"Are we there yet?" The destination in question is the tipping point for equity markets.
Unlike a road trip with maps, GPS, and road signs, it's much harder to answer that
question definitively...having un-populated charts of the future is what makes
forecasting market trends challenging, frustrating and fun.
Regular readers are familiar with the various risk factors addressed herein for a year or
longer: the temporary emotional and equity market highs caused by Federal Reserve
"stimulus" and the possibility of conjured liquidity ending; the risk of a double dip in
US housing; the ongoing Euro debt crisis; stubbornly high US Unemployment; US fiscal policy; rising prices of food and fuel; the bubble in China; and the risk of uncontainable violent conflict in the Middle East and North Africa (MENA), etc.
Perhaps you've begun to wonder if these things actually matter, or have dismissed our concerns as expressions of doomsayers with a pessimistic agenda. One of the occupational hazards of daring to divine the future is to be vilified by those who prefer to hope that the status quo will endure indefinitely. Change is inevitable so we don't fight it, but there are those who insist on denying the possibility of tectonic shifts in advance...and then they scream the loudest when the crisis finally hits.
Over the last six weeks we've managed to re-connect with almost every Client Family to maximize our portfolio managers' ability to protect and grow their accounts during and after the next major market drop. There are always a few stragglers who procrastinate despite our repeated best efforts, but we can't help it if they don't follow our advice. We all live with the results of our decisions - good, bad, or indifferent - and this is a key component of one of the classic definitions of adulthood. We know we've done our best.
Our optimism for significant growth in client accounts is increasing specifically because a major market top is imminent. Major declines amidst an atmosphere of panic inevitably follow market tops, creating exceptional buying opportunities for our clients with loads of "boring" cash. Our optimism will peak when the masses of investors are panicking, and our managers are calmly buying. Bring on the market turmoil!
One of the most profound things my wise father shared with me was "The surest sign of maturity is that you don't feel the need to make all of your own mistakes, rather than learning from the mistakes of others." Feelings of invincibility and omnipotence are typical in adolescence, and have recently been dominating the mainstream financial press - who collectively imitate human adolescence. Until recently, only the experienced "Off Broadway" market sages and contrarian newsletters such as VCN have been warning of pending market risk...but now there are key shifts starting.
The primary determinant of market action is not the opinions of forward thinkers. What matters most is what most people think will happen; it's the hopes and fears of the Masses of investors that determine market direction. Without the future's history at our fingertips, an incredibly helpful guide is shifts in Mass Psychology: the nature and tone of what dominates the air time and front pages of the mainstream business press, discussions overheard at the coffee shop or gym, and what shows up in the first ten minutes of the national news. Ultimately, price patterns correlate closely to shifts in public discourse...and Price is the only Objective Truth in investing.
One of the main focuses of this publication is to help readers drink upstream from The Herd, providing valuable insights of both danger and opportunity in markets. We've been discussing the risks and opportunities that are obvious to objective observers who dare to transcend life on the surface. Being early and being wrong look the same most of the time...until the risks can no longer be contained. We're very close now to a major downturn, perhaps as early as next week or perhaps stretching into mid-May.
Your author's view is that there is maximum upside equity market potential of 3 to 5% and perhaps slightly higher for Energy and Precious Metals producers. It is also entirely possible we've already seen the high water mark in equity markets for the first half of 2011...only time will tell.
Our definition of a "major market decline" is contextual, as always. Since early 2011 our working hypothesis has been anticipating a 15 to 25% decline in the S&P from its peak levels. Recent estimates from Bob Hoye indicate a decline of 21 to 40%. John Taylor says the S&P "needs to be 20% lower to get back to fair value"; keep in mind that markets always over-shoot to both the upside and downside.
Natural Resource dominated equity indices like the TSX have been more resilient than the broad equity markets recently, but please keep in mind that this can and will change when the underlying "global economic recovery led by China" assumption changes. Canada definitely wins the world's natural resources lottery, but when Commodity demand falls, related stocks decline so fast they don't touch the sides. From its peak in June 2008 to its bottom in early March 2009, the TSX declined 48%...and yes that can happen again.
In the last couple years, global authorities referred to Canada's banks as the most stable on the planet, yet Canadian Financials declined over 53% from their peak on Sept 30 2007 to their bottom in early March 2009. We urge readers to not be blinded by dividend yield; your capital value is much more important than yield.
In your author's opinion, the Canadian equity charts look very vulnerable to a significant decline. Energy producers will likely spike last with rising crude oil prices, and perhaps Gold producers will fall less during a general market crash as investors observe the bullion prices falling less than other assets. Mid 2011 is setting up to potentially offer the buying opportunity of the decade in Precious Metals Bullion, Producers, and Explorers.
For just over two years now, we've been warning Clients and other VCN readers of the dangers of eventual price increases resulting from the deliberate expansion of the money supply by central bankers globally, but especially the Federal Reserve System stateside. In an awe-inspiring demonstration of self-interest-based denial of reality, central planners publicly accept zero responsibility for price increases. They deliberately complicate relatively simple concepts for their own benefit. This new Xtra Normal video clip is an excellent summary of general price inflation. Please forward it to everyone in your e-mail address book as a public service.
At the other end of the spin-doctor spectrum, there are certain things which are truly complex and difficult, but clever marketing types have determined how they can benefit from making them appear very simple. Having a computer with high-speed internet access does not make anyone a skilled investor any more than expensive golf clubs help us to qualify for the PGA Tour. Enjoy this short spoof ad featuring the E-Trade baby.
The price of almost everything that is necessary, scarce and priced in $US has increased significantly, creating a massive headwind for the majority of the world's population, especially those of us who are fond of consuming food and energy and have finite financial resources. Any further anxiety around escalation of the war in Libya or bringing Iran into the mix would be disastrous for everyone concerned...except those who profit from wars.
Just as in 2008, oil above $125 per barrel could be the actual catalyst for the next major recession. Call me cynical if you wish, but Iran's outspoken US- and Israel-hating leader makes a perfect enemy for military-interventionist countries to set their missile sights on...and create a big distraction from gasping domestic economies in the US, Europe, Japan etc.
Specialized business television channels need to fill air-time with information that is current, and by its very nature is focused on what is happening right now. Their content can be categorized as follows: 5% are influential agenda-driven cheerleaders like Warren Buffet and Federal Reserve governors; 90% are "me too" parrots who semi-digest and regurgitate what the cheerleaders are saying.
Only about 5% are courageous thought leaders who dare to express well-thought-out arguments that are unpopular. Here's what legendary hedge fund manager John Taylor thinks will unfold shortly in markets. Always pay close attention to contrarians.
For a refreshing dose of Objective Truth, we turn to Precious Metals. The price patterns of Gold and Silver continue to confirm that large-scale global investors are extremely concerned about fantasy-based US monetary policy.Our long time price estimates for gold ($3,000 by 2014 and $5,000 by 2016) are starting to look more likely. Jim Grant, publisher of Grant's Interest Rate Observer is one of the most sensible and articulate advocates of honest monetary policy, in addition to being an elegant, quirky and poetic linguist. Enjoy this interview.
We've finally started to hear whispers in the mainstream financial media about the risks we've been discussing for a year or more:
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• the inevitable "double dip" in US Residential Real Estate ("Non-Sand" States);
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• the "Bubble Called China" led by declining real estate values;
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• out of control U.S. government spending with more political will to move the goalposts than to courageously implement meaningful changes;
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• civil disobedience leading to revolutionary military conflict in MENA, all sparked by rising food prices and increased awareness of greater freedoms in western countries;
Market fatigue is showing...big time.
Initial discussions of these subjects in the mainstream financial press leads to increasing exposure, then to dominating their airtime; eventually these subjects make it to the front pages of the daily newspapers and the lead stories on national newscasts. Financial market crises being front and center in the mainstream media almost always marks the worst of the crisis. Remember that falling markets are only bad if you're following the Buy and Hold approach.
Ironically, periods of maximum Mass Fear are the time of the least risk and greatest opportunity, but you need to be prepared to take the risk of selling a little early (before the absolute top) in order to have cash available at the right times. We all know that good fortune favours the well prepared; most investors don't realize that positioning assets to first side-step the danger of falling markets and then actually benefit from the temporary buying opportunities requires taking action well in advance of the crisis.
In general, it takes 3 to 5 weeks to transition investment accounts into new platforms that can both protect and grow portfolios during and following a crisis. A common error of investors - even those preparing to make a change of financial advice providers - is to wait too long to try and sell the absolute high, and become frustrated if their assets are not properly positioned to take full advantage of the brief panic-driven auction conducted by Chicken Little.
We remain available to assist those readers who are open to effective ways of benefiting from upcoming market volatility, but the opportunity to optimize this round of upcoming market volatility is slipping away. Timing really is everything.
Back on March 2, 2011, we issued our latest Market Warning, strongly encouraging readers to get defensive before further declines: "It is not yet clear whether we are about to experience a "minor" correction of 5 to 10%, or whether it is the beginning of more significant decline;" and "when risk is high, caution is the only prudent course of action." The catalyst for this warning was a series of signals issued by our tribe of independent market analysts and experienced market watchers...all of whom had the courage to step away from the establishment and let their excellent work speak for itself.
As it turns out, our estimated 5 to 10% technical correction range was accurate. From the February 18th peak to the March 16th bottom, the S&P 500 declined 6.4% before rebounding to within 10 points of the February 18th peak, then declining once again to close three successive days this week right on the 50 Day Moving Average; a weak uptick completed the week on Friday April 15th.
There is still a possibility that markets can push to new highs for the year but we'll have to wait for more corporate earnings next week to see if this plays out. The next public statements by market giants Goldman Sachs, JP Morgan, Deutsche Bank, etc (especially about Earnings per Share estimates) over the next week or so could have a massive effect at the margins, either delaying or hastening the next major tipping point.
We are thrilled with how our dedicated portfolio managers handled the decline and rebound from Feb 18 to April 6th. During this technical correction, our clients' "growth" accounts declined about 1.5% while "balanced" mandates declined about 1.25% (versus a 6.4% decline for the S&P 500). Thanks to some exceptionally nimble market navigation - selling some inverse positions near their high and putting more cash back to work in long positions during this mini-panic - our client accounts rebounded back to - and in many cases above - their Feb 18 high water marks.
The critical thing that most investors are unaware of is that between March 14 and 16 the equity markets were extremely close to a major breakdown, testing the key support level of 1257 on the S&P 500 twice within a 72 hour period in the aftermath of the very real human tragedy in Japan. During that period, if we had witnessed even one additional negative catalyst, we could very well have seen a much more significant decline, perhaps as low as 1180 or down to 1050.
If the 1257 support levels had not held between March 14 and 16, our portfolio managers were at their battle stations, even in the pre- and post-market trading sessions that self-managing investors cannot access. They stood ready to protect client capital from what would likely have been a further decline ranging from 6 to 16%. As our clients know, there are visible and quantifiable benefits of active portfolio management, but there are also other intangibles like the peace of mind that flows from knowing that further damage to their account values would have been minimized had markets broken key support levels.
Buy and Hold investors simply have to ride the roller coaster down and hope things rebound, and hope is not an intelligent element of any investment approach. Would you sleep better at night knowing a) that your portfolio is out of a falling market, or b) that you need to wait for a bottom and a full rebound to eventually recoup your losses?
We will issue our next Market Warning when our diverse indicators say so, but the next one will be the last one sent to our entire VCN readership. We invest substantial time and financial resources to discern risks and opportunities in the markets, but we've grown weary of negative feedback from certain readers who don't understand our investment programs yet feel compelled to criticize. IWM clients will continue to receive our Market Warnings as part of our comprehensive wealth management offering.
Fear and Greed are destructive to your financial wealth; Patience and Discipline are accretive.
Click here to enquire about our services, or call 403-517-2234.
Cheers,
Andrew H. Ruhland, CFP, CPCA
President, Integrated Wealth Management Inc.
