Download SELL HIGH AND BUY LOW REMAINS THE BEST PLAN!! July 22

SELL HIGH AND BUY LOW REMAINS THE BEST PLAN!!
July 22-2016
Good Afternoon Folks:
The stock market and its “erratic behavior” is very unpredictable, especially when viewed in the short
term. In fact, it can drive you mad (or broke) if you try to understand the “logic” behind its daily-weeklymonthly movements. Many investors attempt this (in fact most do as that is how we are wired but that
is another newsletter) and some are very successful from time to time (mostly luck), but history tells us
that for the majority of investors having a short term focus-opinion is a very weak strategy.
What is more predictable is the behavior of the markets over the midterm and that is where my focus
has always been. Then the goal of Selling High and Buying Low becomes much more realistic and
achievable.
It is also why I feel very little remorse (or surprise) that the markets continue to climb higher despite the
growing wall of global worry, as I know that this is most likely an erratic short term trend that I have
little interest in following. Although, ironically, this most recent market move was somewhat predictable
as the US is now officially ”the only game in town” globally after the Brexit vote!
The EU now faces massive uncertainty going forward with Brexit and future bank insolvencies, Japan is a
waste land of deflation and in demographic crisis, China could surprise us but odds are they will fall hard
first (as is its stock market), and that leaves the US market as the only game and hence global dollars
have flowed into both equities and fixed income as a place of ‘safety”.
But logic and more importantly—HISTORY—tells me that this is a very poor time to be aggressively
investing in this rising market.
The “short term risk” for defensive investors is that we still have two very strong forces at play pushing
markets higher-- #1 the Fed with its zero interest rates and # 2 continued massive corporate share
buybacks. I am not sure how much longer these two will continue to inflate this bubble BUT today’s
aggressive equity buyers are playing with fire, I believe, or musical chairs as they did in 1999 and 2008
and when the music stops many participants will fall on the floor very hard.
Here are some comments and observations that are influencing my investing decisions these days:
Second Longest Bull Market
- we are in the second longest bull market since the great Depression yet the weakest recovery ever!!
This speaks to the strength of the FED, ZIRP, share buy backs, and good old financial engineering
-this could continue into August-Sept but then we are really into our third bubble in 16 years I
suspect…is this where you want your money??
Valuations
-Goldman Sachs David Kostan recently reported that the S&P 500 P/E ratio has “already expanded by
70% during the last 5 years “ which exceeds all other bull P/E expansions except the 1984-1987 and
1994-1999 runs…
- BUT 1987 and 1999 were very, very risky times to be fully invested….I do not want to place my clients
in this high risk CRASH position hence the defense
-We have covered this before many times, but using historical data as our reference-- markets are at
least over valued 30-35% on most measures and remember when markets correct they always over
shoot…and recall this is the second longest bull in history…
-Jeremy Grantham thinks that stocks are very overpriced (“brutal and widespread asset overpricing”)
but because of the powerful force of the Feds ZIRP and Corporate buybacks US equities could climb
higher (S&P 500 to 2300 from the current 2172) and then this “bubble expert” says we have another
classic bubble on our hands. He also notes the high cash levels and bearish sentiments as market
positives that could push the markets higher in the short term.
-how many investor’s will be able to stay out of this bubble as it climbs higher—history says not many so
we will have to be VERY patient and focused on the down side risk, valuations, and logic if we see more
P/E expansion!!
The Herd Reflex
-the VIX “Fear gauge” is now only 12 reflecting +++greed and complacency
-Liz Sonders says (July 19) that the recent plunge in the VIX over the last three weeks has been the
“largest on record”…to me that is the Herd losing its mind and focusing on greed over logic…it reminds
me of the 13% rally after Bear Sterns went bankrupt in March 2008 only to see markets plunge 6 months
later when Lehman’s also imploded…I mean really— BREXIT is NOT a good event folks for the EU or
global trade yet markets soared upwards?????
Where to Invest
-our focus over the last year has been on Defensive High Yielding Equities (low beta over high beta) and
while this has been very rewarding one wonders if we should be taking more profits now?
-these stocks e.g. utility and REITS have been bid up as investors require yield (as there are none in fixed
income) and safety—in essence it is all part of the FEDs plan to inflate equities (which has worked) and
the TINA outcome (there is no alternative for aging boomers who need yield) they expected.
-so for example in the US--the S&P 500 is up 6% in 2016 yet Telecoms are up 21% and utilities are up
19% …we see the same returns in Cdn
-I think this trend will continue as we know that the top 10% of US households own 85% of the US
Financial Assets (bottom 50% owns just 1% --Hedgeye) and that the majority of these investors are over
the age of 60 and looking for retirement yield and safety, recall that the first of the boomers just turned
70 and the median age is 60 and these folks need yield and they are NOT getting it in fixed income,
hence the surge in “defensive dividend stocks” which we have been focused on for many years as a core
strategy (2014- Defensive Investing Strategy and the logic)
-BUT if we see the markets climb even higher into 2016 I may be forced to do some profit taking on the
utilities, staples, and REITS…
Bond Market Message
-after the Brexit vote the ten year Treasury bond went from 1.74% to a HISTORICAL LOW July 8 of 1.36%
as global money flowed into US bonds (bond price goes up and yield goes down) seeking safety—yet the
equity markets also soared to new highs—that is extremely unusual as most often these are negatively
correlated so as one soars the other tanks…all part of the “Uncharted waters” we live in these days
where nobody really knows what lays ahead
-how uncharted you ask—we now have over $13 TRILLION dollars in global bonds that yield LESS than
0%!!! That is where we, the investor, must pay the debtor for borrowing their money!! We have another
$14.5Trillion that yield 0-1% so David Rosenberg tells us that 75% of global sovereign bonds now trade
less than 1% yields!! That is uncharted!!
-nothing in life is free and ESPECIALLY BORROWED MONEY!!! This cannot play out well going forward
and behooves investors to be defensive and cautious!!
-my bet is that we will see soaring defaults going forward as weak companies that traditionally would
never have survived got an extra 1-2 years reprieve because of zero interest rates…but that financial
engineering scheme is now over, I suspect
GOLD Outperforms
-gold continues to do very well as it is considered a “safe haven” during uncertain times (just like bonds
and utilities are) and we all have a good gold % exposure
Earnings and Revenues
-we have seen earnings decline for 6 consecutive quarters and if Q2 is also negative that will be 7—this
is a rarity outside recessions (JP Morgan says recession 81% of the time…)
-so we have the S&P 500 providing a 3.7% average return per quarter since March 09 and yet the GDP
gain has only been 0.9% per quarter…so ya gotta think that the markets are ahead of the economy as
this is the “widest gap since WW2” says Lu Wang at Blomberg’s…to me this screams risk is way higher
than any reward potential…
Global Economy
-business cycle experts ECRI says that the global economy is slowing and that the risk of a global
recession is high
-global trade has flat lined for the last 1.5 years and is “the first time this has ever been known to
happen outside of a global recession” Hedgeye
Banks Often Tell A Story
-ya gotta think if the banks (i.e. lending) are not doing well then the economy cannot be doing well—
here are some mind boggling stats:
-the largest Bank in Italy is UniCredit and its stock is down 94% from 2008 high!!! (and down 71% since
2015 high!!!)—Italy is the third largest economy in the EU and has a massive amount of bonds
-Deutsche Bank is the largest bank in Germany and it is down 89% from its 2008 high (and down 62%
from 2015 high!!!)
-we are nervous on banks as you all know having sold off National bank recently
CONCLUSION
The conclusion for me is logical and “simple”:
#1 always try to focus on selling high and buying low---we are much closer to a high than low right now
#2 always focus on risk vs reward so as to preserve capital ---with this being the second longest bull
ever, and the weakest recovery ever, and we are now seeing consecutive declining earnings---well that
MUST be a time of more risk than reward—so although markets can-will climb higher from here I do not
want this risk for my clients as the reward is too low
#3 and the hardest is to be patient especially if J Grantham is right (often is fyi) as markets climb higher
into August!!
Everything points to us being much, much closer to the top than the bottom, and the bottom this time
around could/should be a long ways down based on history!
We all remain invested (exception are the new clients) yet in a defensive way as has been covered
previously.
Hence--we can all avail of lots of dry powder should our long awaited buying opportunity come our way.
PS--History tells us that after a strong June-July rally that markets are often very weak heading into AugSept, and with a US Presidential Election happening Nov 8 my bet is that we could see a wonderful
buying opportunity in short order?
Terry
ATTACHEMENT TOPICS BELOW
1.
Pitfalls of Negative IR—good read
2.
ECRI on global recession risk
3.
Timing the Market
4.
Optimism piece from Dr James Paulsen
5.
A real look at Banks and earnings
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