Day: September 12, 2013

Sep

2013

Investing Legend: There Is No “Equity Risk Premium”

The following is an excerpt from a recent issue of Private Wealth Advisory.

As noted yesterday, generally speaking stocks today are showing all of the hallmark signs of topping out. The market is overpriced, overbought, the smart money is selling, CEOs are bearish, market breadth is shrinking and earnings growth looks poor.

Now, I am not officially calling a top in the market today. But I do want to alert you that a top of some kind, possibly major, is forming.

In terms of predicting how far the market will fall, we first need to consider that the stock market is in a bubble. Historically, bear markets feature a drop of 32%. Bursting bubbles on the other hand, usually feature a drop of 50%. Indeed, if you look at the last two market Crashes over the last 13 year, all of them featured drops of roughly 50% or so.

Based on this measurement, this would mean the S&P 500 falling to sub-900.

Other indications of a market top forming can be drawn from historical price movements. Mark Hulbert from Marketwatch recently noted that of 35 market tops since the 1920s, the preceding bull market has seen stocks rise 21% in the previous 12 months.

The S&P 500 just hit a 23% gain in the last 12 months (see Figure 5 below). So we’re on track with a market top in terms of historic price trends.

Finally, there are major valuation concerns for the markets today. Since the S&P 500’s founding in 1926, stocks have returned an average of 11% per year.

Consider the following: had you invested $10,000 in the S&P 500 in 1926 (at that time it was the S&P 90) with dividends reinvested today it would be worth over $33 million.

Without dividends reinvested, it would be worth $1.9 million. Put another way, without dividends, which are paid out of earnings, stocks return only slightly more than Treasuries, though with considerably more risk.

Thus, the ideal time to invest in stocks is a time in which future earnings yields from stocks are expected to grow considerably. This would indicate that dividends are likely to grow, thus allowing for a considering stock market “premium” in terms of returns.

Today is not such a time. As famed value investor John Hussman notes, the 10-year Treasury bond is currently yielding 2.6%. Hussman believes stocks will average 2.8% per year going forward for the next 10 years.

Thus, there is literally no “equity risk premium” at this time. Put another way, the benefits of owning stocks based on future earnings is simply NON-existent.

The time to prepare for this is not once the collapse begins, but NOW, while stocks are still rallying. Stocks take their time moving up, but when they crash it happens VERY quickly.

With that in mind, I’ve already urged my Private Wealth Advisoryclients to start prepping. We’ve opened six targeted trades to profit from the stock bubble bursting.

We’ve also taken care to prepare our finances and our loved ones for what’s coming, by following simple
easy to follow steps concerning our savings, portfolios, and personal security via my Protect Your Family, Protect Your Savings & Protect Your Portfolio reports.

I’ve helped thousands of investors manage their risk and profit from market collapses. During the EU
Crisis we locked in 72 straight winning trades and not one loser, including gains of 18%, 28% and more.

In fact, we’re currently on another winning streak having locked in FOURTEEN winning trades in the last two months, including gains of 10%, 11%, 21% and 25%.

All for the the small price of $299: the annual cost of a Private Wealth Advisory subscription.

To take action to prepare for what’s coming… and start taking steps to insure that when this bubble bursts you don’t lose your shirt.

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Yours in Profits,

Graham Summers

Sep

2013

There Are Major Signs of a Top Forming

The following is an excerpt from a recent issue of Private Wealth Advisory.

Tops never form cleanly.

I’ve made the mistake of attempting to call a top on the “dot” in the past. The reality is that anyone who attempts to do so is exercising their ego more than their judgment.

Market tops occur when investor psychology changes. But it’s not a clean shift. Investors, like any category of people, are comprised of numerous groups or sub-sects: some get it sooner than others.

In this sense there are certain tell tale signs that a top is forming. This doesn’t mean a top is “in” nor does it imply a specific timeline for a top to form (say a week vs. a few weeks).

However, there are clear signals that appear around tops. And I want to alert you that multiple ones are flashing right now.

First and foremost, the number of stocks that continue to break to new highs is contracting sharply.

This means that fewer and fewer stocks are breaking out to new highs while the market continues to surge higher. In other words, the market rally is being driven by fewer and fewer companies.

We get additional confirmation that the market is likely forming a top from the “smart money.”

Over the last 12 months, institutional investors have been net sellers of stocks for most of the time. This trend became much more pronounced in July with institutions selling an average of $1 billion in stocks during that .

In particular I want to note that institutional investors are dumping stocks at a pace last seen in the first half of 2008.

Among the financial institutions that are dumping stocks include Apollo Group, Blackstone Group, and Fortress Investment Group.

These groups are not only selling themselves, but have been urging their high net worth clients to sell stocks as well.

In addition to this, those at the top of the corporate food chain are uneasy with the prospects for growth. According to Markit’s semi-annual Global Business Outlook Survey of 11,000 CEOs found Chief Executives to be the most negative since the depths of the Great Recession in early 2009.

Thus, we see the “smart money” exiting the markets. We also see fewer and fewer companies participating in the market rally. Those who run these companies are more pessimistic than at any point in the last five years dating back to the nadir of the 2009 collapse. And finally we have investors as a whole displaying the most complacency about the market in history.

On that note, Ben Bernanke has created the mother of all bubbles.

Today, the S&P 500 is sitting a full 30% above its 200-weekly moving average. We have NEVER been this overextended above this line at any point in the last 20 years.

Indeed, if you compare where the S&P 500 is relative to this line, we’re even MORE overbought that we were going into the 2007 peak at the top of the housing bubble.

We all know how bubbles end: BADLY.

This time will be no different. The last time a major bubble of these proportions burst, we fell to break through this line in a matter of weeks.

We then plunged into one of the worst market Crashes of all time.

By today’s metrics, this would mean the S&P 500 falling to 1,300 then eventually plummeting to new lows.

This is not doom and gloom. This is a fact. The Fed has created an even bigger bubble than the 2007 one.