As I approach my 34th year in and around the financial services industry, the one factor that has remained the same throughout my career is:
There are only two types of advisors, those who say what they think, or those who say what they think you want to hear – and it sells!
I’ve a lot to stand before Almighty God and to answer to, but one area that won’t take much time is where I fell when it came to the above. By wearing my heart on my sleeve for most of my 34 years, words like “if”, “but”, and “maybe” were never found in my forecasts (but have left that prognosticating racket for a few years now – thank God!). There was no rock to hide behind when a forecast went wrong (but a few stones were tossed by investors who wished they never heard what I had previously uttered).
The following are just observations from a “former Whiz Kid” (one shouldn’t imply you’re a whiz at something when you really are not, hence the word “former” was incorporated into the third edition of my book) who speaks solely as a private investor and who is simply an insurance agent now (but not this guy I hope) but still loves the markets and uses highly-qualified financial advisors to handle all equity-related matters in our alternative to traditional financial planning process.
Overall View – America has already entered its worst-ever social and political era, and while the economic downfall has been delayed, it’s not if, but when, it joins the other two.
U.S. Stock Market – Thanks to “monetary policies gone wild” here and abroad, and Wall Street’s heavily tilted bias towards “it’s always a good time to buy, buy buy”, we’ve reached the FOMO stage in this worldwide financial asset bubble. Fear-of-missing-out (FOMO) is what’s now driving general equities and price action is the only thing that matters. Like a dice game where so many numbers and passes are being made by the shooter and the table thinks the number seven has been removed from the dice, it feels like this can never end.
Political paralysis in Congress, with bitter partisan and factional conflict, increasing, and a President who I think will soon find few if any real allies here and abroad and won’t take that quietly, is setting up for geopolitics to become paramount in the financial arena. With no middle ground anymore (most are either far left or right), social and political turmoil’s will only grow.
But the “reassuring lie” is that the recent supposed tax-cut is beneficial to most (major corporations are really the only major benefactors) and that’s going to lead to unbelievable growth and prosperity. Nothing could be further from the truth.
The weight of now an estimated $67 trillion (some say it’s over $100 trillion when accounted correctly) in public and private debt is just one of several “800-pound gorillas” in the room now. It’s pure fantasy that much of corporate America is going to take the tax cuts and better the average American. No, they will instead do what they have been doing more and more as this bubble grew – practice financial engineering in the boardroom. They will continue to take much of their cash and debt capacity, and plow it into goosing their share price via buybacks, greatly-enhanced dividend payouts and M & A that is productive for near-term share price action, versus true long-term investments and productivity. The main benefactors of corporate actions will continue to be mostly directed toward only upper-echelon management, who get rewarded at the expense of most average Americans.
Numerous sentiment factors are increasingly bearish and despite all the claims of “Happy Days” are here again, most Americans owe more, save less and are poorer now than in the prior decades.
- A greater share of Americans have more debt than savings than at any point since 1962, according to Deutsche Bank economist Torsten Slok.
- Over 30% of U.S. families have negative worth despite the recovery in housing and stock market
- Median net worth for Americans is below where it was in 1989
The DJIA is now the most overbought in history!
There are an ever-increasing number of bearish fundamental and technical factors that cause me to be very concerned. Some people are hoping to use part, or all, of the principle that they have in general equities for things like retirement, college tuition, and other important expenses. The problem is that they may have fewer years to recoup the loss of that principle – especially if the stock market reverts back to a two-way street. The proper response for those individuals is to own fewer equities going forward – starting today.
When you meet our team of financial advisors, they will discuss with you, in detail, regarding my thoughts. IMHO, no more than 50% in equities if you meet the following conditions:
- You have at least 10 years to recoup losses before needing capital – keeping in mind that you are also losing purchasing power too,
- You lower that exposure for each year you’re closer to the need of that capital (example being within 5 years, no more than 25%).
I have no issue personally holding little or no exposure, if the capital is needed within next year or two, but discuss this in detail with one of my team members or a qualified investment advisor. If it was up to me (it isn’t, this is just my personal opinion), I would want to do this reallocating within the next 30 days. We’re going parabolic in equities and I can’t imagine that lasting more than a month. Yes, you can wait and maybe scratch out a few more percentage gains, but to me, the safer versus sorry route is to lower exposure as it goes higher and reach target holdings no later than a month from now (if not sooner).
U.S. Bonds – I have called them the lesser of two evils. Recognizing a currently clear movement away from an open-ended, loose monetary policy in key areas of the world, I suggest speaking with your financial advisor to make sure you’re not exposed to a significant loss of principle before maturity. That is why bond funds, as opposed to individual bonds, are not a great choice IMHO in a rising interest rate environment. The great bond bull run is over IMHO, but speak with one of Registered Investment Advisor team members for specifics.
U.S. Dollar – The long dollar trade was “the” overcrowded trade at the beginning of 2017 and I jump ship back in 2016. I think it still has plenty to go on the downside for 2018. While I don’t favor any one currency, I’m in love with the only true alternative – gold.
Gold – I have stated gold is in the early stages of what I believe can be its greatest bull run of all-time. I’m convinced it’s heading to a new, all-time nominal high above $2,000 by 2020 (if not sooner). It’s overbought here with typical speculators who get washed out in one of the typical bear raids. But it seems it can withstand any bear raids and the path of least resistance remains up for it. Getting above $1,360 for more than a day or two, and far more importantly, $1,400, will go a long way in telling if I’m right that gold is a good buy and not a good-bye.
” Bob Farrell’s 10 Market Rules to Remember.”
- Markets tend to return to the mean over time
When stocks go too far in one direction, they come back. Euphoria and pessimism can cloud people’s heads. It’s easy to get caught up in the heat of the moment and lose perspective.
- Excesses in one direction will lead to an opposite excess in the other direction
Think of the market baseline as attached to a rubber string. Any action too far in one direction not only brings you back to the baseline, but leads to an overshoot in the opposite direction.
- There are no new eras — excesses are never permanent
Whatever the latest hot sector is, it eventually overheats, mean reverts, and then overshoots. Look at how far the emerging markets and BRIC nations ran over the past 6 years, only to get cut in half.
As the fever builds, a chorus of “this time it’s different” will be heard, even if those exact words are never used. And of course, it — Human Nature — never is different.
- Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways
Regardless of how hot a sector is, don’t expect a plateau to work off the excesses. Profits are locked in by selling, and that invariably leads to a significant correction — eventually. comes.
- The public buys the most at the top and the least at the bottom
That’s why contrarian-minded investors can make good money if they follow the sentiment indicators and have good timing.
- Fear and greed are stronger than long-term resolve
Investors can be their own worst enemy, particularly when emotions take hold. Gains “make us exuberant; they enhance well-being and promote optimism,” says Santa Clara University finance professor Meir Statman. His studies of investor behavior show that “Losses bring sadness, disgust, fear, regret. Fear increases the sense of risk and some react by shunning stocks.”
- Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names
Hence, why breadth and volume are so important. Think of it as strength in numbers. Broad momentum is hard to stop,
- Bear markets have three stages — sharp down, reflexive rebound and a drawn-out fundamental downtrend
- When all the experts and forecasts agree — something else is going to happen
- Bull markets are more fun than bear markets