Today's Market
by Dr Invest

Ouch! Ouch! Ouch! say's Wile Coyote. Known for his scheming which always results in the ultimate fail, he races to the next opportunity to fail once again.  This circus of comedy is unfolding right now in our stock market. Here is some of the genius advice being offered by wall street and the news media:

Don't panic... uh, don't panic.... remember that you are a long-term investor. Just stay where you are. The Federal Reserve has been able to establish stable growth after spending FOUR TRILLION DOLLARS and you can trust that they will spend four trillion more to insure that your investment is safe. (This is Wile Coyote kind of thinking!)

Here are some actual quotes:

Still, despite the grim scene across global equity markets, many market participants see opportunities for those willing to ride out the storm.

Peter Kenny, chief market strategist at Clearpool Group, agreed as well, saying in a letter to clients Monday the he remains "positive" on U.S. equities overall.

El-Erian echoed that sentiment, noting, "this sharp downturn will eventually create interesting opportunities for investors. (Another Wile Coyote misquote by the news media to make the sell-off seem insignificant.)

When El-Erian was asked about the falling market today he said: "the selloff will continue until one of two things happen: emerging markets put in place a policy circuit breaker or prices fall low enough to bring buyers back. How low? Low enough means a lot lower than here because they've been inflated well beyond fundamentals by central bank policies, so in order to bring people back in you've got to overshoot the fundamentals on the down side to induce people back in. We are still well above what would be warranted by fundamentals. There has been this enormous faith in central banks, and that faith in central banks means we have borrowed returns and growth from the future, hoping that central banks will be able to hand off to higher growth. That has not happened."

What I am Trying to Prove

The news media and wall street brokers are telling you what you want to hear. They are slicing and dicing the information and providing the private investors with pieces of information which would make it appear that great investment opportunities are ahead. It is true that great investment opportunities are ahead and that a downturn will create interesting investment opportunities, but that is after your portfolio has lost 50%.

Today is not a Buying Opportunity

Traditionally, we see a bounce after a market sell-off, but there is nothing "traditional" about the current stock market. As I have said previously, the market has been an artificial market since 2012 when Quantitative Easing began. What seems as business as usual is actually underpinned by the Federal Reserve. The four trillion in stimulus simply makes it appear that our economy is prospering. The sad part is that everyone knows that the economy is weak, but continue to sell investments to private investors, knowing that private investors are likely to experience significant losses. 

Brett Arends writes:

Don’t be surprised if stock markets stabilize or bounce back in the next couple of days. Markets are due at least a short-term rally after last week’s dramatic plunge. This usually happens after a sell-off, no matter what the next big move is going to be. It doesn’t mean anything.

But anyone who automatically assumes this is another easy “buying opportunity” is talking nonsense.

For the past couple of years, Wall Street’s perma-bulls have had it their way. They’ve been gloating openly as stocks went up and up and up, seemingly without pause.

It got to the point that those warning about valuations and danger signs had been mocked into silence — or were simply ignored.

Not now.

I don’t mean to be alarmist or to induce panic, but someone needs to tell the public that there is a plausible scenario in which the U.S. stock market now collapses by another 70% until the Dow Jones Industrial Average falls to about 5,000. The index tumbled more than 3% to 16,460 on Friday and over 1,000 points in early trading Monday.

Dow 5,000? Really?

For 30 years, stock prices have been increasingly boosted by financial factors: collapsing interest rates and Federal Reserve manipulation, culminating most recently in ‘quantitative easing.’

I’m not predicting that will happen, but contrary to what the bulls tell you, it cannot be completely ruled out. And even if that ranks as an outlier and a worst-case scenario, there are other, more likely scenarios where the Dow falls to somewhere between 10,000 and 12,000.

In other words, although this might be a buying opportunity, a serious reading of history suggests this sell-off might also be the beginning.

Let me say on the record that I am not joining the perma-bears or extreme doom-mongers. I am simply pointing out that the perma-bulls have taken their own arguments way too far. The stock market is not doomed to collapse to oblivion, as some hysterics keep claiming. But it is not certain to keep going up by 10% a year, either. All those claiming that every sell-off is a buying opportunity, and that stocks “always outperform,” are lying to you.

A true understanding of stock market history shows that Wall Street in the past has moved in long, long swings upwards and downwards, often taking years or even a generation or two. There is a great deal of evidence suggesting that the upward move that began in 1982 is one of them — and that the downward move that first began in 2000 has not ended.Read: Meet the market timer who said things would get ‘ugly’

As stock market historian Russell Napier points out in his book “Anatomy of the Bear,” on five occasions in the past 100 years — in 1921, 1932, 1949, 1974 and 1982 — those big downward moves have not ended until share valuations have fallen to just 30% of the replacement cost of company assets. That’s using a powerful, if little-known, economic metric known as Tobin’s q.

And, to cut to the chase, if Wall Street stocks followed the same path today, that would take the Dow down to about 5,000, and the S&P 500 Index all the way down to around 600. (The S&P 500 slumped more than 3% to 1,971 on Friday, extending the drop as much as 5.3% on Monday.)

Yikes.

The “q” is a valuation that they don’t even mention in the training manuals for the official “financial planner” and financial-analyst exams. Your money manager has probably never heard of it. Or, if he has, he probably ranks it with astrology and the mystic rantings of Nostradamus.

But the “q” happens to have by far the most successful long-term track record of any stock market indicator.

It’s been better than the price-to-earnings ratio or quarterly earnings forecasts or economic growth rates or long-term interest rates or Federal Reserve minutes.

Independent analysts — such as professor Stephen Wright at London University and Andrew Smithers at Smithers & Co., a financial consultancy in London — have tracked it back over 100 years.

And in the past there has been no better guide for the long-term investor. It’s been even better than the cyclically adjusted price-to-earnings measure, also known as the “Shiller PE” after Yale finance professor Robert Shiller (which also, incidentally, suggests U.S. stocks could plunge a long way from here).

The “q” looks at the net asset values of public companies and adjusts them for inflation. It makes some intuitive sense. Why would Widget Inc. be valued at $1 billion on the stock market if you could start the company from scratch for a lot less?

Right now, according to data from the U.S. Federal Reserve, the reading on the “q” is about 100%. (It was 106% at the last reading, on March 1, but the S&P 500 has fallen about 10% since then.)

Since World War II, the average “q” reading has been about 70%. So if Wall Street tumbled just to its modern average valuation, that would take the Dow Jones Industrial Average down to about 12,000.See: When the stock market last crashed, these sectors fared best

If we just look at the period 1949 to 1994 — in other words, before the gigantic, off-the-charts boom of the late 1990s — the historic average “q” reading for stocks was 57%. If the market falls to those levels, that would take the Dow to about 9,500.

And if the market fell to its historic bear market lows, namely 30% or so, that would mean a Dow of about 5,000.

Why might such a scenario happen? It’s not just about China, or Greece, or slowing earnings, or the “death cross” on Apple’s stock. It would be because, for the past 30 years, Wall Street stock prices have been increasingly boosted by financial factors: collapsing interest rates and Federal Reserve manipulation, culminating most recently in “quantitative easing.” But at some point, that game has to come to an end. When it does, it is possible — not certain, but possible — that valuation metrics could unwind all the way back down again.

Past performance, as they say on Wall Street, is no guarantee of future results. And that means there is absolutely no guarantee that share prices in the future will follow a similar path to the one seen in 1921, 1932, 1949, 1974 or 1982. I would consider that to be very much the outer range of possibilities.

The real reason to be worried right now isn’t that these scenarios are guaranteed or even likely. It’s that 99% of the people managing America’s money, probably including yours, assume that they are completely impossible. And no, they aren’t. Have you factored that into your plans?

Closing Thoughts

I would expect a head and shoulders signal to develop, but this is not always the case. I am thinking that a regular pattern of entry into a recession might be skewed by the Quantitative Easing by the Federal Reserve. But after careful examination of the varied chart patterns, I can't honestly recognize a pattern that fits. I don't know what I am looking at, and that makes me very uneasy. 

I don't know that this is the BIG ONE or the collapse of the economy as we know it. But a significant downtrend has developed. I think we will find a new bottom where consolidation will start again, but could continue to lower lows. If you  are not invested in the market, don't start investing now. Wait for a month or two and see where the market is at that time.

(Note: the above information is for entertainment purposes only and is not to be used in anyway as investment advice.)

Today's Market
by Dr Invest

A quick look at bloomberg.com leads one to believe that the economy has never been better. The FED is projecting a rousing and robust economic future, and the bevy of financial advisers and analysts are firmly committed to investing in a stock market that they claim is undervalued. One analyst reminded the viewers that you can never trust PE as a measurement of the value of a stock. Another analyst assured the viewers that BONDS would not move lower and would remain a great buy as deflation kept the price of oil low and no major changes in the interest rate would occur.

STAYING OUT OF THE MARKET

I asked a few friends about their view and whether now was a good time for them to invest. The unanimous response was "I'm staying out of the market for now!"  This is no surprise because in
spite of stock prices moving higher and higher, participation in the market is moving lower and lower.

This chart demonstrates that there is a declining VOLUME with rising PRICES in the S&P 500. Simply said, "Fewer people are participating in the stock market even though there are rising prices". This is because people generally are not fooled by the hype and are unwilling to participate in higher risks for financial losses. Those in the market are enjoying some great returns, but will suffer tremendous losses when a down turn finally hits.

INSTITUTIONAL INVESTORS IN REAL ESTATE

Calls that unemployment is at an all-time low and that our economy is finally responding in a robust way to the brilliant actions of the FED has created the belief that things are returning to normal. Black Rock, after the collapse of the housing bubble, began to purchase distressed properties across the U.S. As the price of housing increases, Black Rock will, along with other institutional companies, begin to divest their selves of this real estate.

The problem is that their is a "NEW NORMAL". For most people, their one and only real investment has been their home; now, retiring and needing income, there is a flood of real estate coming onto the market. Individuals and institutional investors will be seeking to sell their properties. When you have too many sellers, the price always goes down.

I live in the Austin, Texas area. My tax evaluation on a property has increased by 44% over the past two years. That is a rise of 44% in the increase of property taxes as well. Currently, there just isn't enough housing in our area, even though builders continue to build as fast as they can. But as more seniors begin to sell their homes, the panic to sell will drive the prices lower for housing in our area.



The above chart shows the peak of BOOMER YEARS being from 1958 until 1962. This means the largest number of seniors will be potentially selling their homes and down sizing over the next ten years. Expectations is a deflation in the real estate market.

THE TRUTH ABOUT DEBT

One of my favorite economist is Dr Lacy Hunt in Austin, Texas. His credentials go on and on, including his time spent on the Federal Reserve board. He knows the angles, but has begun to share just a bit of his perspective. Take a moment to listen on YouTube. Click Here for Dr Lacy Hunt

The Federal Reserve and our politicians have put us into a place that is becoming harder to get out of. Continued national debt and private debt has pushed us into a Japan like scenario at least and a Greece like scenario at worst. We can boast of the strength of the dollar, but only because all the other currencies are doing so poorly. In the next ten years, the interest in our U.S. debt alone will push us near bankruptcy. Even worse, to sustain current levels of spending growth would more than saturate our capacity to pay for all the benefits. Our average GDP since 1776 has been 3.8 and over the past decade we have averaged 1.9 GDP. Even that average of 1.9 GDP has been declining over the past two years.

WHAT TO DO

We will continue to see a flat to declining economy. There is no lift-off in the economy, only a continued lift-off wish used to get investors into a declining market. As hard as it might seem to stay light in stocks, keeping a larger cash position is a better choice at this time. After a market decline, then you can consider the stock position.

Wait for the 15%, 30%, even 50% fall in the market. Then you can re-enter a stock position. Once a recession begins, expect about a year or two in the decline. Most of all, use good judgment. In an era of experimental economics by the FED there are any number of poor outcomes.

(Note: the above information is for entertainment purposes only and should not be used in anyway to make financial decisions.)