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Chief Investment Strategist

Clarity Financial, LLC
________________________________________

lance@myclarityfinancal.com
281‐501‐1791
www.realinvestmentadvice.com

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.”

Social Benefits As % Of Real Disposable Income
21.00%

20.00%

19.00%

18.00%

17.00%

16.00%

15.00%
2007

2008

2009

2010

2011

2012

2013

2014

Seasonally Adjusted Median Household Income (March 2013 $)
$59,000
$58,000

Gallup Poll ‐ Family Of Four Living Needs

$57,000
$56,000
$55,000
$54,000
$53,000
$52,000
$51,000
$50,000
Jan‐00

Jan‐02

Jan‐04

Jan‐06

Jan‐08

Jan‐10

Jan‐12

Jan‐14

1981
‐421

‐95

1985
136
1989
1993
1997

Annual Chg. To NILF
2001
2005

758

625

806

838

938

801

710

522
367
190

120

122

56

8

174

598

607

654

1,609

1,356

1,298

1,348

1,365

1,254

2009
2013

2,294

1,980

2,309

2,060

2,282

2,158

1,951

Workers Not In Labor Force Soars







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

Employment Gains Since 2009 ‐ Including/Excluding B/D Adj.
10000.0
8000.0
6000.0
4000.0
2000.0
0.0
‐2000.0
‐4000.0
‐6000.0
‐8000.0
2009

2010

2011

2012

Cumulative Employment Since 2009
Cumulative Employment Adj For Gallup

2013

2014

2015

Cumulative Employment W/O B/D Adjustment

2016

Employment To Working‐Age Population (16‐54)
58.00%
56.00%
54.00%
52.00%
50.00%
48.00%

Does This Really
Look Like A 5.0%
Unemployment Rate

46.00%
44.00%
42.00%
1976

1979

1982

1985

1988

1991

1994

1997

2000

2003

2006

2009

2012

THIS LOOKS A WHOLE
LOT LIKE 2007

The Same Things I Looked At In 2007 – Are Here Again Today…

The Same Things I Looked At In 2007 – Are Here Again Today…

THE STOCK MARKET
VALUE
SALES

INVESTING
RETURN

BUYBACKS
DOLLAR
RETURN
CHEAP
PRICE/EARNINGS

ESTIMATES
GROWTH
RATIO
CAPE
CAGR
EPS
EARNINGS
RISK
REWARD
REVENUE
DIVIDENDS

INVESTING WITH A LACK OF VALUE

2100.0
1900.0
1700.0
1500.0

QE1

1300.0

QE2

Oper
Twist

QE3

1100.0
900.0
700.0
500.0
2007

2008

2009

2010

2011

S&P 500 Index

2012

2013

2014

2015

What Analysts Promise & What Happens Likely Very Different
65536

S&P 500 Index Actual & Projected (Log Scale)

32768
16384
8192
4096
2048

7% Annualized Return

1024
512
256
128
64
32
1965

1973

1981

1989

Actual S&P 500

1997

2005

2013

2021

Projected S&P 500

2029

2037

2045

2053

2061

Expon. (Projected S&P 500)

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:

Capital Not 
Available, 
25.00%
Psychological 
Mistakes, 
50.00%

Capital Needed 
For Other Things, 
25.00%

65536

10000

32768
16384
6000

8192
4096

4000

2048
2000
1024
0

512
256

‐2000

128
‐4000
64
‐6000

32
1965
1973
1981
1989
1997
Promised Growth Of $10000 At 7%
Actual S&P 500

2005
2013
2021
Actual Growth Of $10000
Projected S&P 500

2029

2037

2045
2053
2061
Return Gap
Expon. (Projected S&P 500)

Actual Vs. Promised Returns

S&P 500 Index Actual & Projected (Log Scale)

8000

Thousands

Impact Of Bear Markets Are Have Substantial Effects On Outcomes

Real S&P 500 Index With Recessions
(Robert Shiller Real Price Data)

 2,048.00

50

 1,024.00

40

 512.00

30

 256.00

20

 128.00

10

 64.00
Jan‐1871 Jan‐1886 Jan‐1901 Jan‐1916 Jan‐1931 Jan‐1946 Jan‐1961 Jan‐1976 Jan‐1991 Jan‐2006

Recessions

S&P 500 (Real Price)

0

Expon. (S&P 500 (Real Price))

30%

50
45

25%
20%

35
30

15%

25
10%

20
15

5%

10
0%

5

‐5%

0

S&P 500 Real Rolling 20‐Year Annualized Returns

CAPE Valuations

CAPE

Rolling 20‐Year Returns

40

Real S&P 500 Index With Record Highs
(Robert Shiller Real Price Data)
 2,048.00

 1,024.00

 512.00

 256.00

 128.00

 64.00
1909

1919

1929

1939

1949

1959

Real S&P 500 Index

1969

1979

1989

1999

2009

2100.0
1900.0
1700.0

Phase 3
Phase 3

1500.0

Phase 2

1300.0

Phase 1
Phase 1

Phase 3

1100.0

Phase 2

Phase 1
900.0

Phase 2

700.0
500.0
300.0
1995

1996

1997

1998

1999

2000

2001

2002

2003

S&P 500 Index

2004

2005

2006

2007

2008

2009

Linear (S&P 500 Index)

2010

2011

2012

2013

2014

2015

10 WARNING SIGNS

Warning #1: Declining Profit Margins
Peaks In Real Profit Margins vs. S&P 500

REALINVESTMENTADVICE.COM

11%

2048

10%
1024

512

S&P 500 (Log Base 2)

Profits As % Of Real GDP

9%
8%
7%

256

6%

128
5%
64
4%
3%
1957

32
1962

1967

1972

1977

1982

1987

1992

1997

2002

2007

2012

Recessions

Real Profits As % Of Real GDP

S&P 500 Stock Price Index

Expon. (Real Profits As % Of Real GDP)

Warning #2: Price-To-Sales Expensive

Warning #3: Economic Output Declines
Economic Output Composite Index

REALINVESTMENTADVICE.COM

10

70

60
5

0
LEI & GDP

40

30

‐5

20
‐10
10

‐15
1974

0
1978

1982

1986

Recessions
LEI ‐ 6 Mth % Change

1990

1994

1998

2002

2006

2010

2014

GDP (Quarterly Change at Annual Rate)
Economic Output Composite Index

Streettalk EOCI

50

Warning #4: Margin Debt Peaks
Margin Debt And Net Credit Balance
June, 2015

180000
142000

510000
460000

104000

410000

June, 2007

66000

360000

28000

310000

March, 2000

‐10000

260000

Crash of 1987
‐48000

210000

‐86000

160000

Credit Bubble

‐124000
‐162000
‐200000
Jan‐80

110000

Dot.Com Bubble

Sept, 1987

60000

Absolutely No Bubble Here
Jan‐84

Jan‐88

Jan‐92

Net Credit Balance (lhs)

Jan‐96

Jan‐00

Margin Balances

Jan‐04

Jan‐08

Jan‐12

Linear (Net Credit Balance (lhs))

10000
Jan‐16

Warning #5: Margin Debt/GDP History
Margin Debt As A % Of The Economy

REALINVESTMENTADVICE.COM

3.00%

2500

????
Financial Crisis
Tech Bubble Bust
2000

2.00%

Asian Contagion
1500

1.50%
1000
1.00%

87 Crash

74 Bear Market

500

0.50%

0.00%
1959

0
1963

1967

1971

1975

1979

1983

1987

Margin Debt As % Of GDP

1991

1995

1999

Real S&P 500 Index

2003

2007

2011

2015

Real S&P 500 Index

Margin Debt As % Of GDP

2.50%

Warning #6: Equity Ownership

Warning #7: Momentum Overdrive

Warning #8: Prior Peak Earnings

Warning #9: Junk Bonds
Falling "Junk Bond Yields"

REALINVESTMENTADVICE.COM
5.0

 2,000
7.0
 1,800

9.0

S&P 500

13.0

 1,400

15.0
 1,200
17.0
 1,000
19.0
 800

21.0

 600

23.0
1998

1999

2000

2001

2002

S&P 500

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

BofA Merrill Lynch US High Yield Master II Effective Yield©

2015

2016

Yields ‐ Inverse Scale

11.0

 1,600

Warning #10: Topping Processes

Internals Signal Caution

MANAGING FOR UNCERTAINTY

MISSING THE 10‐Best vs 10‐Worst Days
640000

320000

160000

80000

40000

20000
1998 1999 2000 2001 2002
$100,000 Missing 10 Best Days

2003 2004 2005 2006 2007
$100,000 Missing 10 Worst Days

2008

2009 2010 2011 2012 2013 2014
$100,000 Invested In Index (Buy and Hold)

Compound REAL Return Of $1000 Plus $100 Monthly Contributions 
(DCA vs Lump Sum)
80000
70000

RETIRE

60000
50000

And The Bottom
Missed The Top

40000
30000

OR NOT…

And The Bottom
Missed The Top

20000
10000
0
1994

1996

1998

2000

2002

2004

2006

2008

Compound Value Of $1000 plus $100 Monthly Contributions (DCA)
Compound Value Of $1000 + $100 Mthly Cont. (Lump Sum)

2010

2012

2014

The Real Value Of Cash
Monthly Compound Real Return Of $100
Valuation Adjusted Return Of $100 (23x = Cash, 6x = Stocks)
P/E Capped At 25x
Annual Change In Inflation
 30

8192

 25

4096

1024

 10
 5

512

 ‐

256

 (5)
128
 (10)
64

 (15)
 (20)
1/1/2010

1/1/2000

1/1/1990

1/1/1980

1/1/1970

1/1/1960

1/1/1950

1/1/1940

1/1/1930

1/1/1920

1/1/1910

32

CAPE Ratio, Inflation

 15

1/1/1900

Inflation Adjusted Return Of $100

 20
2048

 2,000
???

 1,800
 1,600
 1,400
 1,200

Absolutely 
Not Here...

Not Here
Either...

 1,000
Nope...No 
Bubble Here.

 800

SELL IT ALL…

SELL IT ALL…

 600
 400
Credit/Real Estate
Bubble

Tech Bubble

Liquidity Bubble

 200
1990

1994

1998

2002
S&P 500 Stock Price Index

2006

2010

2014

60/40 Benchmark vs. Risk Adjusted 60/40 Allocation
$60k Invested In VFINX (stocks) & $40k in VBTIX (bonds) ‐ Capital Appreciation Only

104000
103000
102000
101000

$99,583.97 

100000

$99,566.39 

99000

$99,008.24 

98000
97000
96000
95000
94000
93000
92000
91000
90000
89000
88000
Dec‐14 Jan‐15 Feb‐15 Mar‐15 Apr‐15 May‐15 Jun‐15

60/40 Model

Jul‐15

Aug‐15 Sep‐15 Oct‐15 Nov‐15 Dec‐15 Jan‐16 Feb‐16 Mar‐16

Risk Adjusted 60/40 Allocation Model Performance

S&P Index

60/40 Benchmark vs. Risk Adjusted 60/40 Allocation
$60k Invested In VFINX (stocks) & $40k in VBTIX (bonds) ‐ Capital Appreciation Only
230000
220000
210000
200000
190000
180000
170000
160000
150000
140000
130000
120000
110000
100000
90000
80000
70000
60000
50000
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

60/40 Model

Risk Adjusted 60/40 Allocation Model Performance

OIL, GOLD & INTEREST RATES

Plunging Rig Count Not Affecting Supply

REALINVESTMENTADVICE.COM

10000

2500

9000

2000

8000
Rig Count

Supply

1500
7000
1000
6000

500

5000

4000
1991
source: EIA

0
1996

2001

2006

U.S. Field Production of Crude Oil (Thousand Barrels per Day)

2011

2016

OIL PRICE / BBL

Interest Rates A Function Of Economic Growth, M2 Velocity & Inflation

REALINVESTMENTADVICE.COM

15.0

2.3

13.0

2.2
2.1

9.0
2.0
7.0
1.9
5.0
1.8
3.0
1.7
1.0
1.6

‐1.0

1.5

‐3.0
‐5.0
1959

1.4
1964

1969

1974

Gross Domestic Product

1979

1984

Inflation (CPI)

1989

1994

10‐Yr Treasury Rate

1999

2004

2009

2014

Velocity of M2 Money Stock

Monetary Velocity

Interest Rates, GDP, Inflation

11.0

Q&A
Lance Roberts
Chief Investment Strategist
Clarity Financial, LLC
________________________________________

lance@myclarityfinancal.com
281‐501‐1791

www.realinvestmentadvice.com