Markets..the why,the high,the danger

      The U.S. stock markets are trading at levels that are carrying exceptional and dangerous overvaluation. We are attempting to explain what we have seen and how we interpret it.  We have no problem with overvaluation in stocks as long as investors take advantage of it and take money off  the table. At current prices, too many stocks and sectors are extremely overvalued based upon both their fundamentals and their technical charts.  What will follow is a brutal bear market. Yet large U.S. brokerages continue to strongly recommend already overvalued stocks.

Yes, we have expected corrections of 20% to 25% to occur over the last six years to be followed by rallies up. This was the normal cyclical and technical expectation from the past decades. They did not occur which would have given institutional and private investors opportunities to accumulate stocks when they are not overvalued and represent solid value. Too many stocks have been bought at the very high end of their five year price ranges. “Paying up” is always proves to be the killer.

While we remain quite negative for many of the stocks in the Dow Jones Industrials, S&P 500 and Nasdaq stocks and others as well, we are near fully invested in undervalued and overlooked stocks that have been trading near their price lows.

QUESTION ! Why are the stock markets trading at such high levels ?

***The major U.S.brokerages desperately need  heavy trading activity, volume and commissions so activity is forced. The industry cannot afford slow activity “off-seasons” where they can advise investors to wait for cheaper buying opportunities. Brokerages must keep the commissions “meter running” and encourage a bullish bias to the price levels of the severe overvaluation that we see in many stocks today. They do it repeatedly, history confirms that.

Recall when major banks and U.S brokerages needed bailouts just to survive; the same ones today are offering their “Wealth Management” programs. Yes, the same ones are giving advice-after having paid billions of dollars in fines and seeing failure in their own stock trading and recommendations.

***LOW PROFITABILITY Where has prior years’ brokerage profitability gone? This is very important to understand. The brokerages and banks’ market makers’ “spreads“ between the Bids and Offers are minimal today. In the past, the spreads were often .12 cents to at times .25 cents or more bringing substantial profits to their brokerage houses.

Today, spreads are often one cent or less which do not provide sufficient profits to support hiring analysts for research coverage. The tragedy is the fact that there are numerous stocks on the NYSE, Toronto Stock Exchanges and NASDAQ that are exceptionally undervalued that merit comprehensive research coverage. Most undervalued? Gold & Silver stocks!

Due to low profitabilty at many brokerages far fewer companies receive comprehensive research coverage today than they did in the past. Worse yet, major brokerages usually do not allow their brokers to recommend stocks that are not included in their in own limited and often untimely research universe of stocks.  The stock recommendations are often good quality companies, it is the timing of the recommendations that has generally been the problem.

***THE CENTRAL BANKS throughout the world are huge buyers of common stocks. Few investors are aware of that. The Swiss Central Bank and the Central Bank of Japan are two of many central banks that now acknowledge their enormous investments in the stock markets. We believe that at various times the Federal Reserve is bringing buying support to the U.S. stock market but the Fed does not acknowledge that. We suspect the Fed as a major factor in the overvalued levels of the stock market and believe it is a “stopper” of stock market declines. The Fed is quite aware of the damage to the economy a bear market would bring.

***HEDGE FUNDS AND HIGH FREQUENCY TRADING  The hedge funds and high frequency trading combined are estimated to be 70% if not more of total trading volume. They provide an enormous inflow of cash which brings support and upside buying pressure to the stock markets. When a true bear market occurs, the Hedge funds and high frequency traders will add dramatically to the downside as shorting with no upticks required will exacerbate the painful decline. It works both ways.

***VOLUME: THE PUBLIC (RETAIL PRIVATE INVESTORS) IN CANADA AND U.S. are very small percentages of stock market trading volume. Read that as “miniscule!  The estimate is that the volume from private investors is between 2% to 3% at most. Note that is the percentage of the total volume not individual transactions. You may find 100 small retail transactions of 100 to 500 shares and at the same time 10 institutional transactions of 100,000 shares each and more. Again we speak of the amount of shares not transactions in the 2% to 3% calculation.

We are told that this time things are different and not to worry. However, our analysis coupled with major market and economic cycles says that we may be about to see a brutal bear market that will match what we saw in 2000-2001 and again in 2007-2008. It is not going to be pleasant at all.

                                                                                                       Our Conclusion 

Our analysis projects a major and painful bear market for the industrial stock market. That is very bad news. However our analyis also projects a major bull market in commodities and hard assets such as gold and silver and Canadian and American stocks embodying those hard assets.                                                                                                                                                                                               Thank you,

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