Stock Market? a time to be prudent

    We have expected the stock market to have suffered 20% corrections over the past three years each time to be followed by returns to the upside, they did not occur. Those normal corrections  would have prevented the stock market from its current extremely high overall valuation. More importantly, harsh corrections offer investors and institutions exceptional opportunities to accumulate shares at lower prices while they are “on sale.” The stage is now set for another brutal bear market. We do not want it to occur and we are not short sellers; we are studying various indicators and they strongly suggest caution. Near zero interest rates and QEing have been enablers supporting the stock market. 

We have said many times, odd as it may seem, that bull markets do not end due to overvaluation. They end with interest rates rising sharply, often with a decline in the money supply or recession. But note well that dangerous market tops are usually accompanied by overvaluation and euphoria. Are we seeing that now?

 While we always are generally fully invested in stocks, we see high risk in many popular and highly recommended stocks. Opportunities for exceptional capital gains are always present but far too many stocks are being recommended at the very high end of their valuation range. The old standby rule is to focus on what is undervalued and not what is popular. Again, many of the best performing stocks are now selling at extremely high valuation levels. That always ends sadly. “Paying up” for stocks often leads to disaster. 

INSIDER SELLING… Last week, we saw one of the largest dollar totals of “insiders” selling their own personally held shares in the companies where they are employed as officers and directors. Their stock sales totaled an astounding value of $519,579,616 while buying was $39,746,064, quite a contrast. These sell levels in the past have always been concurrent with the beginning of what led into brutal bear markets.

The value of publicly traded U.S. stocks to U.S. Gross Domestic Production is now over 140%. While not a “timing signal,” brutal bear markets have commenced from these valuation levels in 2000 and again in 2008.

Since 2009, S&P 500 companies have shelled out more than $2.5 trillion ( $2,500,000,000,000) on share buybacks. A share buyback occurs when a company buys its own stock in the market to lend support to its share price. Few people are aware that “Buybacks” are one of the major drivers keeping the stock market and many individual stocks at these high valuation levels.

What do we mean by paying up?                                                                                                                The term “paying up” refers to the investment in stocks when they are far above their proper value. It happens all the time as recommendations by the large brokerage houses are usually ongoing despite overvalued price levels. Think back to the internet stocks and techs that were slaughtered, think back to 2008. Today, there are some fine quality companies that in our view are selling at much too high prices in view of expected earnings and sales. Some have moved too far too fast. One pundit recently reminded investors that “bear markets have not been outlawed.”

There are numerous companies and sectors that are quite undervalued that offer opportunities for exceptional capital gains.  We favor gold and silver mining companies.