Beware The Ides Of March

My definition of a free society is a society where it is safe to be unpopular.

• Adlai E. Stevenson Jr.

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 7^th 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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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.