Investments

Running Off a Cliff

The stock market at the moment reminds me of those old-time cartoon characters, who would run off a cliff and keep running on thin air—only falling when they eventually noticed there was no ground beneath. In terms of valuations, U.S. stocks are sky high, when measured by methodologies that are actually correlated to future returns. Both this bull market and economic recovery are well past typical lifetimes, and due for a fall, based on history alone. In fact as we move into 2015, there are worrisome signs that an economy many hoped was gaining strength, and would allow stocks to grow into their valuations and find more support, might instead be weakening. We are also experiencing divergences in the stock market and other markets of the type you would expect to find as market participants awaken to the reality that the solid ground they thought was beneath them is not.

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Technically Troubling

I.C. Angles Investment Post…

Despite worrisome characteristics around this bull market, it was not until October of this year that I recommended long-term investors move to underweight stocks. I had remained reluctantly bullish previously, because from a technical perspective of looking at price and volume behavior, including the 125-day simple moving average, the market was simply too robust to bet against in my opinion. But that has changed, and there are several technical indicators, beyond simple moving indicators, that are now cause for concern. It is said no one rings a bell at a market top. That is true. Nevertheless there do tend to be warnings, often recognized in hindsight. And there are some technical warning bells now ringing that previously were silent. Whether they are prophetic or a false alarm, will only be known with the benefit of time. However, given other risk factors, including the overpriced nature of this market, my advice remains to underweight stocks.

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Downside of Falling Oil Prices

I.C. Angles Investment Post…

Business journalists are celebrating the approximately 40 percent decline in oil prices from their June highs, as a positive development for the economy. Their reasoning is simplistic. Lower oil prices mean more money in the pockets of consumers, which means more spending by Americans and hence more economic growth. But three other factors argue that falling oil prices actually represent a net negative for the U.S. economy, despite the positive of American consumers spending less on energy.

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A Time to Fear

I.C. Angles Investment Post

“Be fearful when others are greedy, and greedy when others are fearful.” – Warren Buffett, legendary investor

Recent volatility in the stock market has served as a barometer of investor sentiment and in my analysis only further confirms my recent market call, that regardless of near term price action, long-term investors should now be fearful of stocks. Most investors far too often end up buying high, selling low and realizing disappointing returns. A case in point is the current bull market that began in 2009. For the first few years, when prices were considerably lower, investors were much more fearful than now and inclined to sell or shun stocks. Of course that is what makes for a stock market bottom and the start of a new bull market–the investment herd selling their stocks, when things are at their worst. And the financial media only serves to exacerbate matters. Pushing stories of risks around depressions, financial calamity and double-dip recessions, when the market was bottoming. But that was actually the best time to be greedy. Now prices are much higher. And the investment herd is greedy to get a piece of stock market gains, while the financial media is favoring stories about how pull backs are buying opportunities. In my opinion, now is the time to be fearful and instead use rallies as selling opportunities… that is if you’re goal is to go contrary to the herd by buying low and selling high.

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This Isn’t Going to End Well

Part Four: Take the Money and Run

I.C. Angles Investment Post

“You’ve got to know when to hold ‘em. Know when to fold ‘em. Know when to walk away. Know when to run.” — Kenny Rogers, country music singer

“Go on take the money and run.” — The Steve Miller Band, American rock band

Risks around stocks have risen considerably, and even long term investors should now substantially underweight equity exposure. Due to the unique characteristics of this stock market, my best advice is to now treat it as if in the onset of a bear market, regardless of near term price action. At this point in 2014 many warning signs are flashing red—the bond market is signaling weakening growth and greater risk of default, while stock market breadth has deteriorated with many stocks, including small cap and foreign indices, exhibiting extended weakness, while fewer, very large stocks were supporting the market until the recent sell off. The risk versus reward of stock exposure has become too high for an even normal stock allocation, let alone the aggressive allocation most currently posses. It’s time to under weight stocks by taking money out of the market or hedging equity exposure with relation to key technical levels.

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This Isn’t Going to End Well

Part Three: Malignant Growth

I.C. Angles Investment Post

The stock market is enjoying one of the strongest bull markets in its history, but the story is the opposite for the economy, where this recovery represents one of the weakest in U.S. history. And that spells bad news for investors. High-flying stock market valuations and corporate profits reverting back to more normal ranges, as covered in Part One and Part Two of “This Isn’t Going to End Well” aren’t the only reason for investors to fear an especially painful stock market decline. The particularly malignant and unsustainable nature of much of this cycle’s growth is another powerful reason to prepare for a big decline in stocks.

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This Isn’t Going to End Well

Part Two: Problems with Profits

I.C. Angles Investment Post

Record corporate profits are this stock market’s feet of clay. And it’s just a matter of time until they crumble. Although the rise in stock prices most recently has come largely from stocks simply becoming more expensive, as discussed in part one of “This isn’t Going to End Well” rising corporate earnings are also playing a critical role. Counter intuitively, there are two key reasons record profits are actually bad for future stock market prices. First, profits are mean reverting. History, teaches that record high profits, eventually fall and revert to their arithmetic mean over time–an action that takes stock prices lower in the process. Second, rather than strong economic growth and innovations around productivity driving profitability higher, profit growth has been increasingly generated by wage suppression and financial engineering.

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