Financial Intelligence Report
2/22/17
Is It Safe?
Monday I was pondering a topic for the International Forecaster. It's a publication that was started by the late great Bob Chapman. I continue to donate articles to it to this day. As I was watching the futures, despite our own market's being closed for Presidents day, I decided to share some thoughts that I shared with my readers last week....
Let's suppose you understand everything that's wrong with this market. You know that companies have borrowed money to buy back their own stocks. When there's less stock in the "float" the Earnings per share gets a boost since there's less shares out there. Then you also know that companies have sold corporate bonds, again to buy up and shrink their float.
Let's say you know about the central banks that have been buying stocks. This is a relatively new development. 20 years ago, virtually no Central bank would be caught dead buying stocks. Today most of them do, and they can print money out of thin air. Let's also say you know that all the QE we did was done as Fed head Richard Fisher admitted to....to increase the wealth effect. Let's also suggest that you know a lot of stocks have moved higher than they should because of enormous margin debt loads.
Let me stop there, although I could go on.
There's a dozen reasons that the market is higher. Very few of them are for the age old fundamental reason... meaning expanding revenues ( sales). 90% of our market rise is financial engineering. Pro-forma ( non GAAP) accounting, buy backs, QE, CB's buying stock, etc.
I can give you explicit, in your face, FACTS that show the market is wildly overpriced, with the S&P's price to book at insane levels. (over 3x)
YET it is at all time highs. Despite all this mumbo jumbo, despite knowing that it's all manufactured and fake...the fact is that the market is at all time highs.
It creates synaptic misfire's in old dinosaurs like me.
In years gone by I'd study balance sheets and sales patterns. We'd buy companies that were growing organically, with expanding revenue growth and low production costs. Today all that goes out the window. Companies can create their own financials. Virtually all the so called "earnings beats" come from "NON-GAAP" reporting. What's non GAAP? It's masterpiece theatre. Science fiction. It's make believe. It's "mark to model" instead of mark to market.
Just this am, I saw this headline...
NORWAY GOVERNMENT TO RECOMMEND THAT WEALTH FUND SHOULD RAISE ITS SHARE OF EQUITY TO 70 PCT OF ITS PORTFOLIO -NORWEGIAN NEWS AGENCY NTB
In Norway, they take their oil revenue and place it in a "wealth fund" that they use for social programs etc. Now they want to increase the share of that fund to 70% in stocks. Do you understand the immensity of that? That fund is 870 BILLION dollars. They own 3 billion in Blackrock, 3 billion in JNJ, 4 billion in AAPL, 3 billion in google, etc.
Now they want to hike stock exposure to 70% from 58%
Let's say they do that. Let's say that next month they're "in the market" buying. Despite stocks being artificially high, are they going to "hold off" and buy on weakness? Probably not. They'll do what Japan has done and the Swiss national bank has done. They'll simply buy at market. Price consideration be damned.
My point behind all this is simple. The market doesn't belong "up here" in fundamental terms. But it is up here, and all the things that got it here "can" continue. The ultimate underlying question is "will it?" What's to stop the Central banks from printing and buying more? What's to stop the Bank of Japan and the Norweigan's from going to 100% stocks in their funds? What's to stop Draghi from increasing QE instead of cutting it? What's to stop companies from doing another trillion in buy backs?
But because what we're really talking about is a form of a ponzi scheme, we know that at some point something goes wrong. At some point in every ponzi, the wheels fall off.
So we're 8 years into this particular ponzi. Can it go 9? 10? Or do we wake up one day next week and find that an over leveraged multi billion hedge fund blew up and their counterparty claims are rippling around the world crashing markets?
That is the very danger we face here folks. Being in long term hold vehicles is going to work...until it doesn't. The problem is we can't time the "doesn't"... it could be a week, a month or 2 years.
That is why I'm being very skeptical of this latest push since the Election. Yes up is up and we're "Trading" this up. but we're not "investing" in this up. We're not buying stocks and putting them on a shelf thinking we'll look at them in 3 years and be rich.
For the next several months, my plan is to observe, catch the waves and try and find the loose wheel on the ponzi train.
If we were to get a truly huge market crash, something similar to 2008, then by all means I'd be all over it with mutual funds, 401K's and ETF's to buy and hold. But way up here? Uhm...no.
And just why is that? Well, we have to think about the wide spectrum of people. Most people have some form of a 401K or IRA. Well, when they first came out, my wife opened one at the Medical facility she was working at. It was FUN! I'd go on line and move that puppy around like I was daytrading. I'd have money in say an emerging market fund for a week or two, then pull that and go long an "American growth" fund, and then maybe back out to a high dividend fund for a while. It was no different than doing short term swing trades and frankly, I liked it.
But Wall street didn't like it. Wall street hated the idea that people weren't just putting their money in funds and leaving it there to be played with. Company plan admin's didn't like it because it made their revaluations harder. So over the years, they kept tightening the amount of times a month you could move money around. Then some started to go to "once a quarter" Some went to just 2X a year.
The law by the labor department says you should have the ability to move your investments around at "least" once a quarter and many have adopted that. Well, that's problematic isn't it? Let's say the quarter is April, May, and June. You move a lot of money from say a money market, or a bond fund into stock funds on April 4th. Then all hell breaks loose, and the market takes a wallop.
You can't get out for 3 months. Day after day you're seeing things plunge and yet you can't do anything about it. That my friends is a scary thought to me. Which is why I tend to be very shy about 401K investing. Yes it's great if your employer is matching your donations and I think you should take advantage of that. But you also have to consider some things.
We "trade" the market a lot. I'm in things for a few days to a few weeks. My "goal" is 3 - 5% on a trade. They don't always work, and sometimes they work great. But I AM in control. If I buy something Monday because it looks like a great breakout working, but by Wednesday it's clear the breakout was failed, I can just "hop off". Likewise if I buy something because I think it has 5% in it, and 3 weeks later I'm up 10%, well Great!
I can't do that in a 401K that only allows quarterly adjustments. So, I tend to be pretty protective of that money. I NEVER put 100% in stock funds. Ever. I Always keep at least 10% in cash and maybe (up till now anyway) 10 - 20 in bond funds. But as far as deploying it...you have to think long and hard about your timing.
Heading into mid 2007 we moved our entire 401K into mutual funds and bond funds. We caught a bit of hell from folks as the market moved higher and higher. But then something happened. Right around December the market started falling and it didn't stop. We felt that the housing bubble had run its course and we were ready for a fall... and boy did we get it.
On the trading side of things, we did great. We shorted financials, played inverse ETF's on the banks, bought put options, etc. It was our biggest trading "take". The 401K sat there, safe as bonds actually rose and the money market just sort of sat there. But we didn't LOSE anything. Not a dime.
When 2009 rolled around we started scaling back in. I will readily admit I should have been more aggressive, but I was having a problem. None of the problems of the market were fixed, they were simply covering them up with freshly printed dollars. ( a problem that remains till today) But we did catch the lions share of the run up, and ultimately went back to sit in cash to wait out the next plunge.
Well it didn't happen. It was "supposed" to happen when Trump got elected. It started to happen that very election night as the futures plunged 1000 points and everyone was screaming the end was here. But no...it's been pushed to all time new highs. Does it stink that I didn't have the 401K deployed as the market soared after Nov. 8th? You bet. But again, too many years of playing in this game kept whispering in my ear "this is manufactured. Do you really want to be trapped in your 401K for a quarter, when this market is rising for all the wrong reasons??" The answer was no. And frankly it still is.
Now, if their game plan is to push this market as high as they can for another year or more, then obviously sitting on the sideline watching it run without you is painful. Yet it isn't nearly as painful as "buying the top" of a falling market. So, which one is it? Are we flirting with a market that's topping out as we speak, or do the powers that be have a plan to send us ever higher?
That's the question you all have to work out for yourself. Right now I'm in the camp that suggests that if they can't get Trump out of office via impeachment ( and they're trying believe me) are they really going to reward him with an ever rising market? That doesn't make sense. So for now I'm going to remain parked in the 401K on the sidelines until we get a bit deeper into this year and see where things stand.
Let me finish with this... we originally had two 401K plans. We took the bigger one and liquidated it many many years ago and used it to buy physical gold. I truly wish I'd have done that with both of them. But I didn't and we still have it. However, looking around at the state of the real global situation, the debt loads, the "bail in's" the manipultions, etc....I still don't think it's a bad idea. Always remember that the only thing you have with a 401K is a statement ( usually digital now) that says you have "X" money in some account. What if one day you woke up and that statement said "0?" What if the system froze up? Crazy talk you say? Ask the People of Cyprus about that. Depositors that had over 100K in Cyprus banks woke up one day to seeing up to half their money "gone". Gone to pay off the banks debts.
Are we that much better than Cyprus? Ponder that.
The Market...
Monday we were closed for Presidents day. But that didn't stop the markets around the world from rising. Heading into Tuesday the futures were looking up big again, and sure enough the market put in yet another day of "all time highs". I think that makes 27 since the Election.
That's pretty heady stuff right there. I want to quote something I wrote back on January 18th in these pages....
What if they jam the market higher on the Trump inauguration, sort of like they did with the election last year, and we get that run over DOW 20K? Well that would probably suck in a lot of money from the sidelines, and give us a "last hurrah" push as everyone tried to get in the "all new highs".
Well if that does happen, I wouldn't be surprised to see what ever highs we hit to be "it". In other words lets say we bust 20K, all manner of folks pile in, and in a month we're up to 21K. I wouldn't be surprised at all to see that mark something of a significant top and we roll over and down from there, into a pretty deep correction.
So here we are a month after the inauguration. We busted through DOW 20 K and we're flirting with DOW 20,750. We are 'in" my "last hurrah rally". The only question on the table is when does it stop? The funny part of this, is that some of the truly brightest people in finance have already said "no way, this is a bubble, etc," Folks like John Hussman and his like, have pulled away from this market. Yet it continues to go up.
As Benjamin Graham observed decades ago, "Speculators often prosper through ignorance; it is a cliche that in a roaring bull market, knowledge is superfluous and experience is a handicap. But the typical experience of the speculator is one of temporary profit and ultimate loss."
And so it goes. Are we in a bubble? You bet. You can't justify this run up no matter how many circus Cramer's you parade on Bubblevision. Yet what's the market doing? Going up. I know it shouldn't, you know it shouldn't. And it does.
In our Insiders Club we suggested that today we might end the day just slightly red, we called it "pink". I won't take a victory lap because while the S&P did end the day slightly red, the DOW eeked out a 30 point gain. But my my, look at the volume again. Barely 61 million shares of the SPY traded.
So if you read the commentary section, you know where our head is at. We're walking on eggshells with short term trades because we're so very over extended. A couple of the short term trades I'm in are FISV, AXP and CSOD. They're all up for us, but nothing to write home about. The trend lately is to jam the big names higher, then they pause then jam them again. You know the names, JPM, MMM, AMZN, GS, etc. That's fine...until it isn't. When that pause day turns into a rout. And worse...there will be one.
So venture forth with caution folks. I'll see you all Sunday.
AI
