Donald Trump and the stock market
Donald Trump said last week that now is a bad time to buy stocks. Is he right? Of course, we don’t know but our analysis suggests that the large cap stock market such as the Dow Jones and Standard and Poor’s 500 still face the strong possibility of 25% to 30% declines. But importantly, we can still also find hundreds if not thousands of stocks that are exceptionally undervalued on either earnings of asset value gauges.
Donald Trump’s history? Just weeks before the market crash of 1987, I distinctly recall Donald Trump was selling his personally owned stocks heavily; his comment at the time was “have to raise cash.” He was quoted in the media and he was absolutely correct at the time.
But before, how we view Bear Markets
For years we have believed that bear markets offer the greatest opportunities to buy stocks at bargain prices. Never forget that…if you can stand buying in a downward storm. It’s tough!
Warning signals………Let’s look at some facts
The S&P 500, using the more credible GAAP (Generally Accepted Accounting Principles)is selling at 23 times earnings. With near zero earnings growth, that high P/E level does bring vulnerability. Note that bear markets are far more harsh following periods of high valuation. We are at high valuations again for many stocks- but not all stocks.
Often overlooked is the fact that the stock market is selling at a value of over 135% of Gross Domestic Product. This level has always eventually led to brutal bear markets before. Moreover, the overall stock market is now at the highest “price to sales” ratio is has ever been at. (That is the value of he stock market to the gross sales of the publicly traded companies)
Officers’ and Directors’ (“Insiders”) selling continues at a very high rate over the last eighteen months. This is an important and valid indicator suggesting that the large capitalization U.S. stock market faces significant downside. Note that comprehensive coverage of insider selling is rarely reported on business television. Sensitive information?
I was threatened with a lawsuit when I correctly reported insiders’ selling at a US company while appearing on business television. Some advertisers may not want to see this reported as it may “interfere with business.” BTW that same lawsuit minded company’s stock plunged in price and went out of business.
The enormous corporate “buybacks” were until recently rarely reported in the media. They now have totaled over $1.300,000,000 ($1.3 trillion). We can only estimate their effect on the market but our analysis suggests that it has added between 8% to 12% more upside value to the market. We should point out that very often the buybacks can occur when the stocks are selling near their high price levels. Originally it was designed to have companies support their own shares when they were undervalued and not reflective of their proper value. Not anymore.
Many technical indicators are very negative suggesting that the market is overvalued, facing a large decline and suggest profits should be taken. Hidden and overlooked technical and cyclical indicators suggest problems for the market. Too few pundits suggest taking profits or at least some profits off the table.
What has kept the market up?
Artificially low interest rates kept at low levels by Central banks manipulation coupled with “QEing” have been the major contributors to the stock market’s ability to avoid what would be normal bear markets or at least reasonable corrections. Add the “buybacks” into the mix and we have a market that may soon suffer a major decline. Note well that that half of publicly traded US stocks have gone through or are in bear markets which entails a 20% or more decline.
The overlooked market “Cycles” …not good !
Few investors pay attention to the important market and economic cycles. Again, there is an ugly rumor that they can interfere with brokerage business so they are not promoted and discussed. Right now the cycles are suggesting that we are commencing a long bear market that may have a long duration.
But since most of us are involved in gold, mining stocks and commodities, a bear market in the industrial stocks benefits our favored sector of commodities.
John Templeton’s advice of decades ago
In an interview in about 1989, the fabulously successful investor John Templeton spoke of his approach to investing in volatile markets. After very thorough and rigorous analysis of many stocks, he would choose let’s say thirty or so quality stocks. He would then put in limit orders to buy at prices that if they went there would be substantially below their current prices at the time. Some orders were 30% below their prices. He said that he would never be able to buy all the shares. However, he said that the companies that he was able to buy were outstanding bargains.
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