INTRODUCING THE NEW INVESTMENT STRATEGY LETTER BLOG
LOOKING FOR A TOP IN THE MARKETS
Since 1978 I have written 573 market letters. This BLOG is a continuation of that tradition, to speak out for the individual investors and to give them an independent view of investing that has become dominated by market commentators that drink from one Kool Aid fountain of the large bank dominated financial industry. Just as I was one of the first in my Lone Bull Letters in the 1980’s and 1990’s to forecast a market (DJIA), that would rise from 1,000 to over 10,000. I now see STOCK AND BOND MARKETS THAT APPEARS TO BE READY FOR A TOPPING PROCESS. I have been asked, why am I looking for a top in the stock market, when it keeps on making new highs? Good question. But, it deserves a long answer. Some of my reasoning is in the below section INVESTMENT STRATEGY with two of my concerns 1) the inequality of economic growth and wealth is confined to the top 1% and is sucking the air out of the economy. 2) high-yielding (junk) bonds are not liquid enough should investors holding mutual fund shares in high-yielding bonds decide to sell.
There are a lot of other reasons for my caution. One of them, of course, is the euphoria that investors now seem to have, as they are trained like Pavlov’s dog to not to worry about market setbacks. So, rather than trying to do this (explain my concerns), all at once. I will do this a little at a time on a daily basis
Today’s Subject: Investing Locally
When I was a kid, there were brokerage firms on every corner similar to the way you see Starbucks coffeehouses now. Due to pressure from above (probably from the banks, the SEC and FINRA), brokers have gone from about 10,000 entities to only 3000 entities, most of which are owned by banks. In the past, local brokers and investment bankers, helped small businesses go public. Here I defined small businesses as having 500 or fewer employees. They make up 99% of the businesses in the United States and account for 45% of US revenue and three out of every four jobs. The $26 trillion invested in stocks, bonds and mutual funds, goes mostly to multi national and international conglomerates. Less than 1% of money raised by banks (formerly investment banks, which were separate from the banking industry) goes to local productive use, which hires people and develops new products. Now the banks not only control the brokerage, and mutual fund industry, they also control the investment banking industry. Small companies (those with less than 500 employees) have been cut off by the banking industry from loans and investment banking alternatives. That’s because, the system is set up to help large companies only, those that are only interested in the national and international markets and many of which have corporate headquarters outside of the United States. Just as the top 1% and the 80 people who own 50% of the wealth in the world are sucking the air out of consumers’ pockets, the conglomerates are sucking the air out of small US companies. On a short-term basis, this has been good for the stock market and is corporations. However, the long-term effect could be devastating both the economy and stock market. For further references check out the book LOCAL DOLLARS, LOCAL SENSE by Michael Shuman (who has commented on this subject in the New York Times editorial section)
Tomorrow Subject; House of Cards. Reference book: THIS TIME IT’S DIFFERENT /Eight Centuries of Financial Folly by Renhart/Rogoff
INVESTMENT STRATEGY: Lighten up during rallies
The markets have steadily risen since 2009 and investors have been trained like Pavlov’s dog to not worry about setbacks. Stock markets tops and the beginning of a Bear Market happen when it is least expected. I tend to be suspicious when euphoria and hubris reach high levels ( I just got back from NY City and the euphoria is unbelievably high.) That happened in 2000 and 2008 after which the market corrected 50% of its gains in a very short period of time.
So what could go wrong? There are two bubbles that I am concerned about. 1) All economic growth in last 20 years has gone to the top 1% in the US and to the top 80 people who control 50% of the wealth in the world. There is nothing wrong with accumulating wealth; however its effect on the general economy could make future economic growth unsustainable. How many bars of soap and how many cars can each of the wealthy people buy? These excessive conditions have taken the breath out of the economy for consumers and sooner or later will affect the entire economy negatively. 2) The FED has stopped its stimulus package of buying bonds. Investors who have high-yielding bond mutual funds have immediate liquidity. However, the managers that hold these funds in high-yield bonds, have much less liquidity. PIMCO owns close to 50% of many foreign bonds and controls over 40% of the debt issued by the Bank of China, 40% of the State Bank of India and close to 30% of some Spanish banks. This is not a problem during the good times like now and when the stock market shows higher highs. However if the Fed starts raising interest rates and the stock market starts to fall, this could cause a problem with high-yielding bonds that are not very liquid, which could cause a precipitous drop in in high yield bond prices. ‘Junk bonds’ can suddenly become a new name for these high yielding bonds. Markets hate lack of liquidity!
As always, I will let the market tell me what to do, using my technical methodology outlined in Investment Strategy Handbook for Volatile Markets.(My book). If we start seeing new highs, the Dow could go up to about 18,000 by year end. To me,the market looks like it is running out of breath for 2015. If the market starts making new lows, there isn’t any Intermediate down side support until around the 15,000 area. Stay tuned!
Carl M. Birkelbach 11/11/14