Montreal Analyst

By Harold AGJ Davis    10 July 2016  Most old market denizens are familiar with Charles Mackay’s 1841 classic “Extraordinary Popular Delusions and the Madness of Crowds”, and know from personal experience that it is easier to read about collective insanity than to recognize it when you are in the midst of it. After all, “This time it’s different!” Oh, really? The remarkable political stupidity that has gripped Europe and which reached dizzying depths in Britain can only be described as a madness of the ruling elites. Now, with Europe and the U.K. threatening to unravel, a wave of anxious flight money is seeking safe havens around the world, and an extraordinary popular delusion believes that U.S. Treasury long bonds yielding 2.11% are an appropriate sanctuary from the storm. However, considering how often people in a panic make bad choices that end in tragedy, could this be another?

  We would not mention this if it would not provide us with a perfect example of whom not to listen to or take advice from despite the fact that they may be appearing on television. In a television interview, this TV commentator was imparting his negative opinion on gold to the viewing public abusively by chastising the guest for having advised gold as a part of a portfolio. Fact?  What was incredible is at that very time of the December 2013 on air interview; numerous gold stocks were making their major price bottoms and have seen gains since then of 800% to 1500%. Their enormous price gains have shown the business television host to be an even greater fool.   The interview? In an incredibly rude and bombastic manner, the interviewer asked the guest if he had regrets for even having recommended gold implying that investing in gold had caused gold investors inordinate suffering and pain. The key point was posed in an extremely pompous and disdainful manner as if he (the host) was an expert. He is not by any means as we will show! At that time, with gold down and numerous mining stocks fashioning major price bottoms while at multiyear price lows, the guest was condemned by the ignorant uninformed interviewer. Yet, the guest is not a “gold bug” but rather always recommends a balanced portfolio including a percentage in gold stocks. The commentary by the host was so overdone that within minutes we received calls […]

For three years we have suggested that the stock market should have faced normal downsides of between twenty to twenty five percent to cure the overvaluation excesses that the market has been carrying. After reasonable corrections, the market would have rallied again, but during the corrective periods it would offer the opportunities for investors to invest when stocks are undervalued. These are regular and beneficial market cycles. We have never suggested shorting stocks but rather taking some money off the table and searching for undervalued stocks of which there are always plenty available. But the banks and brokerages cannot afford to face normal bear markets which bring harsh declines in their profitability….which in the past led to the necessity of “bailouts” to the US banks and brokers.  So grossly overpriced stock recommendations are foisted on the public and investment funds that often must invest at excessively high prices. It later leads to disasters! Don’t believe me? Examine the S&P 500 charts in the years 2000 and 2008 and note the 40% declines that followed. Note the similar chart pattern today. Near zero interest rates have permitted the stock market to sustain overvalued levels for a prolonged period. 

Adam Posen, president of the Peterson Institute for International Economics in Washington, contends that the U.S. institutional framework for preventing crises is “likely to fail.” Posen said discretion within individual financial institutions was “huge,” forming a “recipe for creating uncertainty.” Posen is skeptical of the council of financial regulators created by the Dodd-Frank Act of 2010, known as the Financial Stability Oversight Council, which he calls “a mess”, due to Washington’s difficulties in coordinating between multiple agencies. The shaky global economic recovery and the threat of extreme market volatility leave the world’s central banks with little or no margin for error, Bank of England Governor Mark Carney said at a joint meeting of the International Monetary Fund and the World Bank. “This is a pretty unforgiving environment” and “not a type of economy in which one can make mistakes,” he said.

Prices for many commodities are now experiencing important upturns. Years from now analysts will look back and see 2016 as a broad brush changeover from bear markets to bulls, but, here and now, the process is unlikely to be as smooth and continuous as some might imagine. The reasons behind the behavioral diversity in the price bottoms reflect the specific differences underlying each commodity. Collectively, commodity prices and those of other raw materials are considered sensitive to changes in economic activity.

We have expected a decline to occur of minimally 25% to be followed by rallies back up for three years. Half of all stocks have already been corrected 20% or more which classifies them as being in bear markets. Yet, the large cap S&P 500 has not been down much over about 12%…….Let’s also add that the “buybacks” occur in the large cap stocks giving support to their prices-that is $1.3 trillion in buying. That is $1,300,000,000,000 ! As well, Central banks buying shares has supported the market as well. However, it has created a situation where too many large cap shares were purchased at price levels that are selling far above reasonable valuations. Payback will come as it always does.

This article is from www.Canadianmineanalysis.com                                                Our focus going back to our prior research site the “ Canaminvestor.com”  in analyzing any mining company has been “assets that are in the ground” with the potential for further discoveries. Make no mistake about it, successful exploration always remains difficult and challenging. We have rather rigorous requirements but we have had some superb successes with our recommendations in the past.   

We have warned of decline…26% or so, will it be an Opportunity? For the last two years the S&P 500  stock market should have faced declines of at least 20% to be followed by rallies up again. That would have prevented the exceptional overvaluation that the market has been carrying today; it will soon be paid for Let’s just review some of the gauges that have a history of accuracy. Investors and above all major brokerage houses have little use and and  dislike for cyclical anacontempt for “technical analysis” and dislike cyclical analysis. Why? It often tells people that the stock market is overvalued headed down or worse yet that their own stocks are overvalued and heading for large declines. The major brokerage houses do not want technical analysis because it advises at times that stocks are overvalued and better buying opportunities will happen later! It limits business and commissions. Brokerages fight bearish news despite the fact that it is often quite accurate-it interferes with business.

  Sometimes you can get a more sober and unbiased view on the U.S. economy and politics from friends who live in Canada. I remember that about a year before the “great recession” began in the US, Quebec businessman and Hockey Hall of Famer, the late Dickie Moore told me when he thought a recession would begin. He missed by about 10 days. A good friend of mine has been watching the U.S political scene very closely. You can’t say that it has not been entertaining for everyone whether in Canada or in the U.S. My friend’s family has been in Canada for many generations.  One of his children lives in the United States and is now  an American citizen. When the election primaries began, he seemed more entertained than interested, but with recent events and world news, he is now watching the race closely.