always hinged not just on having a job but a career.


You don't have to be a financial blogger to know that "having a job" and "having a career" do not mean the same thing today as they did when I first started swinging a hammer for a paycheck.


Even the basic concept "getting a job" has changed so radically that jobs--getting and keeping them, and the perceived lack of them--is the number one financial topic among friends, family and for that matter, complete strangers.


So I sat down and wrote this book: Get a Job, Build a Real Career and Defy a Bewildering Economy.


It details everything I've verified about employment and the economy, and lays out an action plan to get you employed.


I am proud of this book. It is the culmination of both my practical work experiences and my financial analysis, and it is a useful, practical, and clarifying read.


Test drive the first section and see for yourself.     Kindle, $9.95     print, $20


"I want to thank you for creating your book Get a Job, Build a Real Career and Defy a Bewildering Economy. It is rare to find a person with a mind like yours, who can take a holistic systems view of things without being captured by specific perspectives or agendas. Your contribution to humanity is much appreciated."
Laura Y.


Gordon Long and I discuss The New Nature of Work: Jobs, Occupations & Careers(25 minutes, YouTube) 




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