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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.
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