My definition of a
free society is a society where it is safe to be unpopular.
MONEY FLOWS TALK
My research is
concentrated on both political and economic analysis in conjunction with
ELLIOTT WAVE advanced technical analysis of the financial markets and
individual stocks. I use many technical indicators, including measuring
changes in money flows moving in and out of stocks, sectors and major indices
because the only thing that can change the price of a stock, commodity or
index is a change in the supply/demand relationship. Therefore, we must
measure the changes in money flows. When money has been flowing into a stock
for many months and then the indicators show that money flow has reversed, I
know that a price top is eminent. It may not be a long-term top because
sometimes renewed money flows come in, such as a large company stock
buybacks, surprising earnings announcements, and or new product or CEO.
SENTIMENT
However, the most
reliable indicator of risk—although not as precise as money flow—is
sentiment. It won’t give you the exact day, week or even month of an
important market turn; I use our other indicators for that. However, it does
give you a great indication when the market is getting very vulnerable (near
a top) or a bargain (near a bottom).
At market tops, there is
almost unanimous bullish sentiment (as what is happening right now). The
biggest money managers, the analysts most featured in the media and the
public are all bullish and declare that the Bull Market will continue for a
long time. Caution is being thrown to the winds. Money managers have
abandoned the practice of keeping a cash cushion in their clients’ portfolios
and are now virtually fully invested.
Why is this bullish
sentiment not positive for the market? The answer is simple: When everyone is
fully invested, there is not much money left to drive stock prices higher.
Daily trading volume shrinks and finally the evidence tells us that perhaps
the environment isn’t as great as first thought and the selling starts. But
money managers can’t buy more stocks at lower prices because they are already
fully invested. Therefore, the decline continues, the selling accelerates as
the protective stops get hit and the bad news items become more frequent.
That is how Bear Markets begin.
What is the
situation now?
Let’s look at some of the
indicators that I and some of my more astute colleagues have noted. The bears
have become an almost extinct species. Everyone is bullish.
The last time I saw this was in 2007, when I published my ALL OUT SELL
SIGNAL, which predicted that 2008 would see a monumental global credit crisis
and stock market crash.
- The
Investors Intelligence survey of investment advisors shows only 14.1%
bears, the lowest since the 2007 bull market top. A huge 59.6% are
bullish. Such numbers are rarely seen, and are indicative of an
important top dead ahead. The ratio of bulls to bears is the highest in
11 years.
- The
AAII (small investors) shows the percentage of bulls at 55%, a number
only exceeded once in this last four year.
- The
NAAIM (active money managers) indicate that their members are 98%
invested; the highest on record.
- In
2013, we saw the most IPOs since 2007 when the big Bull Market topped.
Big new IPOs, like Hilton, indicate that the insiders are exiting by
selling their stock to the less informed public and money managers.
- Chinese
IPOs are back on Wall Street. Greed has now overcome the stink of fraud
in Chinese firms traded in the US. Even many of the big US hedge fund
managers, who had lost hundreds of millions of dollars, are ready to
jump back in.
- Some
of the top performing stocks in late 2013 were selling at astronomical
valuations. Some like Twitter have no earnings at all for the
foreseeable future. This is like the boom going into March 2000 before
the dot.com bubble burst. Twitter is selling at 66 times sales (NOT EARNINGS).
- We
are hearing once again from analysts in the media: “The greatest
danger is being out of the market.” That statement has always
struck me as being ridiculous. The way to make money in the markets is
by buying when risk is low, i.e. when stocks are depressed, and selling
when stocks are very high. After a four year Bull Market and last year’s
big performance, I ask you, “are stocks high or low?”
- Investors
are rushing into stocks like Twitter “because they don’t have earnings,”
as Bob Prechter’s latest Elliott Wave Financial Forecast points
out. He predicted this would happen as far back as last October
and reminded us that this happened in late 1999-early 2000 before the
crash. He also refers to the wild forecasts about how high the market
will go, reminiscent of 1999-2000 when books predicting DOW 36,000, Dow
40,000 and higher were on the bestseller lists. Instead, the markets
collapsed. We are once again seeing such wild forecasts. Very few
recognize that on an inflation-adjusted basis, the market today is still
far below the year 2000 top.
- When
you watch financial television, do you see anyone who is bearish on the
market? They refer only to doctored US economic fundamentals, but
totally ignore the big credit crunch in China that will infect all of
Asia and completely ignore Europe and never mention emerging markets or
Japan.
- “NON
Securitized car loans” are being sold to investment
funds just as subprime home loans (CDs) were sold to investors leading
up to the crisis in 2008. Such loans are packaged in pools and
participations are sold around the world. The car loans are worse than
home loans. Anyone who is breathing can qualify for a car loan now. Just bring a utility bill and your
driver license.
- There
is also a new boom in “covenant light” debt. Usually
when bonds are sold, there has to be some collateral and compliance with
minimum financial ratios. With “covenant light,” these requirements are
kept to a minimum. Such sentiment, which says “ignore risk”, is like
2007, which imploded. Only this time Muni Bonds are also involved.
- Margin
debt in stock portfolios is at a new, all-time high, just as it always
is near or just before a major market top. Sentiment is that it would be
easy to reduce the debt if the market reverses. That’s what they thought
in 2008, but the implosion was too fast. We also have speed Trading to make sure most can’t get out.
If you remove the
earnings of financial firms in the S&P500, there would have been no
earnings growth in 2013. Furthermore, much of the rise in the indices has
been produced by stock buybacks. That’s when companies buy their own stock
from the open market place. It reduces the number of shares outstanding and
boosts the earnings per share. It also boosts the stock price, which benefits
management who has stock options. Therefore, can we surmise that the stock
market’s rise is based on questionable assumptions and heavy bullish Wall
Street rhetoric? The “distribution” process seems to have already started;
that’s when the big, smart money managers that includes the proprietary
trading of the large Wall Street firms, sell even while the stock indices are
rising. After all, they can’t sell huge blocks of stock in a declining
market.
Bottom line
There are many other
measures of sentiment. Suffice it to say that everything indicates excessive
bullish sentiment normally only seen near important market tops. That means
most of the available money is invested. What is left to drive stocks up? It
doesn’t necessarily predict a top this week or next or even next month. But
it does say that the market is very very vulnerable.
Other advanced technical
indicators will give me the specific timing. Over the past 40 years, they
have allowed me to predict every Bear Market, often calling the market top
within a few days. Stay tuned. There will be some very exciting but dire
times ahead.
GOLD AND SILVER
1. Tom
Fitzpatrick: “The Gold Market May Be Setting Up to Crush the Shorts”
2. David Stockman
- Terrifying
Financial and Economic Volcano – and Ukraine”
- We
Will See a Massive Selling Panic in Stocks”
3. John Ing:
“A Surprise that may send the Gold Market Soaring within Weeks”
Why Are Stocks
Rising? The Bernanke Legacy
During 2013, many smart
analysts and money managers voiced their puzzlement of why the stock market
continued to rise in spite of the lack of revenue growth of most companies, a
stagnating economy and looming problems coming due in 2014. I opined that it
would have been more productive for analysts to just “go with the flow” and
head for the golf course each day rather than to do tedious analysis.
Let’s look at the possible answer to the above question. This year,
companies have been buying lots of their own stocks. That has been a major driving
force in this rally. Just about every other big investment group has been a
net seller this year. Until May this year, $286 billion of buybacks had been
announced. That’s up 88% from the same period last year, according to Birinyi
Associates. They stated that at that rate, buybacks will exceed the record
set in 2007.
Bill Gross, founder of
PIMCO, the largest bond manager in the world, puts the amount of buybacks at
$1 trillion per year over the past five years. “The U.S. economy –
thanks to the Fed – has been operating a $1 trillion share buyback program
nearly every year since late 2008, buying Treasuries but watching much of
that money flow straight into risk assets and common stocks instead of
productive plant and equipment.”
My goodness! If X can’t
grow revenues any more, if X company’s stock has only gone up because of
expense cutting and stock buybacks, what does that say about the US or many
other global economies? Has our prosperity been based on money printing,
credit expansion and cost cutting, instead of honest-to-goodness investment
in the real economy?
The Web site Zero hedge.com states on the subject: “Nearly every other big player
(other than buybacks) in the stock market has been selling more than they’ve
been buying. Pension funds have been selling. Local
and state governments have been selling. Investment
brokerages have been selling. And, yes,
until recently, even Main Street investors.”
Yes, it’s a shocking
realization. I have not verified Bill Gross’s number, and in fact it’s much
higher than that of Birinyi. I believe it’s more like $1 trillion over five
years, not per year. Furthermore, I don’t know if they counted “announced” or
actually executed buybacks. But even $1 trillion over five years is an amazing
number. It’s an incredible thought that the driving force of the Bull Market
in stocks may have been these buybacks. It has important implications for
investors.
The Fed has not only been
the great ‘enabler’ of the Bull Market, but also of Congress’ big deficit
spending. Without the Fed buying up all those
Treasury’s that no sane person wants, Congress would not have been able in
running up the deficit. The limiting factor would have been the ability to
sell the US Treasury securities around the world. With the Fed buying almost
all that is offered by the Treasury, there is no reason for the politicians
to stop spending.
Currently, the Fed buys
80% of Treasury Securities. Next year, it’s estimated to be around 120%. In
other words, the stockpile of Treasury’s in investors’ portfolios would
shrink. Imagine, the Fed does all this with freshly
created “cyber-money.” This is a big game changer in the 100 year history of
the Fed. And that is the Bernanke legacy.
The buybacks have been
enabled by the Fed’s ZIRP (zero interest rate policy). It doesn’t make sense
for the companies to put hundreds of billions at less than 1% interest in
CDs, money market funds, etc. Therefore, companies buy their own stocks.
Why is that a better
investment? If you own the shares, like management or big investors, it’s
great. Buybacks reduce the shares outstanding and thus increase the earnings
per share even if there is no real increase in profitability for the company.
Therefore, stock prices rise, as we saw this year. It’s a beautiful game.
At the same time,
corporate insiders, i.e. top executives, have engaged in massive, record
selling of their own stocks. Could it be that another reason for the buybacks
is to enable insiders to sell at better prices? Someone should write a book, “How
to make billions in stock profits without any performance gains in the
company.” The above would explain rising stock prices and rising
earnings per share while sales are disappointing and even declining for many
firms.
Therefore, we must
ask, what happens when these buybacks stop? Or, what would cause them to
stop? Perhaps, buybacks would slow if the economy picks up and the
money can better be used for expansion. Conversely, if the economy worsens,
there will be more buybacks to support the stocks, possibly helped along with
an even greater QE by the Fed. Thus we have a situation where a bad
economy would be better for stocks than a stronger one. It’s a fact that the
largest number of such buybacks don’t occur at market bottoms, when stocks
are cheap, but closer to market tops, when they are expensive. Billionaire
investor Carl Icahn wants to push Apple AAPL +0.62% into doing a big buyback,
presumably so he can get out of his APL stock holdings. Companies are sitting
on piles of cash and can’t find any other way to use it. Expanding their own
business apparently isn’t attractive in today’s slow economic environment
where local, state and federal government policies are making business
increasingly less attractive.
Buying Back your own
stock makes a Company weaker not stronger. They would be better of to buy
GOLD with their excess cash.
Some members of Congress
want to reduce corporate taxes because an increasing number of US firms are
moving their headquarters offshore. Congress should hurry. If the US had a
15% corporate tax rate, companies from around the world would locate here. It
would create a hiring boom and a strong economic recovery. But don’t hold
your breath for that to happen. The people in Washington can only think about
higher taxes and punishing entrepreneurs. What they call THE RICH.
Many politicians,
economists, and top Federal Reserve people express puzzlement that the US
economy is having the weakest post-crisis recovery in history. Blame the
universities that only teach Keynesian economics and the many alleged but
false benefits of Socialism. To get the economy moving would be so easy. It
would not only create jobs, but also significantly reduce the growth of the
Federal budget deficit.
Teaching Austrian free
market economics at the universities would be the first step to properly
educating future politicians. But that can never happen. The Social Science
Department are all firmly in control by “TENURED”Socialists, Communists and
so there is no chance in hiring a conservative professor, even if you could
find one, let alone change the direction of any department. Summers was fired
as President of Harvard because he was not far enough LEFT.
Ben Bernanke’s successor: With Janet Yellen, we will
end up with just a lot more of the same. She WAS PROBABLY SET UP TO END UP
being the bag holder.
HOW NOW DOW AND
GOLD
Sorry, but I could not
discover a clear reading for Monday’s opening except to say that the TREND
for both the US Stock Markets as well as for Gold and Silver remain POSITIVE
regardless of Monday’s opening. I am not convinced that the March 7th
decline in stocks or the rally in Gold and Silver is the start of the BIG
MOVES that I have been anticipating; primarily because they consisted of a
lot of overlapping Waves and that is not how major moves start. As you all
know, you never get multiple chances to get in at the lows (or out at the
highs). Major moves that will last for awhile always start with impulsive
Waves that one has to chase to get in. So I am expecting one more substantial
correction before the REAL thing arrives. For the time being, keep your
powder dry and wait for your opportunity. I am expecting one more
manipulative move to the upside for stocks, possibly to new highs (above DJI
17,000) and another desperate manipulated attempt at a selloff in Gold and
Silver perhaps to new lows, but given the international situation, I would be
looking to buy somewhere above their recent lows. Make your buy list and be
ready to pounce. Once the low is made, my upside target for Gold is $2,500 to
$3,000 before year end. So don’t worry too much about catching the low. How
much you might over pay will be peanuts compared to the profit potential of a
resumption of Gold’s Bull Market. Remember, my long term projection made in
2005 is still $6,250 Gold by 2017. Even though Silver may at times seem like
it’s not cooperating, it will still out perform Gold percentage wise.
YOUR PATIENCE WILL SOON
BE VERY WELL REWARDED.
********
GOOD LUCK AND GOD BLESS
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This letter/article, like all my others, is for education purposes only
and is designed to help you make up your own mind; not for me to make it up
for you. Although I include recommendations from time to time, being a
bi-monthly publication, it is not meant to be a trading letter. Only you know
your own personal circumstances, so only you can decide the best places to
invest your money and the degree of risk that you are prepared to take.
