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4 Warnings And Why You Should Pay Attention
Submitted by Lance Roberts via STA Wealth Management,
When I was growing up my father, probably much like yours, had pearls of wisdom that he would drop along the way. It wasn't until much later in life that I learned that such knowledge did not come from books, but through experience. One of my favorite pieces of "wisdom" was:
"Exactly how many warnings do need before you figure out that something bad is about to happen?"
Of course, back then, he was mostly referring to warnings he issued to me "not" to do something I was determined to do such as jumping off the roof with a bedsheet convinced it was a parachute. After I had broken my wrist, I understood what he meant.
Over the weekend, those warnings came to mind as the recent bounce in the financial markets once again has individuals scrambling to grab "bedsheets" to jump off the roof once again. Of course, much of their behavior is driven by mainstream commentary suggesting that the recent market rout is over.
However, there are currently plenty of warning signs that suggest that individuals might want to reconsider the risks before taking that leap. Here are four warnings to consider.
Warning 1: Profit Margins
Edward Harrison at Credit Writedowns picked up on the issue of declining profit margins that I addressed last week.
"While I am not talking about recession yet, I do think we are seeing economic weakness toward the end of the business cycle. And while that doesn't mean recession in the near-term, it could do in the medium-term.
We know from history that the dates when profits rolled over coincide very much with the slide into recession. My interpretation of these data is exactly as Barclays says, that you get enough of a slide in profits and it generally leads to recession. That is because the profits recession comes as a result of a weakening economy that has weakened so much that companies are no longer able to cut costs, buy back shares or massage accounting enough to keep profits rising.
We are now in the seventh year of a cyclical recovery and bull market. Shares have tripled in that time frame. I would say this means we are much closer to the end of the business cycle than the beginning. Moreover, as Jeremy Grantham is quoted in the Business Insider piece, profits are mean-reverting and right now they are reverting from a phase that is "wildly optimistic" according to Warren Buffett. All of this is taking place against the backdrop of an economy in which wage growth is weak, household debt is still relatively high on a historic basis as a percentage of income and we have no policy room on the monetary side, with limited political appetite for policy on the fiscal side.
To me, the pre-conditions for this profits recession speak to downside risk, both for risk assets and for the real economy. None of the data speaks to recession in the real economy right now. We are seeing a slowing of job growth and likely of trend economic growth as well. But with a profits recession hitting, the potential for further downside is high."
Warning 2 - Margin Debt
Recently, Doug Ramsey, Chief Investment Officer for Leuthold Weeden Capital Management, concurred with that view stating:
"Margin debt contracting is a sign of loss of investor confidence and it's confirmation of a lot of other evidence we have that we've entered a cyclical bear market. We got a lot of traditional warning signs leading up to the high in terms of market action, and deteriorating breadth and margin debt is important to the supply-demand analysis."
As I have discussed previously, the importance of margin debt as it relates to the market should not be dismissed. To wit:
"While 'this time could certainly be different,' the reality is that leverage of this magnitude is 'gasoline waiting on a match.' When an event eventually occurs, that creates a rush to sell in the markets, the decline in prices will reach a point that triggers an initial round of margin calls.
Since margin debt is a function of the value of the underlying "collateral," the forced sale of assets will reduce the value of the collateral further triggering further margin calls. Those margin calls will trigger more selling forcing more margin calls, so forth and so on.
Notice in the chart that margin debt reductions begins innocently enough before accelerating sharply to the downside."
No one knows for sure where how far the market needs to fall before "margin calls" are triggered. However, if that point is eventually reached, there will be very little investors can do to shield themselves from the decline.
Warning 3 - Valuations
Valuations are a very poor market timing device for short-term investors. However, from a long-term investment perspective, valuations mean a great deal as it relates to expected returns. Chris Brightman at Research Affiliates recently noted this exact point.
"As a long-term investor, we experience short-term price volatility as opportunity, and high prices as risk."
With earnings growth deteriorating, and valuation expansion having ceased, the risk of high-prices has risen sharply. As I addressed in "Shiller's CAPE - Is There A Better Measure:"
"The need to smooth earnings volatility is necessary to get a better understanding of what the underlying trend of valuations actually is. For investor's periods of 'valuation expansion' are where the bulk of the gains in the financial markets have been made over the last 114 years. History shows, that during periods of 'valuation compression' returns are much more muted and volatile.
Therefore, in order to compensate for the potential 'duration mismatch' of a faster moving market environment, I recalculated the CAPE ratio using a 5-year average as shown in the chart below."
"There is a high correlation between the movements of the CAPE-5 and the S&P 500 index. However, you will notice that prior to 1950 the movements of valuations were more coincident with the overall index as price movement was a primary driver of the valuation metric. As earnings growth began to advance much more quickly post-1950, price movement became less of a dominating factor. Therefore, you can see that the CAPE-5 ratio began to lead overall price changes.
As I stated in yesterday's missive, a key 'warning' for investors, since 1950, has been a decline in the CAPE-5 ratio which has tended to lead price declines in the overall market."
Warning 4 - Economics
Ultimately, asset prices are a reflection of the underlying economic growth and, as Edward Harrison noted above, we are very long in the current economic cycle.
I regularly publish the Economic Output Composite Index which is comprised of the Chicago Fed National Activity Index (a broad measure of 85-subcomponents), the Fed regional manufacturing surveys, the NFIB survey, LEI index, and the Chicago PMI. The correlation between this index and the real economic activity is very high.
Notice that the EOCI index has now fallen to levels where the Federal Reserve has previously "loosened" monetary policy by adding accommodative measures such as "Quantitative Easing." Importantly, despite the Fed's assurances, the economy is clearly not strong enough to withstand a "tightening" of monetary policy by increasing interest rates.
As you will also notice, not only have sharp drops in the EOCI index been coincident with far weaker economic activity, but also declines in asset prices as well.
If They Don't "Buy & Hold" - Why Should You?
Of course, these are just "warning signs." None them suggest that the markets, or the economy, are immediately plunging into the next recession-driven market reversion.
But they are warning signs nonetheless. Past experience suggests that future returns are likely to be far less than historical averages suggest. Furthermore, there is a dramatic difference between investing for 30 years and whatever time you have left before you need your retirement funds intact.
While much of the mainstream media suggests that you "invest for the long-term" and "buy and hold" regardless of what the market brings, that is not what professional investors are doing. As addressed recently by UBS:
"Nothing is good in general. We are in an environment where nothing is good.
At some point, it will disconnect, and it disconnects very aggressively. And the repercussions are very significant. It's very difficult to hedge or prepare for that. We can't take anything for granted.
We challenge through black-swan scenarios every month, every week, every day. We try to understand what in our scenarios is a given, and what happens when it's not a given when it could cause very significant losses for the investment bank.
Rate hikes, big volatility swings, are things we try to anticipate, and we do that all the time. We try to compensate for lack of experience through a lot of thinking."
The point here is simple. No professional or successful investor every bought and held for the long-term without regard, or respect, for the risks that are undertaken. If the professionals are looking at "risk" and planning on how to protect their capital from losses when things go wrong - then why aren't you?
Exactly how many warnings do you need?
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Warning 5-100....Gartman.
The real Warning One: Don't get the Russian bear angry.
http://www.foxnews.com/tech/2015/10/12/russias-small-ships-pack-plenty-c...
Those cruise missiles Russia launched from small ships in the Caspian Sea to targets in Syria shocked the empty suit war criminals at Obama's Department of Defense. The Captain Obvious comments in this posting about Wall Street are big on generalities and weak on real advice. Advice like "Buy stock in beer companies." More people drink beer than use Twitter. And advice like, if you can, put some of your savings in cash, in case ATMs stop working due to "technical glitches." Assuming you have savings and belong to the shrunken middle class.
Think back to 15 years ago and try to remember if you saw the phrase "false flag attack" anywhere. If that phrase is much more common nowadays, there has to be a reason. Nothing wrecks the markets more than a bubble collapse or a major false flag attack (refer to the 9/11 incident).
Secret that Obama is hiding from American people!
http://motivationdose.com/is-america-babylon/
Could you fundamentalist zealots just go away?
The only people who need warnings now are the dummies who haven't been holding stocks during one of the biggest bull runs in history. I'm happy with 25% stop losses that will all close out winners, but I know that won't work for all the Chicken Littles out there. Sucks for them, but the market has a way of punishing fuck-ups.
By the time your stop-loss kicks in, the markets will be about 20 to 30% BELOW your preset level.
Is it the recession that causes the slide in profit margins or visa versa?
Come on. Its different this time.
Standard line of junkies and alcoholics....
"But it's different this time..."
It always is, and the graveyards are full of former optimists.....
"We are now in the seventh year of a cyclical recovery and bull market"
Absolute Hogshit!
We are now in the 7th year of a global depression that has been papered over with 10's of TRILLIONS of dollars in "New Money".
The recession/depression will be unmasked when the "New Money" runs out...and that is when the "bull market" will die...it is different this time....in that government is driving the markets instead of "individual participants"...the old pardigm of how the market works cannot be applied to this market...all you need to watch is the FED and Congress...when they stop pumping..you need to start selling...right now, they're confused..still pumping, but not sure about tomorrow...red flags...but no sirens..yet.
+1000
Total bullshit article.
Good, I wasn't paying attention anyway.
/s A little s for that tiny drip of sarcasm.
Absolutely, the FED will make the recession disappear
For bankers and financiers, there never was a recession! For every other sector (where real products are actually made) we are still in a depression!
+1. Correct. This 'last' bubble is the bond bubble. You sense, the elite grabbing every last asset before game fiat emplodes. Equities are window dressing for the unwashed masses.
Once the players realize the game is over, rules are no longer followed, players no longer take turns and then game just ends unceremoniously.
True100, recessions are for the 70% (now about 30%) consumers. The others have so much money nothing matters as they can wait out/lay seige to anything they want. Commoners are the victims of this grand attempt to save a few at the cost to many.
This not the 70's, 80's, 2001, or 2008, any remaining sense of price discovery for 90% of the "investing public" is fucking dead. The central banks in the west bought everything with FREE MONEY and even better, many private corporations got to dump their debt onto the public/government!
It is different this time as we move forward with this global race to the bottom. This time it is in fact global Weimar!
hedge accordingly.
Good advice!
Fascists found a bigger playing field the world.
Seems any company could let its stock go to "0" or near "0", be taken private (by agreed plan), then re emerge but remaining private (same key players at least in the background). At some point commoners/consumbers/sheeple/whatever are cut off and their lives become a day to day work existance without hope. And they still have all the debt to deal with.
My hedge was to get all the way out of the game and while I'm not making pretend profits on BTFD, I sleep well and my stomach is no longer fucked up....
The FED will start QE 4. This will be their last act. Bada bing bada boom, that simple...
Yes, the last act for all fiat, global Weimar! The Fed has looked liked a hack next to the PBoC.
One more failed act.
Banks have given up and purchased long-term treasuries and morgage backed securities.
If Mr Market comes back and demands higher rates for treasuries these banks will have unload. Should be fun.
Do banks still get to value "UST securities held as long term investments" at cost +/- amortization of premium / discount?
In other words - if they plan to hold them to maturity they do not have to mark them to market.
So BFD if rates spike - fantacy accounting will not force them to recognize the loss.
I'm betting on a helicopter drop to keep the masses from grabbing the pitchforks. That will bring REAL inflation.
Agreed. If deflation really becomes apparent they'll goose the system with money to the citizens. The head of the FDIC actually recommended that in 2008 in a WSJ op-ed. That will kick off money velocity, if only for a time. There is a precident in history during the early 30s with the WWI bonus army. It kicked up the economy for about a year, then it subsided. Deflation is easy to stop and the fed has all the tools to do it. You just need a big printing press.
Given the state of the dollar, they risk completely blowing up the currency and not just getting inflation to pick up, but a total global loss of confidence in the dollar. That's hyperinflation.
I think blowing up the currency is the plan. What other way can they erase all this debt they have accumulated? There is no other way. They must destroy the dollar and reissue a new currency to remove the debt burden now.
I hope they do. A helicopter drop into my bank account would be great. Just give me enough to get a few ounces of gold and some more non-perishable foodstuffs. Maybe a few extra solar chargers.
Yep. $15000 should just about do it.
Yup. Nice way to trade your economic understanding against all the ignorant lunatics. Just move fast to buy the gold, preferably on the day the drop is announced. With everyone receiving printed money at the same time, it won't take long for all prices to rise correspondingly.
I would buy gold rather than foodstuffs so you retain liquidity. Certain income streams like wages and long term contracts can be far slower to adjust and may require a protracted job hunt and change of employer to correct. Meanwhile prices like month-to-month rents, utilities, food, and transportation will all adjust rapidly. Having liquid reserves during this time may be necessary to get through it.
Too bad none of us has access to that sweet 0.25% money. Borrowing at that rate to buy gold upon the announcement of a money drop inflating the money supply to a higher percentage would be a killer arbitrage play.
A new currency, in this case, will mean a new government.
Us non-wealthy types could only wish.
Dee plane!! Dee plane!! No, Dee chopper !!
A SILVER Dollar worth 16 FRNs.
QE makes no sense as long as all the money goes to banks to prop up stocks and indexes and blow up the illusion of growth. Once the bubble bursts and enough people realize QE is and has always been a mere psychological scam for the masses, it will end definitely. As regards real economy they are totally clueless. I suspect they'll never allow anything that would raise the risk of hyperinflation such as proportional distribution of QE. At least not wittingly.
Since the financial crash of 2008, US taxpayers via the FED have literally dumped $ trillions (QE) to prop up (still) insolvent banks. All of this money has inflated asset prices- stocks and trendy real estate in SF, Boston, NYC, etc. (As reported by ZH, the new Google CFO spent $30 million on a 4500 sq ft house in Palo Alto). Despite this asset appreciation, the overall economy has remained weak, confronted with high unemployment, anemic job growth (> 90% of “new” jobs are temp positions- low pay, no benefits or job security) and exploding deficits. Car sales are propped up with sub-prime auto loans, long term financing deals and other financial gimmicks. Not surprisingly, defaults on these car loans are increasing. Bottom line- the US economy cannot grow when the purchasing power of working people is being eroded. Even Henry Ford (certainly no radical) understood this. QE has completely distorted asset prices and consequently, investors have no idea what the real value of these assets should be. Thus, we have tremendous volatility on Wall St.
Yeah, straight up "volatility" since 2009 when FASB 157 was thrown out the window and they went "marked to unicorn".
2008 was the warning. Have your stuff paid-off before the QE ends.
I’d bet most people squandered the time and ran-up more bills.
paid-off--no.......charge it up and default............its all fake money anyways...
fuck the banks
Only if you are willing to either run away (physically) or spar with the legal system, which you will lose. I think your best bet is to 'disappear' from the radar; pay off debt, become self-sufficient, form community groups, get off the grid. Don't be a target for the oppressors to try to squeeze more out of you.
Good advice; better advice - be reconciled to Jesus while you can for He is upholding the world with His word, for now. Eventually He burns it up with "fervent heat"...makes a "Global Warmest Propagandist" very envious.
Well that goes without saying, if you believe there is more to life than what we experience here on Earth. But if all you want out of life is to accumulate wealth and power, go for it. It will all end abruptly for you some day. And all that wealth and power you worked so hard for will be left for someone else.
I have noticed an increase in the amounts of money being left to some churches. Even avowed agnostics are, at the last moment leaving large sums. Trying to buy their way into heaven? Hope it woks for 'em. They left an awful lot of carnage in their path to riches.
Actually it is kinda funny...
This is the truth. I'm always amused by people whose advice is to run up a debt pile to the sky and then walk away.
You do not simply walk away from Rothschild. The banksters will hound you to the ends of the Earth for their illicit plunder. After all, the goyim OWE them - EVERYTHING.
And they have a huge army of thugged-out, mil-spec cops who will mindlessly enforce their illicit plunder without question or hesitation.
It really sucks, watching the FSA have goodies showered upon them. But I'm watching from the vantage point of a paid-off house, with a well stocked pantry. I could choose to be resentful of all the folks who borrowed to the moon to live large and are now getting bailed out, while my family lived within its means and is debt-free.
But when TSHTF, I'll be in a much better place, overall, than the folks to whom the banksters can lay claim.
I know what you are saying (My house is paid off as well), but miss one property tax payment and your house can be taken from you.
I like the advice given elsewhere to take on as much debt as you can fully pay off with liquid assets you can maintain in reserve (e.g. gold).
You get the benefits of holding artificially low interest debt during a time of inflation and debt forgiveness with the security of being able to fully free yourself from creditors if circumstances call for that.
The biggist challange to that however is the risk premium interest on loans still need to be covered and liquid assets don't earn enough return to do that, so you pay a price to maintain this capital structure.
nope...I know people living in houses which they stopped paying the mortgage and property taxes many years ago.
How are you any different than they are? There is no discernible difference; you put yourself in corrupt company.
QEx will lead to NIRP which is thier ultimate goal for a cashless NWO currency. The war on cash has been along one. This was all planned, all done by design.
It will ultimately fail as it is written and therefore it shall come to pass as it always has with all accuracy. Hope you are on the Right side of the trade.
We’re going to be guillotine operators for $15.00 an hour plus overtime.
The X-ains are gonna walk right in. *lop* the head and *plop* into the hole.
sorry, didn't read it. i'm sure it was a fine piece but with the likes of yellen and bernanke at the fed it is all useless.
Blah...Chart Porn...Blah...Chart Porn...
I like the content but doesn't anyone at ZH proof read these things before posting them? Full of grammatical errors;
"
This happens alot, but I'm not so sure some malicious thing isn't interferring with the keystrokes as is happening as I type. On the other hand, it could be that some of the posts here are zionistic attempts to misinform, discredit and confuse. We need to be paying attention - that much is certain.
No warning needed, I don't have anything in that fucking casino.
Good for you :)
TBTF! The markets are eternal; they cannot be timed and are never to be sold. They are EVERYTHING in a capitalist system. There is NEVER a bad time to buy stocks. Every twenty-something now entering the workforce, assuming they can find meaningful employment, will be buying stocks. There is nothing else. They are told to buy and hold for the next 20-30 years and throughout their careers. The Dow will go up to 30K, then 40k, etc, as “growth” explodes in our capitalistic consumption-driven economy. Debt is not to be feared, it is to be encouraged. Buy cars, boats, houses and toys and spend most of your lives in debt…not a problem. Nineteen TRILLION in government debt is meaningless, nobody cares at all; most don’t even know what it is. “Austerity” equals collapse and no recovery ever.
If the twenty somethings were told the Dow will be at 7k in two years, they would panic and the spiral down would become self-fulfilling and self-reinforcing. That is why the bankers must defend the markets at all costs. They are now EVERYTHING. They drive our consumption nation and the Fed believes trickle-down works. A tumbling market means companies are less profitable and are laying-off workers, and those unemployed people will borrow and buy less.
The bankers have been so successful in pushing markets higher and defending them that even retired eighty-year olds are all in. And how can they lose when they know Fed has to stand behind the markets? They have hope for a good reason. Any weakness is met by more QE. Rate hike talk is just Fed-speak propaganda. Their other “success’ as they see it, is in creating and maintaining property bubbles. Twenty somethings must aspire to be debt slaves to the bankers and to their houses for 30+ years. People see Fed-induced inflation in home prices, feel wealthy, take out loans and buy more crap from China. Allowing home prices to go down equals economic death. Every pension fund needs stocks to go up and up FOREVER to meet their payout obligations., or else they will require government bailouts.
If you think the masses are ready to revolt, you are a fool. The bottom 1/3 just want their handouts, the middle just want their McMansions, SUVS, and enough left on the MasterCard to buy more toys, and the upper 1/3, more wealth. The oligarchs will use every trick in their book to preserve this system that enrichens them and keeps the cities from burning. More immigration to create new consumers and borrowers…no growth means certain failure of this capitalist system. The Fed may tolerate small sell-offs which give the appearance of free markets, but they will not throw in the towel if things get ugly. If Christmas sales decline again, which is likely, by January layoffs will soar and QE and even helicopter money, is a certainty. Then, loan forgivness comes. Bears will only make money if and when it all collapses.
President Trump will try to run the government like a business and the people will riot as their benefits end and as ½ million government workers get lay-off notices. Nice idea, but this debt-ridden country must keep kicking the can, or start WWIII as a diversion.
Lucid commentary. The specific magickal discipline of the banksters is that of Illusionist. And the illusion must be maintained at all costs, or it simply vanishes into the thin air from which it was constructed.
In this case, the illusion is our entire economy, as it is all predicated upon fiat currency which, in the absolute sense, does not actually exist.
(Although I'd argue that this is not a capitalist system in any true sense of the word. Capitalism is predicated upon reality. Our fiat economy, obviously, is not.)
Yea I upvoted. I agree with all points.
I used to think I knew what this was - a corpotocracy? A oligarchy? corporate-socialism? But now I think that no one knows what it is. We started it and it has a mind of its own now.
To sum in up, our system has two gears...continuous growth and collapse.
Do you get the feeling that people are starting to remember that stock prices should be tied to earnings? Check your D-rings.
so . . . i'm new here . . . this is bullish, right?
Now you're catching on. :-) Also, learn how to say "bitchez" at the appropriate times, and also don't forget BTFD (or was that replaced by BTFATH?)
Yes, get it out of your system and move on to sarcastic mastery. Then evolve to posting well-sourced information that relates to the topic. I havent made it there yet but I believe the final evolution is to spiral into a deep depression and heavy drinking once you fully comprehend that it just doesnt matter.
Heres that great scene from Meatballs. 2:25 min
it just doesnt matter
Buying actual USA made products - and not simply US-based brands - will do wonders for the US manufacturing economy. It supplies lifeblood to our economy instead of sending that economic lifeblood overseas.
Made in USA will have to come back once the vaunted 12,000 mile. supply chain gets exposed as the most poor idea ever. Hey US national leaders: how about encouraging small local business and entrepreneurship? Why aren't any Prez candidates running on that sound idea?
Why aren't any Prez candidates running on that sound idea?
I'll take "Nail guns" for $1000, Alex.
Try to buy mid-range consumer electronics at competitive prices that are made in USA. Bet you can't find any. How about an android phone, made in USA? Name the brand. Point is, we don't even have a choice. But here is what will happen: When the USA loses control of the confidence and value of the dollar, that is, when the Chinese yuan becomes the world reserve currency because the Fed totally screwed us, they will do to us what we did to the rest of the world for the last 40 years or so. They will export their inflation. Meaning that overseas goods will quickly become terribly expensive here. That will once again present an opportunity for the USA to competitively manufacture those goods for domestic consumption. But it won't happen overnight. First, we will be burdened with digging ourselves out of the hole congress and the banks created, and then we have to rebuild our capital availability and invest in manufacturing capability. It should only take about 15 - 20 years. So cheer up!
That last chart.
we all know how terrible things are out there.
unfortunately, until someone takes care of the fucking bankers on wall st and at the fed, the stawk ''market'' will never reflect the real economy.
just look at today, it was so obvious stawks would be green by 10 am and sure enough they r.
Good analysis but none of this matters. The 60 Minute interview with the liar is what matters. He will not let the republicans wreck the economy in his last year. That means the gov/fed will manipulate the stock market higher.And he says we should spend money to fix our aging infrastructure because money is so cheap (of course caused by manipulation of gov/fed). That will be the cover for QE4, borrow more (of course increasing national debt) to make it look like he is doing something for main street vs wall street. This will be a boom for heavy construction firms.
business cycle? well welcome to earth, here we have clean water, dogs are not allowed to wander the streets and the business cycle has been abolished. as for MOARgin debt, debt is a good thing and the MOAR debt the better, we sometimes call it liquidity. Valuations are always on a time line, if you can establish what fed policy will be ten years from now you can accurately project those earnings, and YES WE CAN. presidents come and presidents go, but the FED goes on forever. enjoy your stay
Debt is Wealth
Ignorance is Strength
Slavery is Freedom
Obummer wull saves us!
How many warnings? Warnings are meaningless when there are no consequences.
Ya know what my daddy taught me? https://www.youtube.com/watch?v=9a0kNAGIqE8
Here are some signs of a coming recession.
http://www.zerohedge.com/news/2015-10-02/us-factory-orders-flash-recession-warning-drop-yoy-10th-month-row
http://www.zerohedge.com/news/2015-10-02/us-financials-default-risk-spikes-2-year-high
http://michaelekelley.com/2015/09/27/vix-predicts-pits-while-pundits-have-fits/
http://michaelekelley.com/2015/05/29/mergers-and-acquisitions-set-record/
http://michaelekelley.com/2015/02/20/fed-warns-of-two-bubbles/
Here is how to prepare.
http://michaelekelley.com/2014/10/16/8-things-to-do-when-recession-happens/
Here is how to get your mind off this stuff.
http://michaelekelley.com/category/humor/
Good luck!