The Stock Market
As we have occasionally mentioned, it is often hard to fathom why sell-side analysts exist at all. After all, in a bear market you don’t want them, and in a bull market you certainly don’t need them. However, as Brett Arends informs us, there is a sure-fire way to make a lot of money from analyst recommendations: at the beginning of the year, simply make a list of the 10 stocks they hate most, buy them in equal weightings and watch your net worth soar. Easy-peasy.
Below is a chart of three stocks that inhabited the “10 most hated” list at the beginning of 2014 – they returned 30% or more each (dividends included). The entire list returned 19%, beating the S&P 500 Index by one third, and featured just one loser (DE), which lost a mere 1%.
Three exceptional performers from the 2014 “10 most hated by Wall Street analysts” list, returning 30% + each over the year, including dividends – via StockCharts, click to enlarge.
Still “Patient”, but too Upbeat for the Stock Market
As a look at the WSJ’s FOMC statement tracker reveals, the Fed currently sounds quite upbeat about the US economy. Given that organs of the State are usually the last to recognize a trend (in this case the trend of a subdued, but better than elsewhere US economic performance), this should be taken as a warning sign that the trend may be close to reversing.
There was only one word for liquidity junkies in the statement: the term “patient”, in the context of the widely anticipated, but continually postponed, rate hike. While the Fed ponders rate hikes, US macro data have begun to weaken rather noticeably of late. Not to an extent yet that would be worrisome, but they offer a strange contrast to the upbeat FOMC statement. Also, the Fed keeps stressing that it sees the recent collapse in inflation expectations as “transitory” (it may well turn out to be), again removing a reason for waiting much longer with a rate hike. Meanwhile, central banks from Canada to Singapore are cutting their administered interest rates, or are adopting a dovish stance (New Zealand, Australia), or are engaging in outright money printing (ECB, BoJ). Bond yields keep plummeting all over the show, including those on treasuries, which benefit from still offering a sizable spread pick-up in today’s world of ZIRP, NIRP and negative yields on government bonds.
Taking Full Advantage of Winners
Investors returned from a three-day holiday and found stocks and gold right where they wanted them. Neither registered any change. So let’s return to the nuts and bolts of investing…
Take a look at your portfolio. Imagine how much better off you’d be if all those 50%… 60%… 80% losses were removed. Unless you’re a true “deep value” investor, and happy to ride out these drawdowns, you could do that by using a trailing stop. That’s the easy part.
“More important,” says TradeStops.com’s Dr. Richard Smith, “is that trailing stops allow you to take full advantage of your winners.”
You buy a stock. It doubles. What do you do? Many investors would sell, feeling that they had made a good profit. Why be greedy?
Often, they then watch as the stock goes higher and higher, as they sit on the sidelines grousing about having gotten out too soon. Old-timer Richard Russell, of Dow Theory Letters fame, tells the story of how he invested in Buffett’s Berkshire Hathaway in the early 1970s.
The stock doubled and he sold. He has been kicking himself ever since. Class A Berkshire Hathaway shares, which Buffett bought for $11 in 1962, are now worth $222,636.
It’s Tough to Make Predictions, Especially About the Future
Markets were closed in the US on Monday for Martin Luther King Jr. Day. So, today, we really are going to talk about stop losses.
Mathematician Dr. Richard Smith, who runs TradeStops.com, was kind enough to visit us in Nicaragua and allow us to buy him a drink or two. He explained how they worked. And he told us about how he’s made them work even better.
“The world is much more uncertain than people think,” began the man with a Ph.D. in the subject.
“There are always far more potential outcomes than you can imagine. So, you’re going to be wrong about the future more often than you will be right.”
We have demonstrated that often enough ourselves. We needed no more proof. But Richard wouldn’t let up:
“Just look at the price of oil. There must be thousands of analysts and economists following the price of oil. Do you remember a single one forecasting $40 oil?”
Warren Buffett: plays the Ukulele and has so much money he doesn’t need to worry about stops. Not to mention, when push comes to shove, his portfolio is also prone to becoming the beneficiary of bailouts, as demonstrated in 2008.
Photo credit: Dexter Shoes
Trends Can Change …
We saw the old year out in business class on Air France. We feted it with champagne and woke up in 2015 thinking about you. Many dear readers wrote to offer best wishes for the New Year. Others wrote with compliments on our book or new newsletter. Thanks to all… and best wishes to you for 2015. We hope to help make it a good year for you.
Often, readers accuse us of “negativity” or “excessive pessimism.” Typically, they also ask for “solutions.”
Perhaps the beginning of a new year would be a good time to address the issue. Chris presented a list of possible market surprises in 2015. Although oil at $40 a barrel and gold at $1,000 may sound shocking, for the most part these trends are already under way.
Trends continue until they end… which often takes many years. “More of the same” is usually what happens. But that doesn’t make it the best bet. The best bet has to take into account the consequences of being wrong. That’s where the negativity comes in.
The stock market may continue to go up in 2015. Investors may continue praying to Saint Janet, with positive results. US economic growth may continue.
But what if they don’t?
Photo via Wikimedia Commons
CPI and the “Wealth Effect”
In Poker, to go all in means to bet everything you have. I do not think it is an exaggeration to say that, at least so far as the mainstream audience is concerned, we gold advocates have gone all in. We have made one argument: we should adopt the gold standard, because inflation. By inflation, it is generally meant rising consumer prices (this is not my definition), again at least so far as the mainstream audience goes.
It’s true. Prices have been rising relentlessly since the Federal Reserve Act of 1913. We certainly have made the argument that inflation happens in paper money, but not in gold. I think most people believe that, despite the obfuscations of the diehard apologists for the Fed.
I think people care about inflation—but not that much. People who work for wages mostly get mad at their boss for not giving them a big enough raise. People who are retired on a pension mostly get mad at the politicians for the same reason. They complain that the cost of living adjustment is not enough.
What about the rich? This graph explains why the rich are not at all unhappy.
Purely Technical Conclusions
In the past, Rick’s Picks has shunned year-end predictions because there are far too many variables to handicap accurately. I’ve decided to take a crack at it anyway this year because I was curious to see what conclusions purely technical analysis would yield for some widely followed issues.
I’m no seer, just a chartist, and I’ll say up front that the question of whether the Dow Industrials are trading at 23,000 at the end of 2015, or at 14,000, is probably no better than a coin-toss bet. Also, because the stock market is a house of cards and only distantly connected to economic reality, only a fool would try to predict the timing of The Big One that we all know is coming.
Stocks could collapse at any moment, to be sure, and although I doubt this will occur next year, the odds are hardly remote. If you absolutely need to know when calamity will strike, I recommend checking the year-end predictions of Bob Prechter, Martin Armstrong and Ross Clark, since they are the very best timers in the guru world.
Rick Ackerman’s stock market picks with the most bullish, most bearish, and “outrageous” target price alternatives
A Brief Update of Rydex Ratios
There is no need to say much to this, except to state that the Rydex ratio indicator has reached fresh heights of absurdity … almost 25 times more assets are now invested in bull & sector funds than in bear funds. This is a full seven times more than at the peak in early 2000, and frankly, at the time we thought we would never see such data points again. As we noted in a previous update already, the recent surge in the bull-bear ratio could only be achieved with sizable inflows – price gains alone cannot possibly explain it. We conclude that everybody was, or rather remains, absolutely certain that the market will rally into year-end and beyond, because that is what it almost always does.
Naturally, no-one has ever seen the market decline sharply in December (although a few major market peaks have indeed occurred in early December, but even that is rare), not least because the last time it happened was exactly a century ago, in 1914. At the time it was decided to simply close the exchange for a few months instead of risking even more carnage. Meanwhile, the “war to end all wars” was raging and laid the foundation for another, even bigger war.
First a look at the leveraged Rydex ratio (comparing assets in leveraged bull vs. leveraged bear funds). This particular ratio has just pulled back a bit from the record high recorded less than two weeks ago:
New York Lumberjacks
It’s cold here in Manhattan. We’ve never lived in New York. And every previous visit had left us unenthusiastic.
The city is not pretty … at least not compared to Paris. And Lower Manhattan always seemed gritty, dirty and unkempt. Like a homely man or a homeless woman.
But a lot has changed. New York is now full of foreigners. Enter our hotel lobby and you hear a din of strange and familiar accents: English, French, Russian… and many we’ve never heard before (We make a small contribution to the cacophony by taking Portuguese lessons in the tearoom).
Soho is full of young people – often dressed in country duds. Almost all the men below 40 have facial hair. One man at a fancy restaurant we were eating in wore a plaid shirt and had a full beard. He looked like a lumberjack.
“That’s the style,” said our 26-year-old son, Jules. Here on the Bowery the pace is fast… and there are new shops, luxury stores and chic restaurants on every street. Just a few blocks away is Wall Street. Thanks largely to the feds, more and more of the world’s wealth runs through the US financial industry.
He’s a lumberjack and he’s OK … (non-NY lumberjack)
Screenshot taken from Monty Python’s ‘Flying Circus’
Still too Much Debt
A faint breeze blew through the US stock exchanges on Friday. A few leaves fluttered. But Diary readers want to know: When is the next hurricane coming?
Alas, we get the newspaper no earlier than anyone else. It always has yesterday’s news… not tomorrow’s. That leaves us wondering and guessing and trying to figure out what comes next.
The storm that raged in 2008 was fundamentally deflationary. It was so predictable that we didn’t need tomorrow’s headlines; the weather forecast was obvious.
After decades of taking on debt, Americans started to stagger under the weight of their debt-service costs. When house prices fell, their knees buckled and their backs broke.
Households cut spending and reduced borrowing. But they are still heavily in debt. In 1971 – before the big credit bubble began inflating under the new fiat currency regime – American households had $5 of income for every $4 of debt.
Now, for every $5 of household income they have $12 of debt. That’s down from the “peak debt” of 2007 – at $13 for every $5 of disposable income – but still much more than the historic average.
Household debt-to-income ratios of US and Canada (Canada’s housing bubble hasn’t burst yet, hence the divergence in trends) – click to enlarge.
The River of No Returns
E-commerce giant Amazon.com has raised $6 billion in debt financing. Investors readily throw their money into the River of No Returns.
Lenders are demanding a yield of 3.8% for Amazon’s 10-year bonds. That’s 150 basis points over the US Treasury’s 10-year borrowing costs. (A basis point is 1/100th of one percentage point.)
Amazon’s bond buyers worry neither about the return on their money nor the return of their money.
Holders of the company’s stock are even more sans souci. If you look up Amazon’s P/E ratio, you’ll find it listed as N/A – for “non-applicable.” That’s because the company is losing money.
After 20 years, Jeff Bezos’s online marketplace has never learned how to make a profit. The last quarterly report showed it with losses of about $1 a share – or about $2.50 on every hundred dollars of sales.
Photo credit: Amazon.com
Positioning Indicators at new Extremes
We are updating our suite of sentiment data again, mainly because it is so fascinating that a historically rarely seen bullish consensus has emerged – after a rally that has taken the SPX up by slightly over 210% from its low. Admittedly, a slew of such records has occurred in the course of the past year or so, and so far has not managed to derail the market in the slightest– in fact, since 2012, only a single correction has occurred that even deserves the designation “correction” (as opposed to “barely noticeable dip”).
While a number of positioning and survey data show a bullish consensus that easily dwarfs anything that has been seen before, this consensus is not reflected in expressions of exuberance by the broader public. “Anecdotal” sentiment seems more cautious and skeptical than the quantitatively measurable kind. Most likely this is because the vast bulk of the middle class has been so thoroughly fleeced in the last two boom-bust sequences that it finds itself in dire straits in spite of the reemergence of major asset bubbles across a wide swathe of assets. This includes by the way an astonishing revival of the bubble in real estate prices – see e.g. this 330 square foot shack in San Francisco, which recently sold for $765,000:
Yes, that tiny dark-brown thingy situated on a steep road sold for $765,000. The real estate bubble is back.
(Photo credit: SFARMLS)
Sentiment on Stocks and Ratio Charts
Below is a brief update of a few stock market related data points we frequently discuss in these pages. Sentiment on stocks continues to be a mirror image of the gold market. Investor complacency is quite pronounced, to put it mildly.
The first chart shows Rydex ratios – with bear assets throughout 2014 stuck at historical lows, the bull-bear asset ratio has recently hit a new record high above the 20 level (i.e., 20 times more Rydex assets were invested in bull and sector funds than in bear funds). This is incidentally quite a distance from the (then) record highs set in February-March 2000.
The second chart shows HYG, the HYG-SPX ratio and the TLT-HYG ratio. The most important takeaway from this chart is that the underperformance of high yield bonds relative to big cap stocks has reached a new annual extreme. A history of past occurrences of this phenomenon was recently shown at Zerohedge. Obviously, the lead times are highly variable, so this is not a timing indicator, but it certainly is a warning.
(Photo credit: fmh)
Keep it Simple
We began buying gold in the late 1990s, when it was still cheap. To illustrate just how cheap it was, for a brief moment in 1980 you could buy nearly all of the 30 Dow stocks for just 1 ounce.
By 1999, the Dow had risen so high that you would have needed 43 ounces to perform the same trick. At this point, you could scarcely go wrong buying gold and selling stocks. Stocks were expensive; gold was cheap.
We are too lazy to do real stock research. And we are too inattentive for trading or meticulous timing systems. We don’t aim to beat the market. “Live and let live” is one of our market mottos.
Here’s an easy way to do it – a refinement of our Simplified Trading System (STS) described in previous Diary entries. You are either in stocks. Or you are in real money – gold. You buy stocks when they are cheap. You sell them when they are dear.
And you use roundish numbers to make it easy. When the Dow components are selling for 5 ounces of gold or less, you buy the Dow. When they are worth more than 20 ounces, you sell.
200 years of the Dow-gold ratio, via sharelynx – click to enlarge.
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- The Lunatics Are Running the Asylum: Draghi's Money Printing Bazooka
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- In America, Government Pays You Interest. In Switzerland, You Pay Government.
- The Swiss Franc Will Collapse
- The Ph.D.’s Guide to Avoiding Big Stock Market Losses
- The Beginning of the End for the Credit Bubble?
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