Were market valuations too stretched to confidently invest?

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DEATH CROSS


Prices of stocks, of course, fluctuate every day. Technicians pay close scrutiny to the trend of price movements typically by comparing the average cost over a 50 day range compared with the 200 day range. At the outset of a correction, the price of the 50 day moving average will often move lower than the 200 day moving average. When stock prices begin elevating after a correction, the 50 day moving average will cross above the 200 day moving average. A move above the 200 day moving average is a positive indicator, while a move below is a negative. When the move is positive, it is referred to a "golden cross". When it is negative, meaning that the moving average price over the immediately prior 50 days falls below the moving average of the 200 day price support, that is known as the "death cross".

Although the perception is that everything is rosy when it comes to U.S. stocks, one of the sectors of the market that has most elevated since the 2008-2009 correction is the Russell 2000, which is an index of companies with smaller capitalization rates. However, prices over the last three weeks have been trending lower for the Russell 2000. And, today, the Russell completed the death cross as its 50 day moving average fell below the 200 day moving average.

What this portends for the market as a whole, only time will tell. However, it is clearly an indicator to pay attention to because it resonates on traders' screens and institutional investors who can often change the direction and momentum of markets expeditiously.

Because markets have become so manipulated by the unorthodox monetary policies of the Fed and related central bankers around the globe, for me, to a point more extreme than even the dot com era, it is critical to be on the lookout for any and all indicators that could reverse the market's course.

Reconciling a death cross for the Russell with the S&P 500 at all-time highs, affects how I am navigating on behalf of clients. I seek to preserve embedded gains, and insulate from the next correction. This requires paying keen attention to the data and having in place the most appropriate strategies to pursue this dual mandate.

I am notifying you about this death cross because I wish to continually empower you with knowledge and strategies that are vital to your financial health, and which you may not otherwise be receiving.


The Russell 2000 Index is an unmanaged index generally representative of the 2,000 smallest companies in the Russell 3000 index, which represents approximately 10% of the total market capitalization of the Russell 3000 Index.

The Standard & Poor's 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. The opinions expressed in this material do not necessarily reflect the views of LPL Financial.

BUYER/HOLDER: BEWARE

One of the investment managers with whom I work is Absolute Investment Advisors, LLC. I wish to share the factual data on the market that they compiled and which screams for us to pay close attention.

1. The Nobel Prize winner in economics and Yale professor, Robert Shiller, is the creator of the Shiller P/E ratio. The current level of this index for the S&P 500 is 26. This level has only been met 3 other times in over 130 years of data. Those times were 1929, 2000, and 2007. And, each previous peak was followed by a decline in the S&P 500 of at least 50%.

2. S&P 500 operating earnings grew a cumulative total of 10% from 2011-2013. Expectations were for 36% growth. Nonetheless, the index gained 55% over that time.

3. Russell 2000 operating earnings from 2011-2013 fell 20% (expectations were for 100% growth), yet the index gained 60% over that time.

4. Except for the 2000 peak, the Price/Sales ratio and Price/EBITDA (earnings before interest, taxes, depreciation, and amortization) for the S&P 500 are the highest in history. In fact, they are double the historical averages despite low growth for revenue and earnings.

5. China's banking assets represent 33% of all global GDP. Of the $30 trillion in worldwide credit growth since 2008, half or about $15 trillion has come from China. To put this in perspective, the US subprime totaled just $1.2 trillion.

6. Over the past seven months, 74% of companies issuing IPOs have no earnings. This is the highest level since March 2000.

7. The fact that the stock prices of companies with weak balance sheets have outperformed those with strong companies by a wide margin over the last 2+ years is further evidence of the disconnect between prices and earnings.

The list could easily go on, but I think it's clear, "enough said". Buyer/holder beware. Loose monetary policies may have prevented a depression, but there is no free lunch. They have made investors' hunger for yield push them into risky assets without realizing the inherent risks. They have made it easy for companies to borrow with exceptionally cheap money to increase dividends and stock buybacks, both of which lead to higher stock prices. However, this financial maneuvering is camouflaging the underlying flaws, which is to say anemic, if any, real growth.

When the majority is thinking the same way and all chasing the same things, demand heightens. Heightened demand inflates prices. Eventually prices go up so far and distort beyond fundamentals that the last guy in has no one left with whom to sell. Therein begins the inevitable unwind. It's basically a legal Ponzi scheme. And, you don't want to be one of the later entrants in a Ponzi. Within this context, and hoping to help you think independently and

Also, in these times of tremendous distortions where sentiments of the herd have shifted from extreme fear in 2008 to excessive greed today, I urge you to heed Warren Buffett's sage advice to be greedy when others are fearful, but fearful now that so many others are greedy. And remember, managing investments should be approached from the standpoint of enduring a marathon rather than expiring after the sprint. Unusual times call for uncommon investment strategies, a fresh approach, and an unbiased second opinion, particularly with a financial professional who is not transaction-oriented.

Best wishes,
Greg






The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

The Standard & Poor's 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The Russell 2000 Index is an unmanaged index generally representative of the 2,000 smallest companies in the Russell 3000 index, which represents approximately 10% of the total market capitalization of the Russell 3000 Index.

Two Steps Forward

Greg Gann is featured in Proactive Magazine 5/14

http://www.proactiveadvisormagazine.com/greg-gann

Unbelievable

The data in the email I received yesterday from Howard Silverblatt, senior index analyst for Standard & Poors Dow Jones Indices*, was so impactful that I feel compelled to share it.

Howard calculated that the S&P500 reached 45 record-setting days in 2013.Considering the fact that there are approximately 230 trading days in a year, this means that roughly 20% of those days were historical.

He also identified that within the first quarter of 2014, there have been 8 record-setting days. Unlike last year, 2014 has seen a few market reversals that have evaporated prior YTD gains.

Prior to 2013, the last record breaking high for the S&P500 was achieved on October 9, 2007. Think about that for a moment. It took from 2007 until 2013 to beat the prior high. Yet, within the last 15 months, a whopping 53 sessions have set milestones.

Using terms like "bubble" or "irrational exuberance" can sound sensational. And, trends can definitely continue beyond prediction. Nonetheless, 53 record-breaking sessions within a 15 month time horizon is not "normal". Furthermore, the significant price escalation can certainly limit the rate of future growth.

Two other indicators illustrate other important analysis. Doug Short in his March 2014 dshort.com references the fact that the greatest number of investors in 2014 are doing so using borrowed money, and this is significantly higher than at any other point within the last 20 years. That is a clear sign of excessive optimism. Furthermore, MarketWatch on March 14, 2014 reported that the greatest number of corporate executives of publicly traded companies are selling their shares at the greatest rate in 25 years.

Pendulums swing too far in one direction and then too far in the reverse. The pendulum of the market has moved a whole lot from 2008 to 2014. Chances are that you have seen this movie before. The question becomes how to avoid the sequel. In my humble opinion this requires diversifying away from stocks and bonds to protect your net worth from being so tied to the direction of these markets. Institutional investors, pensions, and endowments invest in assets and strategies that might underperform in a year of 45 record-setting days, but they incorporate investments that are designed to insulate downtrends, and can even provide growth during these periods through inverse exposure. I advocate investing along many of these same lines.

What worked when the pendulum was moving in one direction will likely fail after the tipping point. Investing for retirement is a marathon that far too many treat as a sprint. It is a sport that requires both discipline and preparation. Now is the time to heed Warren Buffett's sage advice to be fearful when others are greedy. Now is the time for a deep financial check-up. Nothing ever stays the same. And, no one rings the bell before it changes. The fear of 2008 is a distant past. Once again, just like in the 1990s, greed dominates. If you can't muster the strength of the Oracle of Omaha, please remember -- pigs eat, but hogs get slaughtered.




Greg Gann

*The Standard & Poor's 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.



The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

Breakfast Buffet: $50






I traveled with my family the week between Christmas and New Year's to Copenhagen. Because of my interest in economics and the social aspects of diverse cultures, this became the lens through which I experienced the journey.



The Danish people, pretty much universally, are considered liberal. In terms of global neutrality, their reputation is similar to Switzerland. One example of this trait was evident in World War II when the Danes helped their Jewish population evacuate days before the Nazi round -up. This liberalism today is evidenced in their economic and social programs. Free healthcare is just one example. Another example is evidenced by the fact that not only is university free, but additionally all students receive a stipend to cover living expenses, regardless of financial need, in the amount of about $12,000 per year. Another safety net provided by the government is unlimited unemployment benefits provided the recipient provides rudimentary evidence that he or she is actively seeking employment. One Dane with whom I was discussing this policy told me that what satisfies as "actively seeking employment" is a joke. He said that it is quite common for recipients to apply for jobs for which they are clearly not qualified, and therefore have no real shot at being hired. Nonetheless, going through those motions fulfills the obligation and continues the benefits.



Free healthcare, free university education, free income for university students, "unlimited" unemployment benefits, generous social security benefits, a public transportation system that is state of the art that links their subway system with their rail system, and makes the United States look like its infrastructure is still in the Stone Age, how do they do it you ask? Taxes! Tax rates start at 30% and increase from there. In the United States, we have a progressive tax rate where all thresholds of income are taxed at the same rate regardless of total income. So, the first $50,000 of a millionaire's income is taxed at the same rate as a wage earner who makes only a fraction of that income. In Denmark and most of Europe the tax rate is applied to all income on an absolute basis. So a Danish millionaire will pay substantially more taxes than his American counterpart. In addition, a 30% tax rate is a significantly greater portion of income deducted from a low or modest wage earner.



Furthermore, Denmark and Europe impose a hefty 25% sales tax known as the value added tax (VAT) that applies to all purchases. The effect of the VAT is that it inflated the cost of the very simple breakfast buffet at the Crowne Plaza Hotel from an advertised cost of $30 to nearly $40 per person. Adding further hardship to the VAT is the incredible weakness of the shrinking US dollar. Base prices are high in Europe, and adding the VAT and the dollar exchange rate resulted in a self- service breakfast buffet costing $50 per person. This is just one example of many evidencing the effects of European liberalism coupled with US monetary policy. A single can of beer cost $20, and a cocktail would set you back by $35. To raise revenues as well as to legislate social morals such as caring for the environment, certain items such as automobiles have imposed on them an additional tax. In the case of an automobile, the additional tax is equivalent to 120% of the purchase price. This makes owning an automobile out of reach for most citizens, and consequently, bicycles proliferate everywhere.



All of this got me thinking who has the better system, especially in light of the fact that the US is debating these issues today on the domestic front. I was also especially sensitive to the juxtaposition because I personally was a university student in Europe 32 years ago. And, I was a beneficiary of some of the generous social promotions, but at a time when the dollar was king. Notwithstanding the fact that I attended an American college, the Italian government - subsidized cafeteria was available to me and all who had a university ID card. With my college identification, I was welcomed into the cafeteria, and enjoyed a four course meal including wine for about $.75. This coupled with the fact that the dollar was at an all - time high, enabled me to travel throughout Europe on my "lunch money".



Now, as an adult and a financial planner, I am certainly supportive of policies that make life worthwhile and less stressful. As a society, we should look out for our brothers and sisters who are in need and who are in route to becoming independent and successful. The great challenge is balancing these values with policies that do not inhibit innovation, motivation, and incentivization. In striking the right balance, it is important to appreciate the fact that sometimes providing more translates into less. What I mean by this is the law of diminishing returns. When social promises and programs cost so much to support, then there becomes less of an exchange. When breakfast costs $50 per person, or a can of beer costs $20, there are fewer and fewer people who can or are willing to partake. And this becomes a vicious cycle because there is less commerce and therefore less income to support the entire system. If we think of no other industry beyond tourism, at current expenses, it does not take a rocket scientist to realize the effects of diminishing returns. Furthermore, while the Federal Reserve has used unprecedented tools in recent years to suppress interest rates in order to invigorate the US economy, it has also resulted in a dollar that doesn't provide much abroad. A weak dollar makes US exports much more competitive, but it does not help our purchasing power in terms of goods and services that are best rendered outside our borders.



I must say that Danes appear happy with their lifestyle and their government. The policies have been ingrained as a fabric within their society, and they seemed content. My sense was that there is not a large income disparity in Denmark. I felt that there would be relatively few extremes in terms of poverty or wealth. Additionally, I felt that the incomes of the middle class would fall into a fairly narrow range. Their housing and furnishings appeared quite uniform. Along the subway route, the new condominium buildings were all modern, filled with similar looking apartment boxes within. Perhaps due to the fact that there is limited light during the winter, most of the condominium buildings that we passed had limited window coverings. We could see right into the apartments, and literally saw the same furniture down to and including light fixtures in a great number of these units. Even though the Danish design aesthetic is filled with attractive and simple lines with optimum function, the uniformity was so pronounced that, it became monotone. And, with all the talk about income disparity in America, it made me question whether from a purely social rather than economic standpoint, income parity could in fact breed a monotone society.



There are of course no easy or right or wrong answers to these social and economic philosophies. What is clear is the inter-linking of economics and sociology. The monetary and economic policies that we enact are reflective of our values and therefore culture. With every pro, there is a con. At the core of America is individualism coupled with collectivism, the notion of equal opportunity irrespective of how tainted it may be, hard work and sacrifice, and a melting pot that is supposed to celebrate diversity. As our middle is getting marginalized today by the extremes on both the left and the right, I only hope that we continue to debate the social/economic framework that we want for our society in the most respectful manner. As our population ages and our demographics shift, and technology realigns the fabric of our society, these issues will become even more challenging and daunting. We must understand and appreciate both the costs and consequences of moving too far in the European direction, and too far in a direction that results in a large portion of the
populace hurting or becoming disenfranchised. And, what is so interesting and timely in light of this discussion, is the fact that it was just announced that the Danish government has agreed to sell an interest in one of their largest state owned energy companies to Goldman Sachs because like most governments, even the Danes are finding themselves cash-strapped. This reinforces the need to strike the proper balance government largesse and austerity, and the recognition that we will only prevail when that balance is struck.




Greg Gann









The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.