financialsense.com
excellent read....
Wednesday's Stock Market WrapUp
Background Noise
Wal-Mart: some stores' sales up, service economy expands, Perot Systems gave Enron Roadmap for manipulating energy markets,
municipalities borrowing money to cover deficits, suicide bomber kills 16 passengers and wounds 37 others on Israeli bus, and Pakistan says
joint patrols with India won’t work... such are what I call "background noise." These days, the markets have been moving more and more in an
emotional response to daily news. One day the markets are up because of this news or that news. However, as shown in the graphs up above
show, the markets has been down -- and it's still down. We are in a bear market that will likely last for a long, long time. The short-term and
long-term trend of the stock market is pointed down. The trends in the financial markets have changed. This is a fact and reality that Wall
Street and investors have had a hard time coming to grips with and have been unwilling to accept. This morning I watched a report on the
prospects for the semiconductor industry. The message was based on hope and nothing more. Wal-Mart reported their sales were up, but other
stores aren’t doing as well.
It's Over, period.
The fact is the bull market in financial assets is over. It will be a long time before it will return again. The value of most indexes, stocks, and
other financial assets are grossly overvalued. No matter which way you evaluate financial assets, they are simply overpriced. Book value, P/E
multiples, dividend yields, and price/sales ratios still point to valuation extremes. No gibberish coming from Wall Street and the media can
change that. Forget the "new era" theories. Today we are getting daily reminders that there never was a "new era." Those earnings miracles
were a product of financial engineering and a mass media campaign to sell it to the investment public. The Street and the financial media
are now in their third year of selling a second half recovery scenario to the investment public. They are still selling hope. They are praying
that the investment public buys it and will keep their money invested in the market. As a whole, about 50% of the country, in one form or
another, have their money invested in stocks. Washington, Wall Street, and the financial media hope it stays there. So much of the economic
well-being of the country is based on higher stock prices or financial markets that stabilize.
Facing The Facts
What the investment business is myopically forgetting is the fact that investment returns eventually revert to the mean. A new study out by
Grantham, Mayo, & Van Otterloo, a Boston-based investment firm, projects dismal returns for the broader markets in the years ahead. The firm,
which manages $26 billion and an enviable record of beating the market, projects that every significant movement in the market has always
reverted back to the mean. That means poor returns for market in the years ahead, especially for large cap stocks. In fact, they project large
cap stocks as an asset class will be the worst performing investment class over the next seven years. According to the firm’s forecasters, every
asset class reverts to the mean within about six years from any random point in time. In the words of the firm’s lead partner, "Every big bubble
that we have identified in every asset class has followed the pattern…There has never been, statistically speaking, a new era."
What the firm addresses, which Wall Street is so willing to ignore, is that when valuations go as extreme as they did in the late 90’s, there is an
unavoidable corrective process. That is what you see in the graphs of the S&P 500 and Nasdaq above. Grantham points out that the
complacent assumptions the financial industry is now making, that about 9-10% returns for the stock market aren’t possible with the S&P 500
currently trading at 27 times trailing earnings. Even then the P/E ratio is suspect because we no longer measure bottom line earnings. The
point of the firm’s study is investors would do well to ignore the media and Wall Street’s advice and look for other asset classes to invest in
rather than blindly follow the herd to destruction.
This is why no market rallies are able to hold up as shown in today’s graph.
The daily news fed to investors and the public is background noise that does
nothing more than distract investors from the real trend in the markets. The job
of Wall Street and the financial media is to keep investors distracted while
they plan their exit. If you want to sell, you have to have buyers. So they hope
that plenty of suckers are still around to sell to. Unless you are an adept day
trader, your best advice is to use near-term rallies as an opportunity to dump
your grossly-overvalued stocks. Ignore the BS about patriotism in remaining in
the stock market. You owe it to yourself to protect your assets for you own good
and the good of the country. The country is going to need those assets to
rebuild once we get through the coming stock market crash and the
depression that follows. As far as patriotism is concerned, the smart money has
already exited. Insiders have been steadily selling off their shares for years. In
survival of the fittest fashion, they have sold off their shares and are protecting
themselves.
Think Through The Headlines
If you think things are getting better, just think through the daily headlines.
Would IBM, WorldCom, Lucent, Cisco, HP and an endless list of other
companies be laying off so many workers if things were getting ready to
improve? The daily headlines of more companies going through restructuring
are a code-word for more layoffs. How does the consumer prop up the economy when he has just lost his job and is in debt up to his eyeballs?
More workers losing their jobs means less spending power within the economy, higher unemployment benefits, and bigger deficits for the
government. If Wall Street is predicting a miracle recovery, it will have two key ingredients missing: profits and jobs.
The ABC's of Bull Markets
Now I want to get back to asset classes and bull markets. Please view the
chart of gold which yesterday hit a four-and-a-half year high before
getting hammered by heavy selling by desperate short-sellers. Notice the
general direction of the graph. What does that tell you? Look also at the
graph of the returns from gold versus the market above. The price of gold
has barely gone up 20% and idiotic analysts and anchors are calling it a
bubble. If gold and silver are in a bubble, then what do you call Nasdaq
stocks with no earnings, or stocks selling at 40-150 times profits? The gold
market and the rise of gold and silver shares, which are up over 100% this
year, are just in the beginning stages of a new bull market in real assets.
The news about Pakistan, India, and the Middle East is just background
noise that filters out the real story, which is the supply deficits. Gold and
silver production will be going down and major mining companies are
going to have to replace their reserves. No major discoveries are on the
horizon, meaning the majors will have to replace their declining reserves
by buying out other companies. None of this will increase worldwide
supply of the precious metals. In the case of silver, we will soon be
running out of our remaining stockpiles worldwide. This is the real issue
getting clouded in the daily news which seems to focus on so many short-term events. The India/Pakistan conflict, the conflict in the Middle
East, and the war against worldwide terrorism are simple land mines waiting to be detonated that will only accelerate the coming bull market
in metals.
Benchmark Targets & Battles for Gold
The $300 price target on gold has already been taken out and held. The next price run should take it up to $400 an ounce, which is where the
next key battle lies. At $400 an ounce, a lot -- and I mean a lot -- of short-sellers, hedgers, bullion banks and speculators are going to go under.
That is where the fiercest battle will take place. If gold takes out $400, then the next leg up will have no limit until it takes out the previous
highs reached backed in 1980. The fundamentals are now in place to set the stage for the next bull market run. What is often ignored is just
how thin the precious metals markets really are. There are just a handful of pure silver companies worth investing in, and in my mind, there
remain only two. The numbers of gold mining companies worldwide have a market capitalization that is about $60 billion. That's chump
change in today’s $30-40 trillion global financial markets. Annual gold production is only about $24 billion and a little over $2 billion for
silver. The markets are just too small to absorb the inflow of new money without sending prices to the moon. That is why prices are up 100%
this year on many gold and silver equities. In the case of juniors, the price rises have been 100-600% or more. To get an idea of what I’m
talking about, picture a football stadium. It’s the Super Bowl. Everybody wants into the stadium, but there are only a few gateways for the fans
to enter. It’s big game, the parking lot is full, and the game is about to begin. That is where we stand today.
The question is, "Do you want in?"
As far as Wall Street’s advice about gold stocks being overvalued, just look
at this chart since January 2001. Gold is in an upward trend. Period. The
advice given has been poor and strewn with conflicts of interests. You owe
it to yourself to do your own homework and draw your own conclusions. A
better course of action would be to sell overpriced stocks and buy
undervalued natural resource companies. I realize that isn’t conventional
wisdom at the moment, but neither was buying stocks back in 1980. Back
then, investors were buying oil at $40 a barrel, gold at over $800 and
silver at $50 an ounce. Nobody wanted to own stocks, bonds, and mutual
funds. They wanted hard assets and wouldn’t come close to touching
financial assets selling at less than 7 times earnings and offering dividend
yields that were as high as 13-14%. Nobody wanted to buy Treasury bonds
with yields of 15% either. Instead they were chasing the price of oil, gold,
silver, real estate and collectibles; while dumping and ignoring under
priced financial assets.
To The Front of The Line
We have now come full circle and it’s time to trade places and think outside the box. We’re in a new bull market. However, it’s not in financial
assets, but in real things. Short-term rallies in the market should be used as exit points for dumping overvalued financial assets; while short-term
pullbacks in metals should be used as an opportunity to buy shares in raw materials stocks from the weak hands that are selling them. The
amount of opportunities for investing in this market are so few and so small that they will only be bought later at much higher prices. Use this
opportunity to buy at lower prices from those who sell what they don’t understand. |
