Thomas Alva Edison exhibited the first practical, incandescent light bulb to the public on December 31, 1879, in Menlo Park, New Jersey.

The event signified the dawn of residential electrification.

Suddenly, electricity could provide the means for convenient illumination. But wiring houses and running current through them also presented new dangers.

An overload or “short circuit” could easily cause a fire. Safeguards that halted the flow of electricity were needed in order to prevent damage.

Edison’s early electrical systems incorporated fuses. One of his patents also described a nascent form of circuit breaker.

Today, circuit breakers are present in all of our homes and apartments.

Think about a time when you had a few too many appliances running at once and the power suddenly went out. The circuit breaker averted a potential disaster.

This principle has been applied in the financial markets. Rather than arrest an electric current, circuit breakers halt trading activity.

Basically, stock market circuit breakers are intended to prevent a disaster. Their impetus was one of the biggest disasters of all - the 1987 stock market crash.

March 2016

Growing wealth while guarding against market shocks

China is reportedly planning to lay off five million to six million workers over the next few years as part of its efforts to address overcapacity issues.

The S&P 500 Index closed up or down at least 1% on 23 days in the first two months of 2016. That’s the second-highest total (24 days in 2009) since 1957.

Japan auctioned 10-year government bonds at a negative yield for the first time ever. Germany’s 5-year government bond yield hit -0.4%.

U.S. services activity fell for the first time since October 2013. According to Markit’s chief economist, “Business activity stagnated in February as malaise spread from the manufacturing sector to services.”

by ALAN GULA, CFA

The Day the Market Stood StillMARKET TREMORS

Prepare Yourself for Another Market-Wide Trading Halt

BLACK MONDAY U.S. Treasuries were selling off during the first nine months of 1987. The yield on the 30-year T-Bond eventually rose above 10% in mid-October.

Perhaps rising interest rates were the proximate cause of the stock market selloff.

On October 14, 15, and 16, the S&P 500 Index (SPX) fell 3.0%, 2.3%, and 5.2%, respectively. Those were sizable losses. But the worst was yet to come.

On Saturday, October 17, U.S. Treasury Secretary James Baker III warned the Germans, “Either inflate your mark [German currency], or we’ll devalue the dollar.”

The incendiary comment seemed to catalyze panic. Before the U.S. market opened on Monday, stock markets around the world had already plunged.

The SPX ultimately crashed by 20.5% on Black Monday. It was the largest single-day percentage decline in stock market history.

And the selling actually resumed the following morning. The SPX declined another 3.7% intraday on Tuesday before recovering.

It’s believed that “portfolio insurance,” a hedging system designed to mitigate losses, exacerbated the selloff. If everyone starts selling to protect against further declines, then further declines become self-fulfilling.

A crash was the end result.

Naturally, regulators wanted to prevent the harrowing experience from happening again.

A Presidential Task Force on Market Mechanisms was established. Based on the task force’s recommendations, the Securities and Exchange Commission (SEC) approved circuit breakers in 1988.

If the Dow Jones Industrial Average (DJIA) declined 250 points from the previous day’s closing level, there would be a one-hour trading halt in all securities markets. A 400-point decline in the DJIA would trigger a two-hour trading halt.

In 1996, the circuit breaker rules were modified. The time duration of the halts was reduced by half, and the thresholds were raised to 350 and 550 DJIA points.

THE FIRST HALTThe Asian financial crisis began soon after the circuit breaker rules were amended.

Faced with foreign exchange reserve depletion, Thailand was forced to abandon its currency peg. As a result, the Thai baht lost 19% of its value on July 2, 1997.

The currencies of other countries in the region then came under significant pressure. The Philippines and Indonesia had to devalue their currencies soon after Thailand’s move.

The situation became so dire that the International Monetary Fund (IMF) extended

2

emergency loans to the countries in the worst shape.

Of course, the equity markets were none too happy about these currency crises. Stock markets across Asia were hitting multi-year lows. Hong Kong’s Hang Seng Index fell around 10% on October 23, 1997, alone.

The following Monday was an extraordinary day for the U.S. markets.

On October 27, 1997, the market-wide circuit breakers were triggered for the first time since their adoption. Around 2:36 p.m., the first circuit breaker for the DJIA was triggered.

But the 350-point loss only represented a 4.5% decline.

Clearly, the point threshold was too low. Nonetheless, the stock, options, and equity index futures markets stood still for 30 minutes.

The market then reopened in a relatively orderly manner.

However, traders interviewed by the SEC commented that liquidity had evaporated. Sell orders were having an unusually large price impact on securities. In other words, there weren’t a lot of willing buyers.

The market decline continued. At around 3:30 p.m., the 550-point circuit breaker was triggered. The trading day was over… 30 minutes early.

Virtually all of the traders interviewed believed that the 550-point threshold had acted like a magnet.

In the wake of the U.S. trading halts in October 1997, the circuit breakers were again modified.

There would now be 10% and 20% circuit breakers. Percentage declines… finally!

A new timing scheme was also introduced to

33

CHINA’S (SHORT) CIRCUIT BREAKER EXPERIENCE

Chinese stocks experienced a volatile summer in 2015. Therefore, regulators decided that market-wide circuit breakers would be a good idea.

If China’s CSI 300 Index rose or fell by 5%, trading would be halted for 15 minutes. A 7% threshold would also halt trading for the rest of the day. The circuit breakers would be implemented at the beginning of 2016.

Lo and behold, both 5% and 7% circuit breakers were tripped on the very first day of trading in 2016. The circuit breakers were tripped again on January 7. China suspended the new stock market circuit breakers that day.

The Chinese breakers hadn’t even lasted a full week of trading!

Reminiscent of October 27, 1997, the second thresholds had seemingly acted like magnets. The initial halt created a sense of panic, and selling intensified after trading resumed.

Stock market circuit breakers are a good idea in theory. However, there are often unintended consequences.

There’s also something to be said for letting the market find an equilibrium level on its own.

4

increase the probability that the market would close on schedule. Instead of one hour, the 10% breaker halt would only be for 30 minutes if triggered between 2:00 p.m. and 2:30 p.m.

Critically, if the DJIA declined by 10% after 2:30 p.m., trading would not halt at the 10% level.

Finally, trading would cease for the remainder of the day if the DJIA declined 30% at any time.

You’d think that trading would have surely been halted during the Credit Crisis in 2008. But not even the collapse of Bear Stearns, American International Group, or Lehman Brothers was enough to trigger the market-wide circuit breakers.

But soon after the Great Recession was over, the European sovereign debt crisis sparked an unprecedented stock market event that led to the creation of another type of circuit breaker.

THE FLASH CRASHOn May 6, 2010, the Greek Parliament approved austerity measures in order for the country to obtain emergency loans. The move was aimed at averting a default, but it also prompted social unrest.

Protests in Greece devolved into rioting. As videos of the chaos in the streets of Athens appeared on CNBC, traders and investors became increasingly anxious.

Around 1 p.m. Eastern Standard Time, the euro started to come under significant pressure. U.S. equity markets fell in sympathy.

At 2:30 p.m., the DJIA was down around 2.5%.

Losses accelerated as heavy selling of S&P 500 eMini futures contracts pushed the market down further.

The DJIA’s intraday decline on May 6 was as large as 9.2% at one point. However, because it was after 2:30 p.m., the 10% circuit breaker was inactive. Thus, a trading halt wasn’t imminent.

Much of the decline was erased by 2:55 p.m., and the DJIA closed down by only 3.2%.

It was dubbed the “Flash Crash” because of the swiftness of the market decline and the recovery, as well as the split-second crashes in individual stocks.

Many securities went into freefall, as there simply weren’t enough bids to handle the volume of sell orders. Over 20,000 trades were executed at prices more than 60% away from their values prior to 2:30 p.m.

Some of these trades were executed at ludicrous levels.

0%

-3%

-6%

-9%

1160

1140

1120

1100

1080

1060

10am 11am 12pm 1pm 2pm 3pm 4pmIn

dex

Valu

e

Intraday % Change

Previous Close: 1165.87

SOURCE: Bloomberg

S&P 500 INDEXMAY 6, 2010

5

For example, Accenture Plc (ACN) traded all the way down to one cent. Later, all of the trades in ACN below $17 were broken (nullified).

Share prices may have recovered that day, but the episode scarred many market participants.

In an attempt to prevent such a debacle from occurring again, the SEC implemented single-stock circuit breakers.

In 2012, the SEC refined the single-stock breakers. The new limit up-limit down (LULD) mechanism was intended to prevent trades from occurring outside of a price band, based on the price of the stock over the immediately preceding five-minute trading period.

This band is set at 5%, 10%, or 20% (the lower the price of the stock, the larger the band). If the stock trades outside of the appropriate band for 15 seconds, trading is halted for five minutes.

At the same time, the market-wide circuit breakers were updated. The revised rules, which remain in place to this day, are shown in the table below.

Thankfully, the SPX is now the reference index to measure a market decline, and the trigger thresholds are recalculated daily.

Technically, the new circuit breakers haven’t been triggered… but one should have been.

THE FLASH CRASH 2.0August 24, 2015, saw the most chaotic U.S. stock market opening in history.

Overnight, global equity markets had been routed. The S&P 500 eMini futures contract declined to its limit-down price of 5% below the previous day’s close and was paused from 9:25 a.m. to 9:30 a.m.

STOCK MARKET-WIDE CIRCUIT BREAKERS (KEEP TABLE HANDY IN CASE OF EMERGENCY)

HALTS DECLINE IN THE S&P 500

HALT DURATION

BEFORE 3.25 P.M. AFTER 3:25 P.M.

Level 1 7% 15 Minutes None

Level 2 13% 15 Minutes None

Level 3 20% Rest of Trading Day Rest of Trading Day

6

Once the equity market opened for regular trading, many stocks went into freefall.

From 9:30 a.m. to 9:45 a.m., more than one-fifth of SPX constituents hit intraday lows that were 10% or more below their previous day’s closing prices.

General Electric Co. (GE), JPMorgan Chase & Co. ( JPM), Ford Motor Co. (F), PepsiCo Inc. (PEP), Colgate-Palmolive Co. (CL), and CVS Health Corp. (CVS) all declined by more than 20% at one point.

There were over 1,200 LULD trading halts that day. In many cases these single-security circuit breakers were triggered on the way down and on the way back up.

Amid the chaos, numerous exchange-traded funds (ETFs) traded well below their net asset values (NAV).

Normally, these dislocations are small and fleeting because they present trading firms with a near risk-free opportunity. Unfortunately, the trading halts in ETFs and individual stocks hindered this arbitrage activity.

It seems as though the LULD circuit breakers made the situation worse.

And the Level 1 circuit breaker should have been triggered that morning but wasn’t.

The SPX was only down a maximum of 5.2%, which wasn’t enough to trigger a halt.

However, the index is computed using last sale prices from the primary listing market. And many stocks with primary listings on the New

York Stock Exchange (NYSE) didn’t officially open until after 9:30 a.m., even though the shares traded on other venues before and after the open.

Basically, the early morning SPX levels didn’t fully reflect real-time trade prices.

On the other hand, the maximum intraday decline for the SPDR S&P 500 ETF Trust (SPY) was 7.8%, which is higher than the 7% Level 1 breaker.

Few people realize just how close we came to a market-wide trading halt that day.

Would a halt have caused the Level 2 threshold to act like a magnet? We’ll never know.

What’s important to keep in mind is the fact that the market has become increasingly unstable. And circuit breakers aren’t the solution.

THE COMING HALTThe function of the stock market is to bring together buyers and sellers.

Unfortunately, the market’s structure has grown inordinately complex – and a complex system is fragile.

There are now myriad venues where trades take place. Sometimes, our orders don’t even make it to the exchanges. Instead, they’re “internalized” at our brokerage firms.

If you’ve ever been filled at a sub-penny price (i.e. $22.5601), your trade was likely internalized.

Meanwhile, the rise of algorithmic trading has made the markets faster than they’ve ever been.

7

Flash crashes are indicative of the market’s underlying structural weaknesses. Circuit breakers address the symptoms but not the root cause of the problems.

Instead of prohibiting the subset of high frequency trading (HFT) that is predatory or nefarious and addressing market fragmentation, regulators have cobbled together a patchwork of circuit breakers.

In fact, the relatively new LULD single-stock circuit breakers actually increase the probability of a market-wide halt.

Let’s say that you’re an institutional portfolio manager who doesn’t read The Shockproof Investor and is therefore ill-prepared for a market shock.

The stock market is diving, and some of the stocks you own have suddenly been halted. You feel the need (or are being directed by your superiors) to reduce equity exposure.

What do you do?

Well, you sell your stocks that aren’t halted. As institutions do this en masse, more and more LULD halts will be triggered. The market will be driven downwards until the market-wide breaker is tripped.

It’s only a matter of time before the new, 7% market-wide circuit breaker is triggered. A Level

1 halt is inevitable.

Of course, a halt won’t be the end of the world. In fact, it will create opportunities.

That’s why, as Shockproof Investors, we have to prepare ourselves for this event.

In the midst of a panicking market, we have to be ready to buy stocks.

We purchased Ellington Financial LLC (EFC) the week of the Flash Crash 2.0. We also added to our position in Oaktree Capital Group LLC (OAK) in the second week of February, around the time when the SPX was making a low for the year (up to this point).

Because of our discipline, the Shockproof Portfolio has outperformed its benchmark, the Vanguard Balanced Index Fund (VBINX), by 3.4% since inception (see pg. 10).

Shockproof Investors will be buying stocks during periods of market stresses, including the week of the next market-wide trading halt.

This halt could be ultimately caused by the deterioration in the credit markets or a potential Chinese currency devaluation, both of which I’ve warned about recently.

Discipline, diversification, and an understanding of the macro forces driving the financial markets -these remain the keys to successful investing.

8

ISSUE STATUS NOTES

Debt Supercycle PeakingThe world is in the latter stages of an unprecedented accumulation of debt relative to economic output. Total global debt is around 290% of GDP. This is currently the most dominant macro driver of all.

Central Planning Accelerating

The financial markets are increasingly being used by central bankers as tools for economic planning. Supply and demand forces no longer determine equilibria in asset prices, interest rates, and currency exchange rates. When central authorities distort the free market’s price discovery mechanism and exert such a heavy influence on capital and resource allocation, then malinvestment and stagnation are the results. Ironically, this leads to even more central planning.

Robotics, Algorithms, and Automation Accelerating

Technological advancement is having a significant impact on the labor market, and, in turn, economic growth and inflation trends. Digital Fortunes is covering this topic in depth. If you're not already subscribed, click here to join today.

Demographics Long-Term TrendThe aging of the global population is being driven by a secular decline in global fertility and mortality rates. For the first time in history, the global population over the age of 65 will be greater than the number of children under the age of five. Demographic shifts have major social and economic consequences.

The Eurozone Smoldering

The failed euro experiment is an unmitigated disaster. A single currency system across countries with disparate languages, cultures, economic profiles, fiscal situations, and political regimes is unworkable. The euro prevents necessary rebalances from occurring and interconnected banking systems create contagion pathways.

U.S. Dollar Carry Trade Unwinding

A dramatic rise in the U.S. dollar, the reserve currency of the world, is deflationary in nature and bearish for commodity prices. It also stresses speculators who have used dollars as a funding currency (dollar carry trade) and foreign entities that have borrowed in dollars. According to the Bank for International Settlements, a total of around $9 trillion in U.S. dollar credit has been extended to non-banks outside the United States.

Global High-Yield Debt Mispricing Correcting

The global reach for yield has been particularly beneficial for high-yield bonds. In 2014, the yield for the benchmark BofA Merrill Lynch U.S. High Yield Master II Index hit 5.16%, likely a generational low in junk bond yields. Debt issuance has risen to meet investor demand. High-yield energy debt is the focus now, but the mispricing is pervasive, so the upcoming default wave will be shocking.

China's Hard Landing Forecast

China's striking credit boom since 2008 has fueled epic real estate and infrastructure malinvestment. Central planners will be unable to orchestrate a smooth transition from debt-driven investment to consumption-based growth. Considering China has the second-largest economy in the world, a hard landing has the potential to cause horrific market shocks that would reverberate around the globe.

Japanese Yen and Sovereign Debt Crisis Forecast

Japan has one of the oldest and most rapidly aging populations of any nation in the world. Its government debt-to-GDP is also 240%, the highest ratio of any country. The Bank of Japan is in the process of monetizing virtually all Japanese government bond issuance, yet the economy has been in and out of recession and real wage growth has stagnated for quite some time.

Australian Credit Crisis ForecastThe prices for iron ore and coal, Australia's top two exports, have plummeted. Combine the impact of collapsing exports with a proper housing market bubble, and you have the makings of a catastrophe down under.

TREN

DSCR

ISES

MACRO MONITOR

9

FIXED INCOME &PREFERRED STOCKS

50%FOREIGN STOCKS

20%

U.S. STOCKS

15%

CASH, HEDGES & SPECULATIVE

15%FIXED INCOME & PREFERRED STOCKS

50%

TARGET WEIGHTS

OVERALL RISK TARGET

DYNAMIC ASSET ALLOCATION MODEL

Dynamic asset allocation involves actively managing the mix of asset classes and sub-categories in response to the ever-changing market environment.

Myriad macro risks remain.

The risk target was lowered in December largely because of the U.S. corporate bond market’s diver-gence with equities.

The dynamic asset allocation and security selection within The Shockproof Portfolio reflect this lower risk target.

Change from previous month: None.

By design, the target asset allocation is currently dominated by volatility-dampening fixed income and preferred stocks.

Credit risk exposure is low and emerging market equity exposure is zero.

We raised cash in December 2015.

Change from previous month: None.

10

HOLDING CATEGORY EXPENSE RATIO YIELD TARGET

ALLOCATIONPRICE

(2/29/2016)CAPITAL

GAIN/LOSS ACTION

iShares MSCI USA Minimum Volatility ETF (USMV)

U.S. Stock 0.15% 2.0% 4.5% $41.67 3.5% Buy

DoubleLine Shiller Enhanced CAPE Fund (DSENX)

U.S. Stock 0.90% 2.6% 10.0% $11.54 -2.3% Buy

Ellington Financial LLC (EFC)

U.S. Stock N/A 12.5% 3.0% $17.06 -7.8% Buy

iShares MSCI EAFE Minimum Volatility ETF (EFAV)

Foreign Stock 0.20% 2.6% 20.0% $63.16 -2.3% Buy

SPDR DoubleLine Total Return Tactical ETF (TOTL)

Fixed Income 0.55% 2.9% 30.0% $49.11 -1.5% Buy

4-Year U.S. Treasuries (CUSIP: 912828WC0)

Fixed Income N/A 1.2% 5.0% $102.37 0.1% Buy

Nuveen Quality Preferred Income Fund 3 (JHP)

Preferred Stock 1.76% 7.8% 0% $8.23 -5.9% Sell

iShares U.S. Preferred Stock ETF (PFF)

Preferred Stock 0.47% 5.9% 15.0% $38.32 4.8% Buy

Oaktree Capital Group LLC (OAK)

Hedge N/A 4.7% 5.0% $45.90 -3.4% Buy

Central Fund of Canada Limited (CEF)

Hedge 0.30% 0.0% 5.0% $11.85 -9.9% Buy

Cash Cash N/A 0.0% 2.5% N/A N/A

TOTAL 100%

THE SHOCKPROOF PORTFOLIOThe goal of The Shockproof Portfolio is to help you grow your wealth while guarding against market shocks and financial

crises. However, just as there’s no one-size-fits-all asset allocation, there’s no single portfolio appropriate for all investors. The Shockproof Portfolio, therefore, is a guide to help you construct your own personalized shockproof portfolio. This

portfolio’s objective is to produce a long-term, risk-adjusted return superior to that of the Vanguard Balanced Index Fund (VBINX), a passive mutual fund with a 60/40 stock-to-bond ratio. FOR FULL PORTFOLIO DETAILS, CLICK HERE.

Returns exclude the effects of brokerage commissions and taxes. The Shockproof Portfolio's inception date was 2/2/2015.

SECURITY DESCRIPTION ACTION ENTRY PRICE STOP LOSS RETURN

Simon Property Group (SPG) High-Yield Stampede Hold Short $177.26 $210.00 -9.7%

SPECULATIVE AND SHORT POSITIONSThe recommendations below may be appropriate for investors looking for higher risk-reward setups and/or hedging opportunities.

SELL

BUY

The Shockproof Portfolio S&P 500 (SPY) Vanguard Balanced Index Fund (VBINX)

Cumulative Total Return

6%

4%

2%

0%

-2%

-4%

+1.3%

-2.1%

Feb Mar Apr May Jun Jul Aug Sept Oct Nov Dec Jan Feb Mar2015 2016 *as of 2/29/2016

-2.1%

03/0

3/20

16Wall Street Daily provides its subscribers with unique opportunities to build and protect wealth globally, under all market conditions. We believe the advice presented to subscribers in our published resources and at our seminars is the best and most useful to global investors today. The recommendations and analysis presented is for the exclusive use of subscribers. Subscribers should be aware that investment markets have inherent risks and there can be no guarantee of future profits. Likewise, past performance does not secure future results. Recommendations are subject to change at any time, so subscribers are encouraged to make regular use of our website, wallstreetdaily.com.

© 2016 Wall Street Daily, LLC. Wall Street Daily, 105 W. Monument Street, Baltimore, MD 21201. All rights reserved.

Protected by copyright laws of the United States and international treaties. This publication may only be used pursuant to the subscription agreement and any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), in whole or in part, is strictly prohibited without the express written permission of Wall Street Daily. Information contained herein is obtained from sources believed to be reliable, but its accuracy cannot be guaranteed. You and your family are entitled to review and act on any recommendations made in this document.

Wall Street Daily expressly forbids its writers from having a financial interest in any security they recommend to their readers. All Wall Street Daily employees and agents must wait 24 hours after an internet publication and 72 hours after a publication is mailed before taking action on an initial recommendation. Wall Street Daily does not act as an investment advisor, or advocate the purchase or sale of any security or investment. Investments recommended in this publication should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.