Stock Market still overvalued so “insist on value”

                    *Our advice for a difficult stock market is to “insist on value.”

*We want to emphasize that we are always invested in the markets and that the advantage we find in bear markets is that they give us the opportunity to invest in stocks when they are severely undervalued. To us, bear markets are “super sales” and we find many stocks that are undervalued-naturally they are not the prime choices of the esteemed U.S. brokerage industry.

*For three years the U.S. stock market has not seen a normal 20% or so decline which would have allowed investors buying opportunities at better values. It also would have given institutions that are required to invest large amounts regularly opportunities to invest at lower prices and not be forced to invest at frequently high price levels the stocks are selling at. Yes, it creates a high cost basis for many positions. Worse yet, the market has gone 70 months without a 15% correction; historically markets have rallied to a maximum of 65 months and they are followed by brutal bear markets. Yet for now, an expected bear market has not occurred.

*The non-correction mode is primarily due to certain central banks keeping interest rates artificially down with the ruse that inflation is in the 1% range. Those who purchase food, pay for energy, insure businesses and buy medical insurance see inflation closer to 7% at times over the last seven years. Would officials mislead the public about the inflation numbers? Of course not, that would be downright un-American and un-Canadian as well; just the thought of it brings tears to my eyes.

                                  *“Paying Up” for any investment, the ultimate sin!*

*We have seen that pushing the stock market to such an overvalued level creates incredible risk for the markets in general. Too many stocks are being bought at and have been bought at excessively high valuation levels which eventually leads to a return to more normal valuations. It will not be pleasant and all the standard excuses and blame will proliferate. In 1989, with the Nikkei at the 38,280 level, the pundits were suggesting that the best method was the “the Japanese way.” Off that high, the Nikkei began a correction that continued for almost twenty years to a low of 7,831. Yes, it was a 79% decline! Today the Nikkei has rallied with QEing to 18,723, not even half of the high of a quarter century ago.

*The “sin” was not the investments that they made but rather was the price that they paid for stocks, commodities, real-estate and other investments. Japan, a highly educated, industrious, successful and productive country is still suffering for having “paid far too high prices” in the investments with little consideration for value. Do you remember the California golf course purchase?

*Three market valuation indicators are now at levels that when they occur have led to large percentage loss bear markets. Thus, if a bear market starts from these levels, it will be unforgiving. These indicators now reflect very dangerous overvaluation and suggest prudence.

*Gross Domestic Product (GDP) to the Value of US stocks*                                                     * The United States GDP is currently at approximately $17 trillion. The value of all stocks traded in the U.S. is currently between $21 Trillion and $23 Trillion. Some say it is closer to $23 Trillion; however there is some duplication so I will use the lower range of $21 trillion. Using the lower number gives us a market value of stocks equal to 124% of GDP. It has been at this level twice in the last 100 years. At the 1999-2001 market top, the ratio hit 168%. However at that time the NASDAQ had a ludicrous value of $6.7 trillion which pushed the overall Stock Market to GDP level up to 168%. Today the NASDAQ is not near that percentage level of GDP but the S&P 500 stocks which represent 70% of all US stock values are now at percentage levels to GDP that they were at in 1999-2001. Warning? You bet!

                                             *Stock Market’s “Price to Sales ratio”…..its highest ever level*                      *This is an important indicator that few investors are familiar with and is now in dangerous territory, in the past these levels have led to long bear markets. The value of all U.S. stocks is now at over two times the gross sales of the companies. Oddly similar, this is now at about 30% over the normal level and at its highest level ever. That is quite high particularly for the overall stock market.

*Insiders (officers and directors) are heavy sellers recently, a bad sign.  Three weeks ago in a one week period insiders bought $23 million of their own companies’ shares, that same week, the most informed of all investors sold $578,000,000 of their own companies’ shares. It was one of the largest dollar values of insider sales that we have ever seen.       

                                                                      *Conclusion*                                                                    *But note well that with 1-artificially low interest rates such as we have today engineered by the Fed, 2-money supply not contracting and 3-the economy not in recession(it depends where though), we do not have the necessity of a major stock market decline despite what these two indicators suggest.

*The stock market is a major factor and support for the economy and the Federal Reserve knows that. The Fed does everything possible to keep it in a bull market despite the fact that it is overvalued on a historical basis by 20% to 30%. A bear market would devastate this economy and the Fed knows that.