We want to add to our last post because we believe the topic is of immense importance to the younger generations starting to save and plan for their retirements.   Note, we had a slight error in the post,  Keeping Stock Market Returns In Perspective, on the annualized return for President Obama’s S&P due to the wrong start date.  We have made and noted the correction.

We doubt many caught it but glad we did before say, Fox News, as they may accuse us of searching and cooking up fake market conspiracies to hurt President Trump politically.  God forbid that ever happens in this great country.

Beware Of Buying Tops 

Let of preface our post by saying that we do not, nor does anyone else know the future or can say if stocks are topping or have high valuation levels with absolute certainty.  We have no idea if stocks are going to go down 50 percent over the next few years or rise by 1,000 percent over the next ten years.  We can only look to past history, logic, and time tested valuation metrics to try and estimate probabilities.

Moreover,  there is always a possibility that “this time may be different.”  After all, the magnetic north pole is heading south at an unprecedented rate.   Noth pole elves morphing into south pole elves can’t be a good thing.

If you have been reading GMM over the past few years, you know we come from a trading background and our brains are not wired like long-term investors, who work, save and allocate their hard-earned savings to, say, a 60/40 percent diversified portfolio of stocks and bonds and live out their lives, watching the markets only occasionally.   Trading and analyzing the markets and the global economy has been our life, 23/5 for most of our professional career.

It’s ironic the cable financial networks, who profess to be all-in for the long-term investor spew so much market noise, conferring very little value-added to long-term holders, even if only the Top 10 percent of households directly hold 86 percent of all stocks.

We do recognize, however,  there are very few exceptions in an investor’s life that should deviate from the 60/40 allocation discipline and believe the current environment is one of these times.  That is, it’s time to pare back on some risk and move into a higher cash position.

Valuations 

Almost by any metric,  the U.S. stock market is extremely overvalued by any historical measure.

 

Dot.com Giddiness

We are also starting to see the same sort of giddiness experienced at the top of the dot.com boom, canonized by President Trump’s current chief economic advisor, Larry Kudlow’s infamous quote in February 2000,

“This correction will run its course until the middle of the year. Then things will pick up again, because not even Greenspan can stop the Internet economy.”  — Larry Kudlow, Feb 2000

The Nasdaq was in a bit of a slump as of the date of that quote but then rallied to its near-term peak on March 10, 2000, and preceded to fall 74 percent before bottoming in October 2002.

If you had bought the Nasdaq on March 10, 2000, the closing top just after Larry Kudlow’s pronouncement and held the index even until this past Friday’s close, your annualized price return of  2.83 percent probably would have underperformed rolling 1-year CDs (need to confirm)  over the same time period.

Yes, we are cherry-picking Mr. Kudlow’s call and you will find many wrong calls we have made on this blog over the past nine years.  The only people who get it right 100 percent of the time are liars and we can think of a few big ones, who lie and lie a lot.

Mr. Kudlow seems to get the “big ones” wrong most of the time, however.

Stock Market 101

We were so concerned about the dot.com bubble sucking in the “crowd,” including many of our friends at the top,  we felt obligated to teach a class, Stock Market 101,  at our local community college just after Y2K.  The class was overflowing as many signed up, even though they had to pay a modest fee, simply because they felt stupid about being left behind and watching their friends get rich.

In our first class, we showed a documentary about Charles Ponzi.

About halfway through the semester,  Apple announced disappointing earnings just before our night class started and I came in and informed the class that Apple’s stock was down 50 percent — “shaved in half” —   in after-hours trading since the closing bell a few hours earlier.  I could see the blood draining out of many of my student’s faces as, no doubt, they had loaded up at what was probably close to the top.

Holding Apple would have been a good decision, in hindsight and worked out very well or, better yet, having some capital free to pick it up 50 percent cheaper on that day in 2000 would have been even nicer.  Funny though,  how it never seems to work out that way.

Calling Tops 

Calling exact tops is a mug’s game and is truly impossible.  I top ticked crude oil futures in the pits once (I believe it traded on the NYMEX) in a trade one day long ago.  My Jack Carl futures broker congratulated me for selling at the top tick of the day and I felt like a genius.  I must qualify, however, it was one out of about 100K trades and that was before the ‘bots controlled the markets.

Just an aside.  I heard on talk radio this past Saturday some fraud and d-bag promoting trading crude oil and FX futures to retail investors.  Are you frickin’ kidding me?  This is the kind of crap you hear at market tops.  Everyone is a trading genius now.

A better example of the difficulty of top ticking, and one much closer to home is that earlier this year we began selling and setting up some shorts in the S&P at 3025, which worked for us a few times and made a few bucks,  but we were eventually forced to cover at 3125 for a loss, though, thank goodness not a catastrophic one.

Thanks to our good friend, Joe, one of the three Joes now in our Hall of Fame, along with Joltin’ Joe and Joe Montana – he knows who he is – who gave us confirmation on our trade to cover.  We were not absolutely certain of the result when we put the trade on but took a stab calculating the probabilities were in our favor.  We had limited tolerance for pain and a relatively short time horizon and were eventually wrong during that window.  On to the next trade.

Who knows where the market will go from here but given valuations, we don’t think there is a helluva lot of runway left.  We could be wrong but based on past history and current metrics we think the probability of a new bull market is low even though emotions are running high and the trending ‘bots, with zero context for valuation or concern about an approaching cliff, are in control.    I think one day, history will look back to how stupid AI was in determining or ascertaining stock valuation levels.

It’s all about the next trade, HAL.

Housing Bubble Example

I sold my oceanfront house at the end of 2004, on “bankers row” in a small beautiful coastal California town,  having zero doubt the country was in a massive housing and credit bubble.  It had appreciated 200 percent in just over eight years.   My real estate broker, who told me I was paying too much when we bought said I was crazy to be selling then.  We didn’t use her on the sell, by the way, and did a private transaction with the buyer, saving the $100k in brokerage commissions.

Prices continued to rise for another year and many of my friends, who had just bought in mocked us with a plethora of  “I told you so’s.”

I never wavered and knew it was just a matter of time and even began shorting stocks, such as Golden West Financial and Washington Mutual, which continued to rise, squeezing me out of some  — too many — of the positions due to an unwise use of excessive leverage.

I felt bad for the buyer of our house, who later became a close friend, as the price dropped by over 50 percent by 2010 and is probably just getting back to the price point to where I had sold.

Would I buy a house in California at today’s prices?   Only if the price-to-rent ratio pencils out and good luck finding one.

It is tragic for the younger generations just starting out in life and probably why the state’s population growth is stagnant and/or declining.  Their migration out of California to states such as Texas will have political ramifications, turning red states purple, and eventually blue.   If Texas turns blue, it’s over for the Republicans for at least a generation.

Of course, it will be the Fed’s fault (jk) for driving up real housing prices and forcing the second great migration.  No doubt.

Never underestimate the power of unintended consequences.

Data On Buying Tops

So, we leave you with an enhanced version of the chart from yesterday’s post.

The data illustrate the returns if you had jumped in at prior market tops and bull market peaks.  If you had bought the S&P500 at the feeding frenzy just after a Greenspan juiced Y2K liquidity injection (sound familiar?), for example, as many that I know did and even held it until Friday’s close, your annualized return would be 3.85 percent before divies. A fricking dismal return.

Entry price is everything, folks.  Now is not the time to get all lathered up on talk of a new bull market. Rather it’s time to control emotions, tie ourselves to the mast and put wax in our ears to drown out the sound of the sirens and market hype, which is always loudest at market tops.

I certainly don’t think we are going to miss a “chance of a lifetime to buy cheap.”   The last time I heard that is when a clueless manager at a now long-ago bankrupt European bank was putting tremendous pressure on me to “load the boat” with emerging bonds just before a major sovereign debt crisis.  I told him if he wanted the firm to get long, he can buy and sign the trade tickets.

We believe patience and more patience will pay off.  Big-time.

Presidential Stock Market 

We have added a few more presidents to our table in our last post.

Unlucky W..  as not only did he suffer 9/11, but his presidency was also bookended by two brutal, and I mean brutal bear markets, the later maybe some of his own making.

We were a bit surprised by the Bush#41 S&P outperforming President Reagan’s on an annualized basis, but, note, however,  stocks were in a very ugly bear market in Reagan’s first 18 months as he allowed Fed Chairman Paul Volcker to put the squeeze on the money supply to wring inflationary expectations out of the economy.   Do you think that could ever happen today?  Ha-friggin’-ha!

Bush#41’s relatively decent stock market performance and 89 percent approval rating with Gallup in February 1991 didn’t help him get reelected, did it?   In fact, he seemed so invincible at the time, none of the heavyweights in the Democratic Party, such as Senator Bill Bradley thought he could be beaten and refused to enter the race.   Enter William Jefferson Clinton and then the spoiler Henry Ross Perot, who took down 19 percent of the national vote.   See my personal dust-up with Ross here.

President Trump Chasing History 

Never has the country had a POTUS, who day trades and blatantly manipulates the stock market,  taking credit for the price spikes and linking it to his performance as we do today?

The table below illustrates the path the S&P will have to take from Friday’s close to match the S&P of these prior presidents.

 

 

If Trump is a two-term president, which we think is unlikely,  the S&P will have to close at 6405 on January 20, 2025, an annualized 14.46 percent return from Friday’s close in order to match President Obama’s S&P500.   Not impossible but highly unlikely, in our opinion, unless the official measures of inflation (see here for alternative measures of inflation, which we believe better reflect reality) move significantly higher.  But if inflation kicks higher,  its trouble for the bond market, which with the proliferation of debt over the past 20 years will spell trouble for the global economy and stocks.

Our best-calculated guess?  The Trump S&P will significantly underperform the Bush#41 S&P.

There you have it, folks.  At worst, some good data for your holiday cocktail conversations

As always, we reserve the right to be wrong.

Have a great Holiday and to all, a good night!

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