“A Late Summer Night’s Scream,” a Bear Market (this time it’s different…?)

The most important elements in our forecasts and outlook are cycles. The cycles that are now occurring and will occur shortly project a harsh bear market for the stock market and a strong bull market for many commodities. For gold, silver, copper and mining oriented stocks, those cycles are positive. The fact is that if the cycles are correct, from the stock markets current valuation levels, it would indicate severe downside risk in the industrial stock market.

In the summer of 2008 I was doing research in Montreal and wrote “A Midsummer Night’s Scream” as numerous fundamental, technical and cyclical indicators gave strong indications that we were heading to a severe bear market in most asset classes. On our former Canaminvestor site I wrote that “we might see the largest decline in asset values that the world had ever seen”….. we did! We had that brutal decline and central bank money was “pumped in to save the world’s financial system or so they say.

Starting in 2004, for four years I watched the impending disaster develop in businesses, real estate, stock markets and would speak regularly with investment professionals in Montréal, Quebec City and New York. During that time I would speak to a highly regarded writer who was commenting on spending, politics and economics in his syndicated newspaper columns. I phoned him on occasion to compliment the profound accuracy of his columns and would give him my views.

In 2010, while driving in upstate New York near Montréal I heard him being interviewed on radio. He mentioned that someone he spoke to working in Montreal had forecast the enormous market decline of 2008 and had projected that the economic weakness would continue for several more years. I found him to be one of few writers who understood the gravity of what was transpiring.

Moreover, if I am correct in my forecast, the next several years will bring additional challenges and difficulties to the North American economies. Yet opportunities are and will be available in all markets. I truly hope that we are wrong but I am listing problems and subjects that one should be aware of.

BACKGROUND Several times over the last five years the S&P 500 stock market should have suffered declines of at least 20% to be followed by rallies up again.  It didn’t happen which would have prevented the overvaluation that the markets carry today. It would have offered investors opportunities to invest when stocks are not extremely overvalued. Yet, many institutions and funds must regularly invest despite what the price levels are. Presently, too many stocks but certainly not all stocks are overvalued and dangerous. The major brokerage industry often does not offer prudent, timely advice. Only after major declines it contrives excuses and explanations. On average, even quality stocks face the possibility of 20% declines and much more.

                                        Let’s just review some facts that merit attention.

1-Debt levels….both in the U.S. and Canada, debt levels dangerously high with the U. S. deficit in 2018 estimated to be approximately $400 Billion ($400,000,000,000). The U.S deficit is currently approximately $30 Billion per month or slightly over one billion dollars per day.

2-Stock market is carrying a GAAP Price/Earnings ratio of 26 times earnings, well above the index’s long term average. It is at the higher end of the historical valuation levels.

3-The stock market is valued at between 120% to 140% of United States Gross Domestic Product. In the 2000 and 2008 market highs, we saw near the same levels. This is not a timing indicator, but major declines commence from these lofty levels. I should note that in 2000 when the market was selling at approximately 160% of U.S. Gross Domestic Product the percentage of stock valuation based upon the Nasdaq was much higher. Now if we just use the Standard & Poor’s 500 stocks, the valuation is now at approximately the same as it was in 2000-2001.

4-Central Banks have been and still are enormous buyers of common stocks …yes, common stocks! Since January 2017, $1,300,000,000,000 ($1.3 trillion) of stocks has been bought in order to keep the stock market up. It will be approximately $4 trillion for the year. This has been ongoing and I am told now totals over $6 trillion. It is artificial in a sense and will have serious implications.  By the way, the single largest shareholder in Facebook stock is the central bank of a major European country.

5-For six years I have suggested that many pensions are woefully underfunded. I would regularly ask three attorney friends if states, cities or provinces could file for bankruptcy as they are now incapable of covering their pension liabilities. Each admitted they were not sure but thought that it could be a possibility. Now the news is out as some states’ pensions are near 50% underfunded for their payments to their retirees. The Fed recognizes this and the necessity of keeping the stock market performing well.

6-“Buybacks” is the term used to describe when corporations buy their own shares; they have totaled over $4 trillion over the past several years. This was originally used and was a normal method to support stock prices by the companies themselves while they were selling at price lows and were undervalued. Today, it is often used to push stocks to excessively high valuations for various “reasons.” There is an ugly rumor that buybacks are largely employed to enable managements to exercise their options (to sell their own personally held shares) at higher prices. But of course that is just an ugly rumor.

7-Brokerage House Advice. Brokerages need volume and cannot tolerate bear markets and the loss of profitability that goes with bear markets. You will note that now you rarely find technical analysis departments in the brokerage houses. Technical analysis can create lower volume by encouraging “wait and see” approaches and better buying levels which limits business.

8-Business people   In various industries, we question owners and managers, they tell us that business ranges from good to poor. It depends where and what industries.

9-The Russell 2000 Index which contains the largest number of U.S. stocks (including S&P 500, Dow) is not up for the year…it is flat for the year 2017. Few note that fact.

10-Insiders (officers and directors) selling heavily…  Three recent weeks have seen officers and directors selling over $1,500,000,000 of their own personally held shares (One billion five hundred million dollars’ worth). This is close to the highest three week total we have ever seen.

  CONCLUSION  

         Our research suggests a major bear market for the industrial stock market and a bull market for commodities.  Many commodities and commodity related  stocks have already made their price bottoms and many industrial stocks have already put in their major tops.    Of course we could be wrong, but we don’t think so.

 Thank you, K.C. Grainger