My Comments: The writer has a powerful message to send. He was right about this back in 2008 but that doesn’t mean he’s right this time. I have clients and prospective clients asking when the next downturn is going to begin. And yet there are many articles that suggest it’s still a long way off.
This week I received my copy of Investment Advisor. In it five famous advisors share their preferred asset allocation of the month. The most conservative of them has 30% in stocks, 50% in bonds with 20% in cash. The previous month he had 30% in stocks, 40% in bonds and 30% in cash. Clearly, he doesn’t think interest rates are going up soon. The other four had about 65% of their holdings in the stock market.
Another example is an investment manager whose results in 2013 were a plus 17.51%. Rather than moving away from the stocks, he is now fully invested in the stock market to the tune of 120%. (To understand how that works, you need to call or email me.)
PS – I’ve left out the charts since they do not add much to the message other than the one at the top.
Craig Brockle / May. 8, 2014
• This article reveals the convincing evidence that a new bear market has already started.
• Those who failed to sell near all-time highs in 2000 and 2007 have a chance to do it here in 2014.
• Learn the two proven, reliable assets that go up when everything else is going down.
Did you or a loved one lose money in the 2008 Financial Crisis? How about the real estate bubble bursting two years earlier? And if we go back to the turn of the millennium, there was the Dot-com Crash. Remember that one?
This article is intended to help as many people as possible avoid another devastating loss. I will explain where we appear to be in the current economic cycle, what appears to be coming next and how you can protect and grow your money like the top 1% of successful investors.
I’ve done my best to make this article understandable by everyone who reads it, whether you have previous investment knowledge or not. Investment terms, when first introduced have a link to their definition to help aid comprehension. If you see something you don’t understand, a Google search of the word + definition can help.
Before we go any further, observe what the above-mentioned financial events look like on a graph. First, we’ll look at the 2006 real estate bubble. Shown below is the past 20 years of home price data based on 10 US cities.
Up until 2006, the consensus was that real estate only goes up in value and that one’s home was a great investment. By 2009, this belief was proven to be utterly false as foreclosures and short sales became widespread.
There is a great deal of evidence that suggests the real estate market is again poised for a significant drop, but explaining that would be an article of its own. Perhaps after reading this article, you’ll agree that the next financial bear market has indeed begun. If so, you will likely conclude that owning real estate through this period will be hazardous.
Now let’s look at the overall US stock market over the past 20 years as represented by the S&P 500 index in the chart below. This shows the S&P 500 from 1994-2014. (at the top is the S&P from 2000-2014)
If a picture is worth a thousand words, I believe the above chart could be worth 30-60% of your current investment portfolio. That is if you fail to recognize the pattern that’s developed and act accordingly, you could stand to lose that much money.
It’s been over five years since the last bear market bottomed and many investors have forgotten what it was like. The following short clip from CBS 60-Minutes titled “The 401k Fallout” will remind you what average investors were experiencing at the time. Those who cannot learn from history are doomed to repeat it.
Now, let me give at least one reason why you might want to listen to me. After all, there are so many conflicting opinions and obviously not everyone can be right. I’m the first to admit that the market has a mind of its own, which no one, including myself can accurately predict at all times. That said, I went on the record in late 2007 with this YouTube video warning viewers to prepare for the upcoming market crash. That video was released the exact month the S&P 500 index peaked, after which it dropped 57%.
After the real estate bubble collapsed in 2006, it became obvious to my contrarian colleagues and me that it would have a spillover effect into the rest of the financial world. There were other telltale warning signs at that time that I’ll explain below as these signs are giving the same message today.
By October 2007, the S&P 500 index (500 largest US companies) was the focus of attention as it set a new all-time high that month. Meanwhile, the Russell 2000 index (2,000 of the smallest publicly-traded US companies) had already been in a bear market for three months, after peaking in July of that year. This is a sign of stock market exhaustion where only a smaller group of stocks continue to push higher while the overall pack falls off. You could picture this as a huge pack of companies climbing a wall. By the end of it, the overwhelming majority were already in their descent while only the biggest companies inched higher.
Today we’re seeing the exact same thing as the Russell 2000 has again been showing obvious signs of weakness, even though the S&P 500 has been revisiting its all-time highs. The Russell 2000 Index Peaked at 1,213 on March 4, 2014.
Another warning sign that a new bear market has begun is courtesy of the volatility index (VIX). In finance, volatility is a measure of the variation of stock prices over time.
Volatility, investor emotions and stock prices are all very closely related. In periods when volatility is low and investors are feeling complacent or even euphoric, we experience high stock prices. Conversely, when stock prices collapse and fear becomes widespread, we see volatility spike much higher.
Volatility measures can be a very early warning signal. For instance, in the last financial crisis, volatility began to rise seven months before the bear market in the Russell 2000 began and 10 months before the S&P 500 started its decline.
Taking a look at volatility in the current cycle, we see that it reached its lowest point on March 14, 2013. Since then volatility has been in an uptrend, setting a consistent pattern of higher lows. This time around, it has taken the Russell 2000 almost 12 months to peak, hitting its high on March 4th of this year. I suspect the S&P 500 will make at least one last push higher, at least above 1900. This would also help fool more people into believing that there’s nothing to worry about when they should actually be most concerned.
Other warning signals are currently blaring today as they did in 2007. These include stocks being extremely overpriced, selling by the most experienced investors and heavy buying by the least informed, the general public. Let’s look at each of these factors briefly.
Adam Hamilton, a contrarian colleague of mine, recently published an excellent article. In it he points out that as of this year, stocks are more overpriced than they were prior the 2008 financial crisis. In case you’re unfamiliar, the value of a stock is determined by comparing a company’s current stock price to how much profit it earns. This is referred to as a price to earnings ratio. For instance if a stock is currently priced at $10 and has earned a profit of $1 over the past year, the stock would be said to have a price to earnings ratio of 10.
Over the past 125 years, the average price to earnings ratio has been 14 for the largest 500 companies in the United States. Prior to the 2008 financial crisis, these same stocks reached peak price to earnings ratios of 23.1. As of the end of March of this year, the average price to earnings ratio for these same 500 stocks was 25.7. This indicates that even if corporate profits were to remain constant, that stock prices would need to drop 45% just to reach their historical average of 14.
Furthermore, we’ve recently seen a significant increase in insider selling of stocks combined with heaving buying by the general public. Insiders include directors and senior officers of publicly traded companies, as well as anyone that owns more than 10% of a company’s voting shares. Insiders are among the most knowledgeable and successful investors as they have such strong understanding of what’s really going on in their company and industry. When insiders are selling, it’s usually wise to take notice. Insiders are among the top 1% of successful investors and act more on logic rather than emotion.
Lastly, we have the average investor. We could refer to them as the other 99%, based on their sheer numbers. These are the least informed investors and have the worst track record. This group tends to react emotionally rather than rationally at major turning points in the market. This is evidenced by the fact that the heaviest selling of stocks by the general public occurred in the first few weeks of 2009. This was right before the last bear market transitioned into one of the strongest bull markets in history.
Recently there hasn’t just been strong buying by the general public, but they have been borrowing more money to buy stocks than they ever have. As always, knowledgeable insiders, commercial traders and contrarian investors are unloading their positions near the current all-time highs to an unsuspecting public that really should know better by now-especially after what happened in 2000 and 2007. Here we are in 2014, another seven years later and it is again time to prepare for another bear market.
While no one, including me, likes to live through difficult economic times, at least we all have a choice as to how we are affected. There are truckloads of lemons coming our way, so I think we’d best get started making lemonade. And while we’re at it, help as many other people as possible do the same.
In crisis, we find both danger and opportunity. Reportedly, there were more millionaires created during the Great Depression than any other time in American history. And that’s back when a million dollars was worth many times what it is today. A million dollars in the Great Depression would be worth over $35 million today.
So, what is one to do? How can you avoid becoming road kill and instead conquer the crash? Fortunately there are proven, reliable ways to protect and grow your money in a bear market. Below are the two best assets I know for doing so.
The first chart shows the US Treasury fund (TLT) rise as the US stock market fell. The period shown is the 2008 financial crisis. When investors panic, they sell everything they can and put their money in something they consider reliable. This is called a “flight to safety” and US Treasury bonds are considered one of the safest assets during times of trouble.
Based on the information in this article, I hope you too realize that a new bear market has begun. Volatility bottoming last year was the first warning signal. More recently we’ve seen the Russell 2000 run out of steam, corporate insiders selling and the general public buying in droves. On top of this, stocks are more overvalued today than they were at the peak in 2007.
My goal in writing this article is to help you and as many other people as possible avoid another devastating financial loss. My 2007 YouTube warning reached over one hundred thousand viewers. This time I’m hoping that millions of people are able to get this message in time. I appreciate you following me here on Seeking Alpha, leaving your comments and sharing this article with others.
Bear markets are not to be feared. In fact, they can be very profitable for those who are well prepared. Buckle up. This is going to be one heck of a ride!