Monday, December 4, 2017

“The hard part is discipline, patience, and judgment.” --Seth Klarman


TAXES DROP; STOCKS DROP MORE (December 3, 2017): The financial markets have behaved very differently during the past week than they have done during the entire bull market which began in early March 2009, and the anticipated "success" of the Republican tax plan is largely responsible for it. From now on, any negative economic event or trend will be blamed on the new U.S. tax rates. If we have inflation, recession, rising unemployment, or even a lengthy losing streak by the New York Yankees, it will have been "caused" by Trump and the Republicans. In case you think this is an exaggeration, Barack Obama was able to win the U.S. Presidency in November 2008 partly from blaming the recession on the 2001 tax cut which had occurred 7-1/2 years earlier. The Republicans have taken charge and responsibility for everything that happens with the U.S. stock market going forward, and at the worst possible time. The legislation also provides a convenient excuse which millions of investors will use as justification for selling. Whenever investors have a reason to act, they will be far more likely to do so.

The past week was accompanied by several key reversals.

FAANG and similar stocks, which had been among the top performers in 2016-2017, suddenly began to struggle during the past week. Semiconductor shares behaved likewise. The most undervalued stocks were among the biggest winners. The Russell 2000, which had been persistently lagging the S&P 500, briefly soared to a new all-time top before once again sliding lower and pointing the way down for everything else. Just when investors have become convinced that the U.S. stock market can only go up as long as Donald J. Trump remains the U.S. President, we have probably begun some of the largest percentage declines for most U.S. equity indices since the 1929-1932 collapse which was the worst in U.S. history. By many measures, the U.S. stock market has never been more overvalued even including 1929 and 2000, and we are likely to reverse toward a roughly equal and opposite extreme of undervaluation in roughly two years.

Any non-bipartisan tax plan must fail, because so many people want it to do so.

The next recession will give Democrats enormous voter support in upcoming elections as the Republican tax bill will be given almost all of the credit for the economic slowdown. We would have suffered a stock-market slump and a recession even with the old tax code, but people love to imagine nonexistent cause-and-effect relationships in the financial markets because as humans we prefer easily repeatable stories to reality. The Republican tax plan is the perfect excuse for inventing a new set of myths about why the U.S. stock market is behaving differently and why it will experience an accelerating downtrend. A "surprise" decline for U.S. equity indices in 2018, especially as it will immediately follow the tax cut chronologically, will almost surely cause Democrats to regain control of the House of Representatives following the November 6, 2018 elections. The Senate is less certain since only 8 Republicans are up for re-election versus 25 Democrats, but there is probably more than a 50-50 chance that Democrats will prevail there also. As long as Trump remains President, this won't result in significant legislative changes in 2019 or 2020, but on November 6, 2020 we could have the Democrats sweeping the Senate, the House of Representatives, and the Presidency. Even though that is far from certain and almost anything can happen in three years, a tax cut almost always leads to increased selling as experienced long-term investors decide to capitalize upon lower rates to unload assets which they have held for years or decades. Knowing what might happen in November 2020, and especially the likelihood of much higher U.S. taxes becoming law in 2021, this leaves only a three-year window to get out at favorable rates. Thus, the Republican tax cut will encourage investors to sell first to get out ahead of everyone else. The market probably won't even be able to sustain itself until the lower rates become effective on January 1, 2018, since experienced investors know that many others will try to get out in early 2018. This could lead to meaningful losses in the final weeks of 2017, which is perhaps partly responsible for why we began to see new intraday behavior during the past week which had been almost completely absent for the entire calendar year. In general, the most bearish intraday behavior consists of strength near the opening bell and progressive choppy weakness thereafter.

Previous tax cuts have almost always led to lower prices for U.S. equity indices.

The 1981 and 2001 tax cuts were followed by lower prices as the most experienced investors sold first, gradually working its way down to the least-knowledgeable participants bailing out just before the subsequent rebound began. It will likely be the same this time, with top corporate insiders being the first to sell and average investors roughly two years from now probably making their largest outflows in history and thus surpassing the previous all-time records--which not surprisingly were mostly set during the first quarter of 2009. Amateurs will repeatedly buy high and sell low. The 1986 tax cuts were followed by only a moderate correction and eventual (although temporary) new highs the following year, but in that case the tax cuts were expected to persist for the long run since they were bipartisan. Democrats can't wait to enact completely new and higher taxes as soon as they have sufficient numbers to be able to do so. With just three years to get out, it will be a race where the losers will be anyone who plans to hold U.S. assets for the long term. This includes not only stocks but corporate bonds, real estate, and most other U.S.-based assets.

Surging deficits will translate into significant changes for asset valuations.

Rising inflation hasn't been a serious concern for U.S. investors since the 1980s. That is going to change and probably quickly, as the tax cut adds over one trillion additional dollars to the total U.S. debt obligation. If U.S. stocks quickly retreat then U.S. Treasuries might benefit as a safe-haven alternative in the short run, but over the next year it is likely that the U.S. Treasury yield curve will continue to flatten and that most U.S. Treasuries could climb to their highest yields in several years. This will end up slowing the U.S. economy even more than a tax hike would have done, and it will have a more lasting effect. Companies like commodity producers along with emerging-market stocks which benefit from rising inflationary expectations will likely be among the biggest winners. Many gold mining and silver mining companies, along with energy shares, rebounded energetically during the first several months of 2016 from multi-decade bottoms. Afterward, they stalled as investors' favorites dominated the list of winners from the summer of 2016 until recently. The leadership is likely to shift back into commodity producers and other inflation-loving assets during the upcoming year, partly from the tax cuts and partly from the fact that these are typically outperforming securities whenever we are transitioning from a bull market--especially a hugely overextended one--to what will likely become an especially severe bear market.

The dividend yield on the S&P 500 dropped to 1.89% during the past week.

Many historic valuations have never been more extreme in their entire history including a dividend yield of merely 1.89% for the S&P 500 during the past week. Whether you look at the margin-adjusted Case-Shiller price-earnings ratio, or the differential between bulls and bears in various investment surveys, or the all-time record low ratios of bank accounts and other safe time deposits to fluctuating assets, or whatever is your favorite indicator, you will see extremes that have never been previously experienced even if you go back to 1790 when the Philadelphia Stock Exchange was founded (the New York Stock Exchange took two more years before they officially began in 1792).

I haven't even discussed the unfairness of the Republican tax plan.

Cutting corporate tax rates too drastically, disproportionately favoring certain people, and treating different kinds of income with a complex series of diverging tax rates are just a few of the serious problems with the latest legislation. If it had been bipartisan then there would be some incentive to improve it, but the Republicans will be happy to live with it regardless of its serious defects while the Democrats will be thoroughly delighted to leave it alone so it can fail and be blamed for just about everything which goes wrong. It is a formula for disaster and that is exactly what we will get.

It's going to be a long bumpy road to the bottom.

Disclosure of current holdings:

There are numerous ridiculously overvalued assets today and a few undervalued sectors. The multi-decade commodity-related and emerging-market undervaluations of late 2015 and early 2016 are gone, but I have been continuing to gradually purchase energy shares along with funds of gold mining and silver mining companies whenever they are most gloomily reported in the media, are forming higher lows, and when investor outflows have been maximally intense. In a world where U.S. equity indices, junk bonds, and real estate have finally begun major bear markets amidst massive all-time record inflows mostly from investors taking money out of their bank accounts, the post-election love affair with wildly overpriced favorites is in the early stages of transitioning to a new set of investors' darlings which will persist for most of 2018 followed by a synchronized collapse in 2019. The election of Donald J. Trump as U.S. President led to a "yuge" surge in investors' expectations which following a one-year surge to all-time record highs is being transformed into the most severe U.S. equity bear market since 1929-1932. The absurd popularity of cryptocurrencies, with no intrinsic value, is highly characteristic of a generational peak in anything from tulips to worthless canal/railroad/internet shares. I have recently purchased GDXJ which remains a compelling bargain below 32 and which historically performs well following Fed rate hikes, and had been buying URA prior to its recent uptrend primarily because it had been underperforming other energy producers. Energy shares had been among the biggest winners since late August after spending the first eight months of 2017 as the worst-performing major sector. I also bought a little HDGE as it dropped below 8 for the first time. My largest recent short addition has been IWM which tracks the Russell 2000 and which briefly soared to a new all-time high. I had been selling short NFLX, NVDA, and AMZN until all three of these huge favorites began forming lower highs during the past several trading days. I also added new short positions in XLI. From my largest to my smallest position, I currently am long GDXJ (some new), TIAA-CREF Traditional Annuity Fund, KOL, SIL, XME, HDGE (some new), GDX, EWZ, URA (some relatively new), REMX, NGE, RSX, GXG, I-Bonds, ELD, FCG, GOEX, bank CDs, VGPMX, money market funds, BGEIX, OIH, SEA, NORW, VNM, TLT, PGAL, EPU, RGLD, WPM, SAND, SILJ, and FTAG. I have short positions in IWM (many new), AMZN (some new), NFLX (some relatively new), NVDA (some relatively new), IYR, XLU (some relatively new), XLI (some new), FXG, and SPHD, in that order, largest to smallest.

As a general principle, I strongly believe in buying into the most panicked all-time record outflows while selling into the most intense inflows. Not counting short sales, during the past year I have done my heaviest selling since the first half of 2008 to close out profitable long positions which suddenly became trendy including COPX, BCS, RBS, EWW, TUR, LIT, EPOL, and BRF. I plan to sell even more aggressively in 2018 whenever the public makes all-time record inflows into my holdings while insiders have greatly increased their selling relative to buying. This is partly because I own many securities which tend to perform most strongly when we are transitioning to a major U.S. equity bear market, and partly because I expect 2019 to eventually transition to a full-fledged collapse for nearly all global assets. With my short positions, whenever VIX surges upward I will do a combination of partially covering and partially selling covered puts, depending upon how high their implied volatilities climb during any correction.

Those who respect the past won't be afraid to repeat it.

I expect the S&P 500 to eventually lose more than two thirds of its value from its all-time top, whether that level has or hasn't already been reached, with its next bear-market nadir occurring roughly two years following its zenith. During the 2007-2009 bear market, most investors in August 2008 didn't realize that we were in a crushing collapse. We already have numerous classic negative divergences including junk bonds sliding to multi-month lows, the Russell 2000 struggling to keep up with new all-time highs for better-known large-cap U.S. equity indices (Dow, S&P, Nasdaq), semiconductors suddenly reversing their extended uptrends, previous investors' favorites underperforming, fewer 52-week highs and more 52-week lows, the strongest intraday behavior near the opening bell when amateurs are the most eager buyers, and closed-end fund discounts climbing from rare lows. Expecting several more years of gains for the U.S. stock market is like anticipating that a 100-year-old marathon runner will continue to complete marathons for a few more decades. Far too many investors--even the most left-wing Democrats--believe that U.S. assets will keep climbing as long as Donald J. Trump remains the U.S. President. There is also a little-known megaphone formation in which the S&P 500 has been making higher highs and lower lows since 1996, so it shouldn't be a shock to investors if the current or upcoming bear market for U.S. equity indices results in the S&P 500 approaching or sliding below its March 6, 2009 nadir of 666.79. Even if it doesn't plummet quite that deeply, a two-thirds loss would put the S&P 500 below 900 which I believe is nearly certain but which almost no one currently believes is remotely possible. Far too many conservative investors took their money out of safe time deposits since they didn't want guaranteed yields of one percent; they have no idea what to do during a bear market and will inevitably end up making all-time record outflows as we are approaching the next historic U.S. stock-market bottoming patterns.

Monday, September 18, 2017

“There is nothing riskier than the widespread perception that there is no risk.” --Howard Marks

JUMPING OFF A ROOF (September 17, 2017): When I was in kindergarten the boys used to get together during recess and play word games. A popular one was to suggest two methods of dying and ask which one we would prefer: would we rather be slowly eaten by ten thousand fire ants or burned at the stake by cannibals who planned to devour us afterward? Another popular game was to pose rhetorical questions about unpalatable situations: if one of us jumped off a roof of a tall building downtown then would the rest of us also jump to show solidarity? On the way down, would we say to ourselves, "everything's fine so far"? I often wondered, and still do, if girls similarly engage in such whimsical disaster banter.

The financial markets today are serving as a repeat of my impossible childhood decisions. Would I rather buy Amazon with a price-earnings ratio above 500 (they earned 40 cents per share last quarter) or would I prefer to own Netflix at merely 222 times earnings? Would I rather purchase real estate in Vancouver or San Francisco, given that housing prices in many neighborhoods in those cities are selling for more than ten times the household income in those neighborhoods?

If everyone is jumping off the roof, my favored bet is assuming that they will fall to the ground rather than ascending into the sky.

Call me Ishmael or call me misguided, but I have no doubt that eventually investors won't be willing to pay any price for today's Nasdaq favorites. Exactly how depressed Amazon, Netflix, and Nvidia will become is uncertain but I think that 2000-2002 and 2007-2009 are useful guides to the future since the past repeats itself a lot more consistently than most people realize. I began selling short Amazon above one thousand, shorted it all the way up, and continue to add to my short position whenever Amazon reaches one thousand as it did during the past week. I believe that Netflix and Nvidia are also absurdly overvalued, and have begun shorting it less aggressively than I am doing with Amazon. If Amazon and Netflix want to be able to grow at a sufficiently rapid rate to justify their current prices, then they will have to go well beyond the solar system and find a new batch of intergalactic consumers. Even if this happens, the free shipping to another solar system might erode profit growth.

A friend of mine has owned Amazon shares for years, even suffering through their 94% collapse near the beginning of the century. I asked him why and he told me that there will always be another batch of stupid people who will pay a higher price for it. Somehow I don't think that's sufficient reason to own anything. Given the trillions of dollars which have exited bank accounts in recent years where such people have never previously invested in fluctuating assets, it is hardly surprising that they would select names like Amazon and Netflix with which they are personally familiar. If they order packages from Amazon--as I also happily do since they don't mind operating that business at a loss--and they pay 7.99 per month for Netflix, then it's hardly surprising that they would prefer to purchase those shares rather than those of far more compelling energy shares. As usual, the media has been happy to parrot meaningless and misleading hype about an alleged energy glut and why prices will remain low indefinitely--until after they soar higher, at which point they'll talk about a "global energy shortage" and give you plenty of plausible-sounding but false reasons why it was inevitable that energy rallied strongly.

Investors are too easily misled by whatever has happened during the past few years.

Without thinking about it, nearly all investors are overwhelmed by the recency bias in which their decisions are heavily influenced by whatever has happened lately. They are also easy prey for believing nonsensical price targets by anyone who wishes to proclaim them--with many of these so-called gurus having recently graduated from MBA programs and who were busy studying for their SAT tests in high school when the last bear market occurred. If someone throws around a meaningless 250-dollar price target for Nvidia then that becomes the anchor upon which millions will make buying and selling decisions; this partly explains how Amazon was able to reach one thousand.

In 2009-2012, the 2007-2009 bear market was fresh in people's memories and there were mostly net withdrawals from U.S. equity funds. Now that more than 8-1/2 years have passed since the bear market, it seems emotionally as far away as the era of the dinosaurs and thus investors are completely unconcerned with taking risks. This is evident in VIX plummeting to an all-time bottom of 8.84 on July 26, 2017, minutes after the Fed's 2 p.m. rate announcement. Since then, VIX made a higher low of 9.52 on August 8 and is completing another higher low in September. Only the most experienced investors are bothering to hedge themselves against a downturn, with many institutions figuring that doing so is an unnecessary waste of money. After hurricanes Katrina and Rita devastated the southeastern U.S., prices for hurricane insurance quintupled which encouraged Warren Buffett to sell it the following year. Investors will once again be eager to insure their portfolios against loss, but only after there has already been a substantial correction and such insurance becomes outrageously expensive. Protecting against a disaster is seen as irrelevant until it is too late to act.

Precious metals mining shares and energy companies are among the best remaining bargains.

In late 2015 and early 2016, nearly all commodity-related and emerging-market assets had become irrationally undervalued, with some of them trading at their lowest prices in decades. Emerging-market securities enjoyed one more period of notable underpricing shortly following Trump's election when the media were almost universally bearish toward them, but now that they have far outperformed most other investments in 2017 the media have turned almost unanimously favorable toward them. The main negativity remains with gold mining and silver mining shares which aren't as frequently derided as they had been around January 20, 2016 before they mostly doubled, but are usually dismissed as being unpredictable or worse. As for energy shares, the Wall Street Journal devoted its entire back page on Monday, August 28, 2017 to the hopelessness of purchasing anything in this sector. Since then there have been moderate rebounds from deeply undervalued levels. FCG, a fund of natural gas producers, is one of my favorite choices in this sector with OIH, URA, and KOL also worthwhile. FCG could double or triple from its recent bottom and would still be far below its top of June 23, 2014, while the others above could enjoy dramatic gains during the upcoming year. Insiders of energy companies during the past several trading days have been notable buyers of their own shares.

Energy shares have almost always been lagging performers, being among the last winners immediately before any severe bear market is approaching its downward accelerating phase. In years including 1981 and 2008, energy shares were among the biggest winners after the Russell 2000 had already begun its downtrend. In 2017, it is possible that the Russell 2000 and its funds including IWM peaked on July 25, 2017, the day before that month's Fed meeting. Even though the S&P 500 and many other large-cap equity indices have repeatedly set new all-time highs since then, the Russell 2000 has so far been unable to do so. This was also a feature in 2007 in which the Russell 2000 completed a double top on June 1 and July 9 while the S&P 500 completed its intraday zenith on October 9, 2007 and the Nasdaq did so on October 31. A look back at 1929, 1937, and 1973 shows nearly identical behavior prior to a severe bear market each time.

Very few investors pay attention to fund flows.

Fund-flow data has been available for open-end mutual funds for decades and for exchange-traded funds since their inception. However, similar to insider buying and selling, hardly anyone pays attention to it. It has been proven academically that all-time record inflows consistently precede periods of poor performance, whereas all-time record outflows are almost always followed by huge bull markets. The biggest monthly outflow in history from most U.S. equity funds was in February 2009, while the biggest inflows have mostly been in 2017 which surpassed their previous all-time record inflows from 2016. According to Barron's, total net inflows into U.S. exchange-traded funds during the first eight months of 2017 totaled 295 billion dollars, thereby outpacing the total net inflow of 285 billion for all of calendar year 2016. Top corporate insiders have not been so easily fooled, with among the highest ratios of total selling to buying ever recorded for top corporate executives for 2017.

We had all-time record outflows for precious metals shares during the second quarter of 2017 and all-time record outflows for most energy funds throughout 2017. For example, the outflows from both GDX and GDXJ were four to five times their previous records.

Real estate remains among the most overpriced in history in many parts of the world.

In 2001, there were numerous neighborhoods in Arizona, Florida, Nevada, and elsewhere where housing prices sold for less than 1.5 times average household incomes. In 2017, there are places where this ratio is greater than ten to one. The long-term historic average is almost exactly three, so this does not bode well for real-estate prices. This poses a serious problem to the economy since many people have purchased real estate almost entirely using borrowed money, and will thus be underwater even with moderate price losses. While there aren't as many subprime loans in 2017 as there had been in 2007, valuations are in many cases far higher and thus present much greater percentage risks to the downside.

You might think that the average 34% decline for U.S. housing prices in 2006-2011 would convince people that housing prices don't always go up, but apparently the latest fantasy is that the previous bear market was the only one in their lifetimes and from now on housing prices will keep climbing indefinitely. If reality were presented as a television mini-series then no one would believe it. Truth is indeed stranger than fiction.

There are other worthwhile short positions besides AMZN, NFLX, and NVDA.

Obviously the above three Nasdaq favorites are far from the only irrationally overpriced securities today, although they are among the most extreme. Utilities have never been more expensive in history, making funds like XLU worthwhile shorts, while funds of industrial shares including XLI are also ideal short positions. For pure diversification, selling short IWM which matches the Russell 2000 capitalizes upon the average price-earnings ratio for that basket of two thousand U.S. companies sporting by far its highest-ever price-earnings ratio in history.

In kindergarten we would always ask ourselves, "How terrible can it get?" While being devoured by wild beasts may have been our biggest fear in those days, it is far more perilous to be blissfully unconcerned with dangerously high overvaluations. Investors often mention in surveys that they are worried about terrorism, Chinese GDP growth, or whichever monsters are most frequently mentioned in the mainstream financial media. Hardly anyone is terrified as I am by the greatest overvaluations in history for most assets, the greatest-ever reliance on borrowed money, and especially the pervasive lack of worry.

We have nothing to fear but complacency itself.

Disclosure of current holdings:

There are numerous ridiculously overvalued sectors in the world today and fewer undervalued ones. The incredible bargains of late 2015 and early 2016 are gone, but I have been continuing to gradually purchase energy shares along with funds of gold mining and silver mining companies whenever they are most gloomily reported in the media and when investor outflows have been maximally intense. In a world where real estate along with U.S. equities and junk bonds have finally begun major bear markets from ridiculous overvaluations and all-time record inflows, these irrational favorites of recent years and the brief post-election love affair with wildly overbought four-letter favorites is in the very early stages of transitioning to a completely new set of investors' darlings. The election of Donald J. Trump as U.S. President initially led to a "yuge" surge in investors' expectations which have not been validated by reality; soaring price-earnings ratios have caused the U.S. stock market to become the most dangerous game. It is timely to sell short those Nasdaq favorites which are most overpriced, along with those funds with the heaviest insider selling and the most intense all-time record investor inflows. So far in 2017 we have experienced new all-time records for total insider selling of U.S. equities and all-time record net investor inflows into many U.S. equity funds. I have recently purchased FCG, OIH, GDXJ, HDGE, and URA in that order while selling short XLU, XLI, AMZN, NFLX, NVDA, and IWM. I had also bought EWZ when it suddenly plummeted over 21% to 31.78 on May 18, 2017 due to a political scandal which as with nearly all geopolitical developments exerts essentially zero impact on Brazilian corporate profits. From my largest to my smallest position, I currently am long GDXJ (some new), TIAA-CREF Traditional Annuity Fund, KOL, SIL, XME, HDGE (some new), GDX, EWZ, URA, REMX, NGE, RSX, GXG, I-Bonds, ELD, GOEX, FCG (many new), bank CDs, VGPMX, money market funds, BGEIX, OIH (some new), SEA, NORW, VNM, TLT, PGAL, EPU, RGLD, WPM, SAND, SILJ, and FTAG. I have short positions in AMZN (many new), IYR, XLU (some new), XLI (some new), NFLX (some new), FXG, NVDA (some new), and SPHD, in that order, largest to smallest. U.K. banks in particular were huge winners, with BCS (Barclays) enjoying an enormous increase since June 27, 2016 from 6.89 to 11.61 when I sold it in early February, plus some dividends as shares along the way. In 2017, EWW and TUR went from being widely detested in January to being eagerly purchased a few months later. This highlights the advantage of buying aggressively into the most severe panic selloffs while selling into the most intense excitement.

Those who respect the past won't be afraid to repeat it.

I expect the S&P 500 to eventually lose two thirds of its value from its all-time top, whether that level has or hasn't already been reached, with its next bear-market bottom probably occurring at some unknown point in 2019. As with all bear markets, the biggest losses will likely occur in its final months, and won't even be acknowledged as a bear market until it is nearly over--just as most investors in August 2008 didn't realize that we were well into the crushing 2007-2009 bear market. The current (or recently ended) U.S. equity index bull market is already the longest on record; expecting several more years of gains is like anticipating that a 100-year-old marathon runner will continue to run marathons for a few more decades. While the media have been quick to trumpet new all-time highs for many U.S. equity indices in recent months, almost no one has noticed that fewer and fewer individual shares have set new 52-week highs especially as compared with previous peaks including June 2015, and with generally reduced overall participation. While many investors expect the surge following the election of Donald J. Trump as U.S. President to continue as long as he is in office, nearly all of the anticipated future gains have likely already occurred. IWM, a fund of the two thousand companies in the Russell 2000, had been outperforming the S&P 500 by roughly 3:2 from the nadir in early March 2009 through early March 2014, with IWC--a fund of even smaller U.S. companies--also significantly outperforming the S&P 500 in percentage terms. Since then, both IWM and IWC have struggled, with IWM only modestly surpassing its December 9, 2016 intraday high of 138.82 several times and always falling back afterward, while IWC marginally surpassed its December 20, 2016 peak of 87.82 several times before failing to follow through each time. While the S&P 500 has made numerous higher highs since July 25, 2017, the Russell 2000 and IWM have not surpassed their zeniths from that day. Small-cap shares similarly underperformed at important past stock-market zeniths prior to severe bear markets including September 1929, January 1973, and October 2007. There is also a little-known megaphone formation in which the S&P 500 has been making higher highs and lower lows since 1996, so it shouldn't be a shock to investors if the current or upcoming bear market for U.S. equity indices results in the S&P 500 approaching or sliding below its March 6, 2009 nadir of 666.79. Even if it doesn't plummet that deeply, I expect a two-thirds loss to roughly 833 or lower for the S&P 500. Far too many conservative investors took their money out of safe time deposits since they didn't want yields of 1% or less; they have no idea what to do during a bear market. They have no concept of valuation or historical behavior and have been purchasing Amazon and Netflix because they are familiar with those names from their daily lives. It is the best of times and it is the worst of times.

Tuesday, July 11, 2017

“Value investing is at its core the marriage of a contrarian streak and a calculator.” --Seth Klarman

OVERLAPPING OVEREXTENDED OPPORTUNITIES (July 10, 2017): Some investors who are momentum players attempt to identify the most overextended trends and to chase after them in the hope that they become even more extreme. Others attempt to identify key turning points so they can buy or sell near the exact bottom or top. I prefer a different approach: identifying trends which have already been underway for weeks, months, or years, but aren't acknowledged because they go against the popular myths of the day. It thus becomes possible to bet on a horse which is a favorite when everyone is giving it unusually long odds against it happening. In this way, bets which should be even money will pay off far more than the downside risk you are assuming in your trading. Fortunately, we have more than the usual number of trends which fit into this ideal category at the present time.

U.S. equities have been in stealth bear markets since December 2016, but almost no one recognizes them because a tiny number of very popular shares have enjoyed huge gains so far in 2017.

Is the U.S. stock market up or down from its highs of December 2016? Most investors would immediately respond that it was higher, because they are bombarded with media stories proclaiming new all-time highs for the Dow, for the Nasdaq, for the S&P 500, and for seemingly just about every other U.S. index. However, if you examine the data more carefully you will soon realize that these well-known benchmarks have been able to achieve repeated higher highs almost entirely because of only one or two dozen huge winners which are disproportionately represented in these indices.

Take a look at IWM, a fund which invests in the Russell 2000 and which had reached a high last year of 138.82 on December 9, 2016. This fund is higher today--but by only about one percent even if you include all reinvested dividends. A one-percent climb in seven months is not much of a bull market, especially since the two thousand companies represented in this index total more than half of the 3599 total listed U.S. companies. If you prefer, you can look at IWC which had reached 87.82 on December 20, 2016, and which has similarly gained only about one percent since then. Many investors intuitively realize that this must be the case, because when they look at their quarterly statements ending June 30, 2017 they discover that their accounts have barely increased from their levels of the end of 2016.

Underperformance by smaller U.S. companies is much more bearish than simply fewer stocks remaining in bull markets.

It's not just a case of fewer U.S. stocks being in bull markets; what is essential is that when small stocks are notably underperforming large-cap favorites then this behavior is almost always followed by a severe bear market. If you look back at August 1929, January 1973, and October 2007, what all of these have in common is that small stocks had already been underperforming the best-known favorites by anywhere from several months to more than a year. Once funds like IWM and IWC struggle to make new all-time highs while the S&P 500 does so routinely, the clock is ticking on the bull market and a significant correction or worse lies just around the corner. While this is one of the most reliable patterns in the financial markets, it is also among the least appreciated.

Here is a quiz: which are the top-performing funds since late 2015 and early 2016?

If you were to ask ten thousand people this question, most of them would probably respond that technology shares were the biggest winners, with some perhaps guessing industrial or infrastructure shares. Almost no one would correctly state that commodity producers and commodity-related emerging market equities have been almost exclusively the only funds represented in the top 50 and predominantly in the list of the top 100 unleveraged funds going back to the early weeks of 2016. The reason is primarily that big-name technology shares including NVDA and NFLX have received persistently positive media coverage, whereas the media rarely talk about mining or energy companies. In addition, since most commodity producers and emerging markets had suffered multi-year severe downtrends from April 2011 through January 20, 2016, many analysts who used to follow these sectors ended up switching to other sectors or haven't been taken as seriously by most media outlets since then. A list of those funds which have doubled since their intraday lows of January 20, 2016 would be populated almost entirely with unfamiliar sectors including gold mining, silver mining, coal mining, base metals mining, along with stocks in countries such as Peru, Brazil, and Russia.

Record inflows into U.S. equity funds in 2017 have been combined with all-time record insider selling.

The best time to buy into any sector is when top executives of companies in that sector have been heavy buyers of their own shares, while most investors are aggressively unloading them. This applies to nearly all energy shares in recent weeks, with all-time record outflows from many energy-related funds including FCG which is a fund of natural-gas producers that if it quintupled in price would still be below its top of June 23, 2014--just over three years ago. FCG has unusually intense buying of its components by insiders. There have been all-time record outflows from mining funds including actively-traded gold-mining funds GDX and GDXJ during the second quarter of 2017. GDXJ had a net outflow of more than 27% of its total market capitalization during April through June 2017. This did not stop GDXJ from making additional higher lows including 27.37 on December 20, 2016, 29.33 on May 4, 2017, 30.89 on May 24, 2017, and 30.97 at today's open (July 10, 2017).

For most non-commodity sectors, insiders have never been heavier sellers than they have been in 2017, while investors have made all-time record inflows this year into most U.S. equity funds. Whenever insiders are doing the exact opposite of the public is when insiders are most likely to be proven right while the vast majority of investors will be on the wrong side. This is one reason that the rich get richer and the poor get poorer--the rich only follow each other, while the poor (really the working- and middle-class) do whatever just about everyone else is doing and which must therefore fail. Most investors are excited about buying stocks near all-time highs, while the most experienced investors are cautious and have been progressively selling into the most extended uptrends.

One sure sign of a bull market for commodity producers is when the shares of the producers far outpace their respective commodities.

How can we tell whether gold mining shares or natural-gas producers are in true bull markets? One way is by measuring the percentage increase in a basket of producers versus the increase in the commodity itself. For gold mining, for example, GDXJ is a fund of junior gold mining companies which trades millions of shares daily. On January 20, 2016, GDXJ slumped to an all-time bottom of 16.87. Since then it paid a dividend of 1.507 U.S. dollars per share in December 2016. Meanwhile, GLD which tracks gold bullion slid to an intraday low of 104.94 also on January 20, 2016. If we compute the ratio of how much each of these has gained since then, we see that GLD or gold bullion using today's closing numbers (July 10, 2017) is up by (115.47-104.94)/104.94 = 10.03% while GDXJ has gained (32.06-16.87+1.507)/16.87 = 98.97%. The ratio between these two is over 9.86 to 1. This is more than twice its historic average and thereby signals that the rally for precious metals and the shares of their producers is likely to continue. Additional supporting evidence can be seen in the Daily Sentiment Index, a survey of futures traders that has been tracked for decades; as of July 7, 2017 it showed only 10% of investors who were bullish toward gold and 9% who were bullish on silver.

The traders' commitments are at simultaneous historic extremes for gold, silver, and platinum.

The traders' commitments last week showed that commercials--the equivalent of insiders for any futures contract--were net short (238,416-131,190) or 107,226 contracts. This was their lowest total since February 9, 2016 when the rallies for precious metals and their producers had barely begun. For silver, commercials were net short 39,228 contracts, their lowest net total since January 19, 2016. For platinum, commercials were only net short 12,598 contracts which is their lowest reading since the last recession. You can see a chart of gold's traders' commitments here: notice the shrinking maroon bars. Substitute SI.png and PL.png for GC.png to see silver and platinum respectively:

  • Gold's Traders' Commitments, Current


  • VIX has been forming a pattern of higher lows from a multi-decade bottom, which historically is especially bearish for U.S. equity indices.

    People are often confused by VIX. Its most bullish behavior is when it has been forming a pattern of lower highs following a multi-decade top, as it did starting in October 2008. This was an early signal that we were transitioning from a major bear market to a powerful bull market. Now we have the exact opposite situation, where VIX slid to 9.37 on June 9, 2017--the same day that the Russell 2000 and the Nasdaq completed their respective zeniths (so far). On that day, VIX slid to 9.37 where it hadn't traded since it had touched 8.89 on December 27, 1993--almost 23-1/2 years earlier. Since then, VIX has made several higher lows including 9.68 on June 26, 2017 and 9.73 on June 29, 2017.

    Until VIX climbs to another multi-decade high and begins to form lower highs over a period of weeks or months, it is probably premature to purchase most funds of U.S. equities.

    Disclosure of current holdings:

    Whenever they have appeared to be especially irrationally depressed, I have been purchasing the shares of funds which invest either in the shares of commodity producers or emerging-market stocks and bonds, since I believe these remain the two most undervalued sectors in that order. In a world where real estate along with U.S. equities and junk bonds have finally begun major bear markets from ridiculous overvaluations and all-time record inflows, these irrational favorites of recent years and the brief post-election love affair with wildly overbought four-letter favorites is in the process of transitioning to a completely new set of investors' darlings. The election of Donald J. Trump as U.S. President has led to a "yuge" surge in investors' expectations which have not been validated by reality; soaring price-earnings ratios are far more dangerous than rising earnings. The latest illogical pullbacks for most commodity producers has encouraged me to add to these sectors. It is timely to sell short those funds with the heaviest insider selling and the most intense all-time record investor inflows. So far in 2017, we have experienced new all-time records for total insider selling of U.S. equities and all-time record inflows into many U.S. equity funds. I have recently purchased GDXJ, FCG, OIH, URA, and HDGE while selling short XLI and AMZN. I also bought EWZ when it suddenly plummeted over 21% to 31.78 on May 18, 2017 due to a political scandal which will have essentially zero impact on Brazilian corporate profits. From my largest to my smallest position, I currently am long GDXJ (some new), SIL, KOL, XME (some new), GDX, EWZ (some new), RSX (some new), URA (some new), HDGE (some new), ELD, FCG (many new), GOEX, REMX, VGPMX, GXG, NGE, OIH (many new), BGEIX, SEA, VNM, NORW, PGAL, RGLD, SLW, SAND, TLT, SILJ, and FTAG. I have short positions in IYR, XLU, XLI (some new), FXG, AMZN (some new), and SPHD, in that order, largest to smallest. U.K. banks in particular were huge winners, with BCS (Barclays) enjoying an enormous increase since June 27, 2016 from 6.89 to 11.61 when I sold it in early February, plus some dividends as shares along the way. In 2017, EWW and TUR went from being widely detested in January to being eagerly purchased a few months later. This highlights the advantage of buying aggressively into the most severe panic selloffs while selling into the most intense excitement.

    Those who respect the past won't be afraid to repeat it.

    I expect the S&P 500 to eventually lose two thirds of its value from its all-time top, whether that level has or hasn't already been reached, with its next bear-market bottom probably occurring at some unknown point in 2019. As with all bear markets, the biggest losses will likely occur in its final months, and won't even be acknowledged as a bear market until it is nearly over--just as most investors in August 2008 didn't realize that we were well into the crushing 2007-2009 bear market. The current (or recently ended) U.S. equity index bull market is already the longest on record; expecting several more years of gains is like anticipating that a 100-year-old marathon runner will continue to run marathons for a few more decades. While the media have been quick to trumpet new all-time highs for many U.S. equity indices in recent months, almost no one has noticed that fewer and fewer individual shares have set new 52-week highs especially as compared with previous peaks including June 2015, and with generally reduced overall participation. While many investors expect the surge following the election of Donald J. Trump as U.S. President to continue as long as he is in office, nearly all of the anticipated future gains have likely already occurred. IWM, a fund of the two thousand companies in the Russell 2000, had been outperforming the S&P 500 by roughly 3:2 from the nadir in early March 2009 through early March 2014, with IWC--a fund of even smaller U.S. companies--also significantly outperforming the S&P 500 in percentage terms. Since then, both IWM and IWC have struggled, with IWM barely surpassing its December 9, 2016 intraday high of 138.82 several times and always falling back afterward, while IWC marginally surpassed its December 20, 2016 peak of 87.82 several times before failing to follow through each time. Small-cap shares similarly underperformed at important past stock-market zeniths prior to severe bear markets including September 1929, January 1973, and October 2007. There is also a little-known megaphone formation in which the S&P 500 has been making higher highs and lower lows since 1996, so it shouldn't be a shock to investors if the current or upcoming bear market for U.S. equity indices results in the S&P 500 approaching or sliding below its March 6, 2009 nadir of 666.79. Even if it doesn't plummet that deeply, I expect a two-thirds loss from 2454 to 818 for the S&P 500. Far too many conservative investors took their money out of safe time deposits since they didn't want yields of 1% or less; they have no idea what to do during a bear market.

    Thursday, May 11, 2017

    “I've never walked the same path other people found comfortable and I'm not going to start now.” --Lora Leigh

    THE PIT AND THE PENDULUM (May 11, 2017): It is relatively rare to have one group of assets being incredibly overvalued and another group being simultaneously underpriced, but that is the situation which has existed in May 2017. U.S. stocks, corporate bonds, and real estate have all never been higher in their entire histories even if you adjust for inflation--with the exception of the Nasdaq which in real terms had been higher on March 10, 2000 but has already surpassed twice its previous top on October 31, 2007. Real estate in many U.S. cities is at double or triple fair value based upon historic ratios of housing prices relative to household incomes. At the same time, we have experienced incredibly low prices for many shares of companies involved with commodity production. Most mining companies slid to their lowest points in early May since December or November 2016, while many energy shares recently traded close to one-year bottoms. Nearly all commodity-related securities had completed severe extended bear markets which had lasted in most cases from April 2011 through January 20, 2016, but their bull markets have been almost completely forgotten due to their extended corrections since the second week of February 2017.

    Some funds of commodity producers have suffered all-time record outflows and have enjoyed significant insider buying of their components.

    For the one-month period ending Wednesday, May 10, 2017, the total net outflow from GDX was 1.72 billion--a new all-time record. The net outflow from GDXJ was also an all-time monthly record of 790.21 million--and since the total market capitalization of GDXJ at the close on May 10 was only 3.8 billion, this represented more than 20% of the entire fund which was withdrawn by a combination of panicked investors, momentum players switching to the short side, and some long-term holders disappointed that last year's strong initial rebound from January 20 through August 11, 2016 didn't last longer and emotionally seemed to have run into a wall. Other funds of commodity producers have also been weak since the second or third week of February 2017, with some of them trading at their lowest levels in more than a year. FCG, a fund of natural-gas producers, had the heaviest insider buying of all exchange-traded funds' components in 2017, and recently traded at less than one-fifth its June 23, 2014 dividend-adjusted peak of 113.84 (see http://stockcharts.com or any other reliable charting site).

    The funds with the biggest outflows are generally the biggest percentage winners of all funds since January 20, 2016.

    The irony is that investors aren't unloading lagging shares--they are selling those funds which had generally been the biggest winners from their historic bottoms of early 2016. If you look at a list of the top fifty funds from January 20, 2016, they consist almost entirely of securities which are primarily or entirely involved directly or indirectly with commodity production. They have gained far more than even the most aggressive technology sectors. However, most investors have remained obsessed with their favorites of recent years and after a brief fling with alternatives during the first several months of 2016--probably encouraged by weakness for U.S. equity indices around that time--they have mostly gone back into their old favorites again. This has caused already oversold and undervalued commodity-related securities to become even more compelling bargains, while many well-known U.S. equity indices have been setting frequent new all-time highs in recent months.

    Negative divergences for all U.S. assets are being widely ignored.

    If you didn't hear about the Dow surpassing 20 and then 21 thousand, while the Nasdaq topped six thousand and then 6100, it's likely that you almost never check the internet or cable TV. These round-number benchmarks were so widely reported that it was the first time since the last bull-market top that these were often quoted in non-financial news headlines briefs. The Nasdaq surpassing six thousand was announced during a break in the Yankees' radio broadcast on WFAN. However, you hardly heard anyone mentioning that thousands of smaller U.S. companies were struggling to surpass their respective December 2016 highs. Almost no one discussed how many previous severe bear markets began similarly with ignored underperformance by smaller companies. The number of new 52-week highs has also been diminishing.

    Fewer and fewer shares are propelling well-known benchmark U.S. equity indices higher in 2017.

    The S&P 500 consists of 500 stocks (a related puzzle: who's buried in Grant's tomb?) but what is amazing is that only ten stocks out of that five hundred are responsible for 46% of the entire 2017 increase in this index:

  • Just These Ten Companies Account for 46% of the S&P 500's 2017 Gains


  • VIX slid all the way down to 9.56 on May 9, 2017 for the first time since 2006.

    The last time VIX was at 9.56 or lower was when it had completed a multi-year bottom of 9.39 on December 15, 2006. A VIX reading below 10 signals that most investors who have been hedging their portfolios through insurance every single year since 2009 have decided that it is a waste of money and unnecessary. Naturally, when the fewest investors have their portfolios insured, they are maximally likely to decline so the fewest participants make money (as always). One can perhaps understand how investors today would repeat the mistakes of 1929-1932 or 1973-1974 since those earlier episodes had occurred decades ago and getting detailed information about them is challenging. However, everyone today either remembers or can easily access voluminous information about 2000-2002 and 2007-2009. I guess they figure that we'll somehow miraculously avoid a third 21st-century collapse, but unfortunately it's already baked in the cards no matter what Trump, the Fed, Putin, or anyone else does. The Fed kept rates so low for so long that companies routinely borrowed very cheap money for a very long time and used it to purchase their own shares at inflated prices. Even the most frequently repeated games have to end sometime.

    I have done more selling than buying in 2017.

    Especially if you count selling short as selling, I have done more selling than buying in 2017 which is a dramatic departure from 2016 when we had three key buying opportunities--during the first several weeks of the year for essentially all commodity producers and emerging-market securities, on June 27, 2016 for those assets which plunged the most in response to the Brexit vote, and near the end of the year when disappointed long-term holders did tax-loss selling and otherwise impatiently closed out positions just before strong early 2017 rallies. In most cases with some key exceptions like COPX, I didn't sell out of expectation of an impending collapse but due to previous worthwhile bargains becoming much less worthwhile. My guess is that the upcoming year will require even more selling than buying, especially as we approach the spring of 2018 when seasonally commodity producers often complete important topping patterns. As always, I will never sell because a particular price or time target is achieved, but only when there is aggressive selling by top corporate insiders in the sectors I own, massive fund inflows, especially optimistic sentiment, and persistently positive media coverage.

    The loonie remains the most compelling currency for purchase.

    One can make an argument for the Australian dollar and even for several others, but the Canadian dollar has become one of the world's most detested assets. It's like Rodney Dangerfield--the loonie "can't get no respect." In the early morning of May 5, 2017, the loonie slid to 72.52 U.S. cents. This was shortly after crude oil had bottomed at its lowest point (43.76 U.S. dollars per barrel) since April 18, 2016 and the day after GDXJ had completed a key higher low at 29.33 while July platinum had similarly bottomed at 894.50 U.S. dollars per troy ounce for the first time since February 2016. When it rains, it pours. Nonetheless, the Canadian dollar has a history of enjoying especially strong uptrends as we are transitioning from a bull market to a bear market for U.S. equity indices. Partly this is since Canada has an unusually high ratio of commodities to people, and commodities--especially in the energy sector--often tend to be among the last assets to complete their bull markets prior to a global recession.

    Disclosure of current holdings:

    Whenever they have appeared to be especially irrationally depressed, I have been purchasing the shares of funds which invest either in the shares of commodity producers or emerging-market stocks and bonds, since I believe these remain the two most undervalued sectors in that order. In a world where real estate and U.S. high-dividend securities have finally begun major bear markets from ridiculous overvaluations and all-time record inflows, these irrational favorites of recent years and the brief post-election love affair with overpriced industrial shares will transition to a completely new set of investors' darlings. As the greenback surprises most investors by accelerating its bear market, with the U.S. dollar index moving below 80 within roughly one year instead of continuing to rally to new 15-year peaks as almost everyone is expecting, this will lead to a major upward revision in global inflationary expectations. The election of Donald J. Trump as U.S. President means "yuge" U.S. government spending and modestly lower taxes which is a combination for a massive rise in the deficit. The latest illogical pullback for most gold mining and silver mining shares, along with natural gas producers, has encouraged me to add to these sectors, while some emerging markets have become no longer undervalued and were ripe for selling. As in late winter, it is once again timely to sell short those funds with the heaviest insider selling and the most intense all-time record investor inflows. So far in 2017, we have experienced new all-time records for total insider selling of U.S. equities. Thus, I have recently purchased GDXJ, FCG, URA, HDGE, GDX, and NGE while selling EWW, EWI, TUR, GREK, IDX, SOIL, RSXJ, and EPHE, and selling short XLI. From my largest to my smallest position, I currently am long GDXJ (many new), SIL, KOL, XME (some new), GDX (some new), EWZ, RSX, URA (some new), HDGE (some new), ELD, FCG (many new), GOEX, REMX, VGPMX, GXG, NGE (some new), BGEIX, SEA, VNM, NORW, PGAL, RGLD, SLW, SAND, SILJ, and FTAG. I have short positions in IYR, XLU, XLI (some new), FXG, and SPHD, in that order, largest to smallest. U.K. banks in particular were huge winners, with BCS (Barclays) enjoying an enormous increase since June 27, 2016 from 6.89 to 11.61 when I sold it in early February, plus some dividends as shares along the way. In just three months during 2017, EWW and TUR went from being widely detested in January to being eagerly purchased. This highlights the advantage of buying most aggressively into the most severe panic selloffs while selling into the most intense excitement.

    Those who respect the past won't be afraid to repeat it.

    I expect the S&P 500 to eventually lose two thirds of its value from its all-time top, whether that level has or hasn't already been reached, with its next bear-market bottom perhaps occurring near the end of 2018 or during the first several months of 2019. As with all bear markets, the biggest losses will likely occur in its final months, and won't even be acknowledged as a bear market until it is nearly over--just as most investors in August 2008 didn't realize that we were well into the crushing 2007-2009 bear market. The current (or recently ended) U.S. equity index bull market is already the longest on record; expecting several more years of gains is like anticipating that a 100-year-old marathon runner will continue to run marathons for a few more decades. While the media have been quick to trumpet new all-time highs for many U.S. equity indices in recent months, almost no one has noticed that fewer and fewer individual shares have set new 52-week highs especially as compared with previous peaks including June 2015, and with generally reduced overall participation. While many investors expect the surge following the election of Donald J. Trump as U.S. President to usher in four or eight more years of a bull market, nearly all of those gains have likely already occurred. Following the election of Narendra Modi in India on May 16, 2014, many analysts expected a bull market to continue for a full decade. The fund SCIF of a hundred small-cap Indian equities actually peaked on June 9, 2014 which was 24 days later; it has made a series of lower highs since then. IWM, a fund of the two thousand companies in the Russell 2000, had been outperforming the S&P 500 by roughly 3:2 from the nadir in early March 2009 through early March 2014, with IWC--a fund of even smaller U.S. companies--also significantly outperforming the S&P 500 in percentage terms. Since then, both IWM and IWC have struggled, with IWM barely surpassing its December 9, 2016 intraday high of 138.82 twice and falling back both times, while IWC barely surpassed its December 20, 2016 peak of 87.82 and soon resumed its downtrend. Small-cap shares similarly underperformed at numerous past stock-market zeniths prior to severe bear markets including September 1929, January 1973, and October 2007. There is also a little-known megaphone formation in which the S&P 500 has been making higher highs and lower lows since 1996, so it shouldn't be a shock to investors if the current or upcoming bear market for U.S. equity indices results in the S&P 500 approaching or sliding below its March 6, 2009 nadir of 666.79. Even if it doesn't plummet that deeply, I expect a two-thirds loss from 2400 to 800 for the S&P 500. Far too many conservative investors took their money out of safe time deposits since they didn't want yields of 1% or less; they have no idea what to do during a bear market.

    Saturday, March 4, 2017

    “Thus in order to be a 'radical' one must be open to the possibility that one's own core assumptions are misconceived.” --Christopher Hitchens

    FROM RICHES TO RAGS (March 3, 2017): During the past week, some amazing historic tops have been formed for well-known U.S. equity indices. The S&P 500 (SPY, VOO) soared above 2400 for the first time in history, representing a huge gain from its 666.79 intraday bottom of March 6, 2009. The Nasdaq (QQQ) is trading for double its previous top from 2007, while the Dow Jones Industrial Average (DIA) made headlines by surpassing 20 thousand and then 21 thousand in rapid succession. Since a sharp surge higher began on the day after Donald J. Trump was elected as U.S. President, many investors have concluded that this uptrend will continue for four or eight years depending upon whether or not Trump is reelected. However, this logic is just as misguided as when investors in early 2009 had nearly unanimously decided that the stock market would keep dropping because we had never experienced a subprime mortgage collapse before. There are clear signs that the post-Trump buying surge is entirely emotional and that we have already begun what will become the worst bear market since the Great Depression.

    Investors keep buying prior to major tops and selling shortly before historic bottoms.

    One sad truth is that the average investor ends up actually behind after inflation, even with assets such as stocks and bonds which have long-term net gains after inflation. The reason is that investors emotionally buy high and sell low and keep repeating this pattern. Prior to 2017, the biggest inflows generally occurred in months including February 2000 when most funds of technology shares experienced their heaviest inflows ever recorded, before or since. Afterward, from March 10, 2000 through October 10, 2002, the Nasdaq plummeted 78.4%. In February 2009, most funds of U.S. equities experienced their largest-ever monthly outflows. Not surprisingly, this was followed by the eight-year bull market which stands as one of the longest in history and which may have finally begun to reverse. Thus, investors have a proven track record of buying shortly before each top and selling within weeks of any ultimate nadir.

    Who do you think will be right, top corporate insiders or average investors?

    While investors have made all-time record inflows into U.S. equity funds at various periods in recent months, especially those funds which are expected to benefit the most from the "Trump trade," top corporate insiders have rarely been more aggressively selling. The ratio of insider selling to insider buying in recent months, and especially during the past few weeks, has surpassed most benchmarks going back to when insiders were first required to report their buying and selling during the Great Depression. There are all kinds of excuses being offered on the internet, such as insiders selling to take advantage of expected lower tax rates in 2017, or because they want to step up their buying of luxury goods, and naturally to help all of their children and grandchildren struggle through college, but the real reason is that they're selling because they expect prices to move lower--and in this case enormously lower. The Nasdaq has to drop by roughly half--not to reach its previous bottom, but amazingly to revisit its previous top from October 31, 2007. Throughout its history, no basket of small-cap stocks has ever had a price-earnings ratio above 30 prior to the final weeks of 2016, but currently the median P/E ratio in the Russell 2000 is near 31. Here is another analyst's computation of how recent valuations were even more extreme than they had been at previous all-time tops:

  • Second to None--a Look at Valuations Vs. Fundamentals


  • Small stocks are underperforming, which also happened in 1929, 1973, and 2007 prior to severe bear markets.

    One reliable historic gauge of a transition from a bull market to a bear market can be found in the behavior of small-cap U.S. equities versus their large-cap counterparts. While the Dow Jones Industrial Average, Nasdaq, and the S&P 500 have been setting numerous new all-time highs in recent months, the Russell 2000 and funds which track it including IWM have barely surpassed their December 9, 2016 highs. IWM reached 138.82 on December 9; it climbed as high as 140.86 on March 1, 2017 but is now trading near its December 9 level again. IWC, a fund of 1,359 microcap U.S. shares, topped out at 87.82 on December 20, 2016 and hasn't moved above that level since then. This is similar to the divergences which have usually occurred prior to the worst bear markets in U.S. history.

    Sentiment is unusually extreme on the bullish side toward large-cap U.S. equity indices.

    According to Daily Sentiment Index which has been around for several decades, 92% of traders were bullish toward the S&P 500 and 92% were similarly bullish toward the Nasdaq on March 1, 2017. Readings this high are rarely seen even during strong bull markets. There has also been a pattern of higher lows for VIX, which is a gauge that measures the average implied volatilities of a basket of options on the S&P 500 Index. When numerous higher intraday lows for VIX occur, it means that the most knowledgeable investors are increasingly eager to hedge their portfolios even when new all-time highs are being achieved. This is in sharp contrast to the sharp overall drop in short selling, indicating that less-experienced traders are concluding that since the U.S. stock market only goes up it is a waste of money to hedge on the potential downside.

    Many alternative investments are positioned to pick up the slack in the event of a U.S. equity downtrend.

    Bear markets for U.S. equity indices are more likely to occur if there is a set of highly liquid alternative investments where investors can put their money which they get from selling U.S. stocks. In this case, you don't have to look any farther than the U.S. Treasury market for such an alternative. The total value for all U.S. Treasuries and related assets is surprisingly close to the total value for U.S. equities and U.S. equity funds. TLT, a popular fund of long-dated U.S. Treasuries averaging 28 years to maturity, has slumped since its 143.62 top of July 8, 2016 and traded as low as 118.55 on Friday, March 3, 2017. Investors will eventually realize that it makes sense to sell especially overvalued U.S. stocks to purchase TLT and other U.S. Treasury funds. Other than U.S. Treasuries, many energy funds and precious metals producers have rebounded smartly from their multi-decade bottoms on January 20, 2016, but still are sufficiently undervalued historically to present worthwhile and more volatile opportunities with substantial potential upside based upon their previous peaks from years including 2014 for energy and 2011 for mining. Emerging-market bonds are a lesser-known alternative which are below their historic average valuations due primarily to overoptimism over the likelihood of a higher U.S. dollar.

    The greenback remains incredibly popular even though it has barely gained in the past two years and has probably begun a key downtrend.

    On March 13, 2015, the U.S. dollar index reached 100.39. It surpassed this mark by achieving a 14-year top of 103.82 on January 3, 2017. This is indeed a higher high, but the total gain from March 2015 was about the same as for boring U.S. Treasury notes. Since then, the U.S. dollar index has touched several key lower highs including 102.95 on January 11, 2017 and perhaps an additional lower high on March 2, 2017 at 102.26. Much of the excitement over U.S. equities has been from non-U.S. residents who receive extra gains when the greenback climbs versus their home currency. If the U.S. dollar moves lower, then many non-U.S. investors will perceive total losses when measured in their own currencies and will become increasingly likely to sell their U.S. assets. The only reason the greenback has remained high for so long is a continued misunderstanding of the Fed's rate-hike cycle. Historically, rising rates are not bullish for the U.S. dollar as is clear when studying a multi-decade history of Fed activity and overlaying it with the U.S. dollar index.

    The Presidential cycle is especially strong when a Republican becomes U.S. President following a Democrat.

    The U.S. Presidential cycle is a pattern in which the stock market tends to correlate with geopolitical developments. Looking back at the last four Republicans who took over from Democrats, the stock market moved lower in 1953 after Eisenhower took charge, again in 1969 after Nixon's election, in 1981 when Reagan became the chief, and once again in 2001 with George W. Bush at the helm. It is highly unlikely that Donald J. Trump will end this streak. In addition, it is common for the lowest point of any U.S. Presidential term to coincide relatively closely with the next midterm (non-Presidential) elections for the Senate and the House of Representatives which will occur on November 6, 2018. If a moderate decline for U.S. equity indices in 2017 becomes a full-fledged bear market in 2018 as I am expecting, then this could lead to key bear-market bottoms in late 2018 or early 2019.

    Recent discussion is almost entirely about how much higher U.S. equity indices can climb and when they will do so, rather than whether the U.S. stock market will move higher or lower.

    Have you read lately about forecasts of when the Dow will reach 19 or 18 thousand the next time? I thought not. However, there are all kinds of predictions about when the Dow will climb to 22, 23, 24, 25, or 30 thousand. When the nature of the debate about any financial asset is only about how much higher or lower it will go and when it will occur, then almost always it does the exact opposite.

    Gold mining and silver mining shares are once again worthwhile for purchase.

    Whenever it is timely to purchase gold mining and silver mining shares, I always know it on Seeking Alpha since there is a sudden brief wave of trolls who inform me that I have no idea what I am talking about. The last time this happened was in December 2016 when GDXJ had bottomed at 27.37. The same trolls appeared in force on a single day, which was today (March 3, 2017) primarily in the morning when GDXJ slid to an intraday low of 33.59--its most depressed point since January 4, 2017. The intraday pattern has been bullish for more than a year in which the greatest weakness for this sector occurs near the opening bell, with each selling wave followed by fresh buying from a combination of value investors and other strategic money managers. It isn't widely known that gold mining and silver mining shares have been among the biggest percentage winners from their intraday lows of January 20, 2016, with this bull market likely continuing for perhaps another year. Eventually, these shares will plummet along with the overall stock markets in most countries, but that is likely something to be concerned with a year from now rather than in the near future. Recent hype over a likely March Fed rate hike has greatly assisted in providing the most recent buying opportunities in this sector, just as it did in December 2015 and January 2016 and again in December 2016.

    Disclosure of current holdings:

    Whenever they have appeared to be especially irrationally depressed, I have been purchasing the shares of funds which invest either in the shares of commodity producers or emerging-market stocks and bonds, since I believe these remain the two most undervalued sectors in that order. In a world where real estate and U.S. high-dividend securities have finally begun major bear markets from ridiculous overvaluations and all-time record inflows, these irrational favorites of recent years and the brief post-election love affair with overpriced industrial shares will transition to a completely new set of investors' darlings. As the greenback surprises most investors by accelerating its bear market, with the U.S. dollar index moving below 80 within 12 to 15 months instead of continuing to rally to new 14-year peaks as almost everyone is expecting, this will lead to a major upward revision in global inflationary expectations. The election of Donald J. Trump as U.S. President means "yuge" U.S. government spending and modestly lower taxes which is a combination for a massive rise in the deficit. The latest illogical pullback for most gold mining and silver mining shares, along with natural gas producers, has encouraged me to add to these sectors, while recent overvaluations for base metals producers along with overpriced industrial and financial shares combined with huge inflows and a sharp rise in insider selling has encouraged me to sell those. Thus, I have recently purchased GDXJ, FCG, and HDGE while selling COPX, BCS, RBS, EPOL, ECH, EPU, and THD. From my largest to my smallest position, I currently am long GDXJ (some new), SIL, KOL, XME, GDX, EWZ, RSX, URA, HDGE (many new), ELD (some new), GOEX, REMX, VGPMX, GXG, FCG (some new), IDX, NGE (some new), BGEIX, SEA, VNM, NORW, EWW, TUR, RSXJ, PGAL, GREK, RGLD, SLW, SAND, SILJ, FTAG, SOIL, EWI, and EPHE. I have short positions in IYR, XLU, FXG, XLI (many new), and SPHD, in that order, largest to smallest. U.K. banks in particular were huge winners, with BCS (Barclays) enjoying an enormous increase since June 27, 2016 from 6.89 to 11.61 plus some dividends as shares along the way. This highlights the advantage of buying most aggressively into the most severe panic selloffs while selling into the most intense excitement.

    Those who respect the past won't be afraid to repeat it.

    I expect the S&P 500 to eventually lose two thirds of its value from its all-time top, whether that level has or hasn't already been reached, with its next bear-market bottom perhaps occurring near the end of 2018 or in early 2019. As with all bear markets, the biggest losses will likely occur in its final months, and won't even be acknowledged as a bear market until it is nearly over--just as most investors in August 2008 didn't realize that we were well into the crushing 2007-2009 bear market. The current eight-year U.S. equity index bull market is already the longest on record; expecting several more years of gains is like anticipating that a 100-year-old marathon runner will continue to run marathons for a few more decades. While the media have been quick to trumpet new all-time highs for many U.S. equity indices throughout 2016, almost no one has noticed that fewer and fewer individual shares have set new 52-week highs especially as compared with previous peaks including June 2015, and with generally reduced overall participation. While many investors expect the surge following the election of Donald J. Trump as U.S. President to usher in four or eight more years of a bull market, nearly all of those gains have likely already occurred. Following the election of Narendra Modi in India on May 16, 2014, many analysts expected a bull market to continue for a full decade. The fund SCIF of a hundred small-cap Indian equities actually peaked on June 9, 2014 which was 24 days later; it has made a series of lower highs since then. IWM, a fund of the two thousand companies in the Russell 2000, had been outperforming the S&P 500 by roughly 3:2 from the nadir in early March 2009 through early March 2014, with IWC--a fund of even smaller U.S. companies--also significantly outperforming the S&P 500 in percentage terms. Since then, both IWM and IWC have struggled, with IWM barely surpassing its December 9, 2016 intraday high of 138.82 while IWC still hasn't moved above its December 20, 2016 all-time top of 87.82. Small-cap shares similarly underperformed at numerous past stock-market zeniths prior to severe bear markets including September 1929, January 1973, and October 2007. There is also a little-known megaphone formation in which the S&P 500 has been making higher highs and lower lows since 1996, so it shouldn't be a shock to investors if the current or upcoming bear market for U.S. equity indices results in the S&P 500 approaching or sliding below its March 6, 2009 nadir of 666.79.

    Wednesday, December 21, 2016

    “Yet high uncertainty is frequently accompanied by low prices. By the time the uncertainty is resolved, prices are likely to have risen. ” --Seth Klarman

    DOLLAR SHMOLLAR (December 21, 2016): Whenever anything is repeated frequently enough, most people will end up believing it even if it is a preposterous concept. In early 2009, investors were bombarded with "experts" telling them why the U.S. economy and stock market would remain depressed for many more years because we had never experienced a subprime mortgage collapse before. Instead, we enjoyed one of the most powerful short-term rebounds in history and subsequent huge gains for U.S. equity indices. In 2011, analysts kept insisting that inflation would keep rising, commodities would soar, and emerging-market shares would remain the biggest percentage winners; all of those were the opposite of what actually happened between April 2011 and January 20, 2016. Recently, it's all about how the U.S. dollar is allegedly going to keep setting historic peaks and gaining against nearly all other world currencies. However, this is just as misguided as the other examples. The U.S. dollar has likely already begun a vital bear market.

    Tiny gains are trumpeted as allegedly being huge historic events.

    If you scan media headlines about the U.S. dollar, they emphasize how the U.S. dollar index has reached a new 14-year high, how the greenback hasn't been so elevated against most global currencies since December 2002, and why these increases will continue for many more years. While the first two statements are both technically true, they are misleading, while the inevitable conclusion of a perpetually-rising U.S. dollar is the opposite of what is going to happen during the next two or three years. First, let's look at the claim that the U.S. dollar is at a 14-year high. Against most currencies, this is correct; however, the total increase during the past couple of years has been tiny. On March 13, 2015, the U.S. dollar index achieved a peak of 100.39 which was slightly surpassed near the end of last year when it reached 100.51 on December 2, 2015. The recent top for the U.S. dollar index was 103.65 at 7:40 a.m. on Tuesday, December 20, 2016. If you do the math you can see that this is an increase of less than 3.25% over a period of more than 21 months, or about the same total gain as a U.S. Treasury note. If you look at currencies of commodity-producing countries including Australia, Canada, Brazil, and Russia, then they have not fallen to multi-decade lows but have been forming several higher lows from their bottoms which had mostly occurred in January 2016. Recent currency losses have mostly been confined to developed-market currencies such as the Japanese yen, the Swiss franc, the euro, and the British pound. As a result, the last four have all become incredibly disliked by investors while just about all speculators have been crowding into the U.S. dollar.

    Thus, while frequent media stories about "new 14-year highs for the U.S. dollar" are technically accurate, they create the illusion among most investors that these have gained 30%-40% in recent years rather than just 3%-4%, while a modest pullback would wipe out all of the gains since March 2015.

    Quantitative evidence supports the concept of a wildly overvalued U.S. dollar.

    On Thursday, December 15, 2016, 96% of professional futures traders surveyed by Daily Sentiment Index, which has been conducting such surveys for decades, were bullish toward the U.S. dollar index. On the same day, only 4% of such traders were bullish on gold and only 6% were bullish on silver. There were 7% bulls toward the Japanese yen and the euro and only 9% who were bullish on the Swiss franc. Interestingly, there were only 9% bulls on U.S. Treasury bonds (10-30 years to maturity) and 8% bulls on U.S. Treasury notes (2-10 years to maturity), indicating that oversold and widely-detested bonds are likely to rebound during the next several months along with a retreat for the U.S. dollar. Even non-financial web sites have been hyping the strength in the greenback, assuming that it will continue indefinitely. Travel channels on cable TV are telling you why U.S. residents should go overseas during the next few years to capitalize upon the strong U.S. dollar, while programs about cooking and leisure will frequently make comments such as "due to a continued climb for the U.S. dollar, such-and-such will likely become even more affordable." When non-financial commentators start taking a rising U.S. dollar for granted, you know that its rally has become very mature and is likely set for a major reversal of fortune.

    If the U.S. dollar is really going to plummet instead of surging, then your investment allocations will have to be entirely different.

    Weakness for the greenback will mean that recent all-time record inflows into U.S. industrial-related and other highly popular equities are likely to be badly misguided. A drop for the greenback will likely also help to ease pressure on interest rates, thereby causing yields to decline and prices to rebound for most bonds including U.S. Treasuries, emerging-market government bonds, and corporate bonds of companies which will be helped by a weaker greenback. Instead of betting on a stronger U.S. dollar and higher U.S. interest rates, investors should be doing the opposite.

    Gold mining and silver mining shares have been among the biggest winners of all sectors in 2016, and will likely achieve even greater percentage gains in 2017.

    Gold mining and silver mining shares in particular have been hard hit by expectations of continued gains for the U.S. dollar. After having collapsed by 80%-90% from their April 2011 tops to their multi-decade bottoms of January 20, 2016, gold mining and silver mining shares and their funds including GDXJ and SIL generally more than tripled by August 11 or 12 before thereafter suffering significant downside corrections. While they remain far above their January nadirs, they once again represent compelling values and are likely to more than triple again during the next year or so. In addition to GDXJ and SIL, funds in this sector include the relatively speculative SILJ, SLVP, SGDJ, and GOEX, along with somewhat less volatile large-cap alternatives including GDX, RING, SGDM, and PSAU. Even if a fund like GDXJ tripled in value from its current price, it would still be only about half its historic top from April 2011.

    Emerging-market bond funds are strongly out of favor, pay high yields, are not nearly as volatile as equity funds, and have been making higher lows since January 20, 2016.

    Emerging-market bond funds including ELD, LEMB, PCY, and EMLC are barely known by most investors. At least with funds like GDXJ and GDX there are huge daily volumes even if most investors swing emotionally from loving to hating them based upon their recent performance. With emerging-market bond funds, hardly anyone knows of their existence. Their yields are usually in the 6%-7% range on average, while prices have been forming several higher lows since January 20, 2016 as is characteristic of a meaningful bull market. Each of the above funds has the additional advantage of being commission-free with one or more major U.S. brokers. The strong U.S. dollar has discouraged investors from participating in emerging-market securities of all kinds, even though a weak Brazilian real means lower wages in U.S. dollar terms for Brazilian workers and thus higher profit margins--thereby explaining why Brazilian equities have been among the biggest winners of all exchange-traded funds (not just emerging markets) in 2016 with Russian equities similarly enjoying outsized gains. As a group, emerging-market equities are roughly 30% underpriced relative to U.S. equities, thereby providing an additional motive for value investors to accumulate them into weakness. As investors progressively move out of overpriced U.S. equities into emerging-market stocks and bonds, emerging-market government bonds are an excellent and less volatile way of participating in this transition.

    Several emerging-market equity funds are once again worthwhile for purchase at higher lows.

    For those who are willing to accept greater risks, many emerging-market equity bourses have become compelling bargains. Most prices are above their multi-decade bottoms of January 20, 2016, but EWW (Mexico) has become especially cheap due to overblown fears about Trump's frequent negative public comments about that country. A depreciated Mexican peso means that Mexican companies are paying wages in much lower U.S. dollars, thereby leading to wider profit margins which will soon be evident in rising corporate earnings. TUR (Turkey) with numerous political scandals and VNM (Vietnam) primarily out of unpopularity have also become worthwhile bargains for purchase. Whenever there is geopolitical upheaval or some kind of scandal in any emerging market, its stocks will often plummet even though such events rarely have any impact on corporate profit growth. A good rule is to buy on fear and uncertainty and to sell into excitement. Track the fund flows: huge inflows tend to precede market tops and lead to declines, while record outflows usually occur prior to major bull markets.

    The most popular sectors since Trump's election are not ideal for purchase, including most base metal producers and steel manufacturers.

    Following the election of Donald J. Trump as U.S. President, some commodity-related assets have surged including funds of base-metal producers like COPX (copper mining) and SLX (steel manufacturers). Therefore, I have stopped buying these, although I haven't sold them because they remain generally undervalued on a long-term basis. In general, it makes sense to purchase whichever assets are currently the least popular, which have the heaviest insider buying, which have suffered recent historic outflows, which are wildly unpopular in the media, and which have especially bearish sentiment. If you only buy such securities, while selling whatever has become trendiest with the heaviest inflows, the most positive media coverage, and the most intense insider selling, then your portfolio will perform impressively in the long run.

    Investors become irrationally obsessed with myths like interest-rate differentials.

    Two years ago, the highest interest rates in the world were almost entirely in emerging-market countries including Russia and Brazil. If investors had purchased those currencies with the highest interest rates, then those would have been among the worst currency performers in 2015. I am not sure why the myth persists about investors seeking out the highest yields when making currency trading decisions, but it has no basis in the historical record. U.S. interest rates are currently above those in most developed countries, which is used by many analysts and brokerages as an excuse for anticipating a higher U.S. dollar. However, following their recommendations would be a major error. The most successful currency investors look at relative valuation which has no correlation with interest rates. I will now explain a simple method of computing such relative valuation.

    The Big Mac tells the truth.

    One well-known but little-used indicator to determine which global currencies are too high or too low is the Big Mac indicator. This was discovered by some clever person several decades ago. A Big Mac contains almost identical ingredients no matter where in the world it is made or consumed. If the price of a Big Mac sandwich at a number of McDonald's restaurants in any given country is significantly higher or lower than it is somewhere else, then it usually indicates that the country with the higher price has an overvalued currency while the cheapest Big Mac sandwiches can be found in the countries with the most underpriced currencies. Today, you can get good bargains on a Big Mac in countries including Japan, the U.K., most of the EU, and Switzerland. This is not usually the case. Among the highest Big Mac prices are those in the United States, which is also not typically true. In 2011, a Big Mac was unusually costly in cities including Sao Paulo and Moscow, which contradicted most analysts' expectations of continued gains for overpriced emerging-market currencies and led to some of the biggest losses for these currencies in their entire histories between April 2011 and January 2016. Today's Big Mac message is that the U.S. dollar will retreat while the currencies of nearly all developed markets will rebound.

    How long will these reversals persist?

    Since January 20, 2016, most funds of commodity producers and emerging-market equities have been among the top-performing winners from their respective 52-week lows out of all exchange-traded funds. This pattern will likely continue in 2017, but it won't persist forever. Eventually, heavy insider buying of these securities will become transformed into substantial insider selling, just as has occurred recently with twice the usual ratio of insider selling to insider buying for overall U.S. equities. The media will change their tune and will invent a new series of meaningless myths--just as they did in the first half of both 2008 and 2011--which everyone will believe about commodities and emerging markets continuing to climb forever. This will encourage all-time record inflows into most funds of commodity producers and emerging-market securities. Such a dramatic transformation probably can't happen soon, but it could occur by the first half of 2018.

    Aging bulls lead to fewer and fewer stocks remaining in bull markets.

    One consistent pattern is that as U.S. equity indices try to extend their longest-ever bull markets, fewer and fewer stocks will continue to climb while others gradually begin bear markets. Whenever such a transition occurs from a major bull market to a major bear market for U.S. equity indices, most investors are reluctant to embrace a bearish thesis. Instead, they will crowd more and more frenetically into whichever sectors and shares are the biggest percentage winners. So far, hardly anyone has been pouring into most of the top gainers of 2016, but this will likely happen at some point during 2017-2018. Therefore, whatever continues to climb next year will likely enjoy far more positive investor attention than usual, especially as rising shares face less and less competition. This kind of narrowing reached its all-time extreme in January 1973 when only about 75 shares (known popularly as the "Nifty Fifty") were continuing to climb while thousands of U.S. equities had already begun major bear markets. Eventually, from January 1973 through December 1974, we experienced the most crushing bear market since the Great Depression with the Nifty Fifty stocks being among the greatest percentage losers.

    It is likely that before we enter the next global recession we will have a final surge for whichever assets are continuing to set new 52-week highs several months or a year from now, and perhaps also into the early months of 2018. At that time it will probably be essential to sell all risk assets, because a very undervalued and pummeled U.S. dollar in 2018 could be setting the stage for its next powerful bull market. Just when everyone will have concluded that the greenback will keep slumping, it will probably enjoy even greater gains than it has achieved in the current cycle.

    Disclosure of current holdings:

    Whenever they have appeared to be especially irrationally depressed, I have been purchasing the shares of funds which invest either in the shares of commodity producers or emerging-market stocks and bonds, since I believe these remain the two most undervalued sectors in that order. In a world where real estate and U.S. high-dividend securities have finally begun major bear markets from ridiculous overvaluations and all-time record inflows, these irrational favorites of recent years and the brief post-election love affair with overpriced industrial shares will transition to a completely new set of investors' darlings. As the greenback surprises most investors by accelerating its bear market, with the U.S. dollar index moving below 80 within 1-1/2 years instead of continuing to rally to new 14-year peaks as almost everyone is expecting, this will lead to a major upward revision in global inflationary expectations. The election of Donald J. Trump as U.S. President means "yuge" U.S. government spending and modestly lower taxes which is a combination for a massive rise in the deficit. The latest illogical pullback for most gold mining and silver mining shares, along with undervalued emerging-market bonds, has created some compelling buying opportunities, so be sure to seize them before they disappear. From my largest to my smallest position, I currently am long GDXJ (many new), SIL (some new), KOL, GDX (some new), XME, COPX, EWZ, RSX, GOEX, URA, REMX, VGPMX, ELD (some new), HDGE (some new), GXG, IDX, NGE, BGEIX, ECH, FCG, SEA, VNM (some new), NORW, BCS, EWW (some new), PGAL, GREK, EPOL, RBS, TUR (some new), RSXJ, RGLD, SLW, SAND, SILJ, EPU, FTAG, SOIL, EWI, EPHE, and THD. I have short positions in IYR, XLU, FXG, and SPHD, in that order, largest to smallest. I recently sold DXJ because I believe the uptrend for Japanese equities and the downtrend for the Japanese yen have both been overdone.

    I expect the S&P 500 to eventually lose two thirds of its value from its all-time top, whether that level has or hasn't already been reached, with its next bear-market bottom perhaps occurring near the end of 2018 or in early 2019. As with all bear markets, the biggest losses will likely occur in its final months, and won't even be acknowledged as a bear market until it is nearly over--just as most investors in August 2008 didn't realize that we were well into the crushing 2007-2009 bear market. The current U.S. equity index bull market is already the longest on record; expecting several more years of gains is like anticipating that a 100-year-old marathon runner will continue to run marathons for a few more decades. While the media have been quick to trumpet new all-time highs for many U.S. equity indices throughout 2016, almost no one has noticed that fewer and fewer individual shares have set new 52-week highs especially as compared with previous peaks including June 2015, and with generally reduced overall participation. While many investors expect the surge following the election of Donald J. Trump as U.S. President to usher in four or eight more years of a bull market, nearly all of those gains have likely already occurred. Following the election of Narendra Modi in India on May 16, 2014, many analysts expected a bull market to continue for a full decade. The fund SCIF of a hundred small-cap Indian equities actually peaked on June 9, 2014 which was 24 days later; it has made a series of lower highs since then. IWM, a fund of the two thousand companies in the Russell 2000, had been outperforming the S&P 500 by roughly 3:2 from the nadir in March 2009 through March 2014, but thereafter has gained less than the S&P 500 and many other large-cap indices. The most recent high for IWM occurred on December 9, 2016, making the total post-Trump rally less than 31 days. At least you can say that it lasted a week longer than India's "decade-long" bull market. There is a little-known megaphone formation in which the S&P 500 has been making higher highs and lower lows since 1996, so it shouldn't be a shock to investors if the current or upcoming bear market for U.S. equity indices results in the S&P 500 approaching or sliding below its March 6, 2009 nadir of 666.79.