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Would the last one to leave please turn out the lights? Ordinary investors, corporate insiders alike flee stocks
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Living through an “ebb tide” market… and the No. 1 way to play it
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Crisis is over, declares Spanish premier Tuesday… Three eggs hit his face today
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Smoot-Hawley redux? Critical China vote in Congress tomorrow
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Rare earths story takes a critical turn: Is China shutting off exports to Japan?
If you’ve been feeling skittish about stocks lately, you’re hardly alone. A poll of investors commissioned by the Associated Press and CNBC finds…
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61% are less confident about buying and selling individual stocks, owing to recent market volatility
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55% believe the market is fair only to some investors.
Over the last 2½ years, investors have pulled a net $244 billion out of stock mutual funds, adds the Investment Company Institute. Meanwhile, they’ve poured $589 billion into bond funds during the same period.
My how times change. Ten years ago — just as we were recommending gold as an alternative — the mantras among middle-class investors were “invest for the long run” and “stocks always go up.” The following chart, helpfully assembled by economist David Rosenberg, shows how daft that idea was, indeed:
Yep, you could have parked your money in 90-day Treasuries and rolled them over continuously… and you’d have made nearly as much money as you’d have lost buying an S&P 500 index fund.
One single investment decision in 1999 — to put your money in gold — would have paid 10 times that return. Of course, gold was the province of cranks and kooks back then… so very few people made that choice.
Even corporate insiders are headed for stock floor exits these days. Last week, as the S&P posted a nice 2% gain, corporate officers and directors bought $1.4 million in shares of their companies. A tidy little sum…
But they sold $411 million — a ratio of $291 of stock sold for every $1 purchased. But hey, it’s an improvement over the week before, when the ratio was 652-1.
With data like this, we’re struck by how equally irrational a bust can be…
“Odds are if your neighbor knows anything at all about the stock he just bought beyond its ticker symbol,” says Chris Mayer, “it is probably the price-to-earnings (P/E) ratio.
“The P/E ratio is the most well-known (but not best) measure of how cheap or dear a stock may be. The market overall, too, has a P/E that rises or falls dramatically. It has fallen 35% in the last 12 months. Earnings surged in the second quarter, but the stock market was lower.
“I say get used to it.”
Chris recently reread Humble on Wall Street, the 1975 memoir of investor Martin Sosnoff. Like many in those era, Sosnoff got burned by the bear market that set in after the Dow hit 1,000 in 1966.
“It is worth saying,” Sosnoff wrote, “how difficult it was for any professional investor in 1965 to conceive of the Dow Jones industrial average heading toward 7 times [earnings] when it was then at 17 times.
A handful of people did, like A.T. Mahan, who toiled in a now-defunct brokerage called Delafield and Delafield. He saw prices advancing more slowly than profits — and the inevitable compression of P/Es that would follow. “We are currently in an early phase of an ebb tide,” he wrote in late 1965.
“We are in a Mahan-like market,” Chris concludes. “We are on the ebb tide. Stocks will rise more slowly than earnings as P/Es compress.”
“But don’t let that discourage you,” Chris urges, always the optimist in the bunch. “‘For the enterprising investor, this should be a challenge, rather than a cause of discouragement,’ Mahan wrote. ‘In good times, almost anyone can make a profit. But the years ahead should separate the men from the boys by placing a high premium on stock selection.’”
In other words, “It’s a good time for stock pickers,” says Chris. A basket of carefully chosen stocks is about your only choice right now if you don’t want to flee to strictly gold and/or cash.
Ed. Note: In fact, we expect it to be a “good time” for stock pickers for several years to come. That’s why we’re opening up membership to one of most coveted services. If you missed the announcement we sent yesterday, here’s a brief summary:
The Agora Financial Equity Reserve gives you lifetime membership to all of our stock-picking services. If you want the flexibility from a suite of services… but you don’t want to be bogged down with options recommendations that don’t fit your style… the Equity Reserve is exactly what you need.
We’re opening up membership for the next seven days… and that’s all. Come Wednesday, Sept. 29, we’ll issue a report called 8 Stocks for RIGHT NOW, spelling out the cream of the crop from all our editors… and then membership will be closed.
For a comprehensive rundown of the services and privileges that come with the Equity Reserve, please give your attention to this presentation by our publisher Joe Schriefer. Once again, this offer is open only for the next seven days.
Major U.S. stock indexes gyrated during the first hour-plus of trading today… ending up about where they were yesterday, which is about where they’ve been all week.
On the positive side of the ledger…
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Existing home sales rose 7.6% in August. (Never mind that it rose from a record low in July. Or that 34% of those sales were foreclosures, short sales, etc. — up from 31% a year ago)
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The Conference Board’s leading economic indicators rose 0.3% in August.
But on the negative side…
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First-time jobless claims grew last week by 12,000 — the first increase after two weeks of declines. The Street was betting the figure would stay flat
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Jitters about the health of the eurozone are back in view. And how…
Two days after Spain’s prime minister declared, “The debt crisis affecting Spain, and the euro zone in general, has passed," we have ample evidence to the contrary.
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Ireland’s economy shrank 1.2% during the second quarter, much to the shock of mainstream analysts expecting growth. All of a sudden, the cost of insuring $10 million in Irish sovereign debt for five years just blew out from $464,200 to $490,800. Spreads are likewise widening for Portugal, Spain and Greece
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Opposition politicians in Ireland are calling for the nationalized Anglo Irish Bank to default on its bondholders, prompting the finance minister to label such a prospect “unthinkable”
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The European purchasing managers index is pointing to a euro slowdown, in yet another surprise to mainstream analysts. This is one of those figures (like the ISM manufacturing index in the U.S.) where 50 indicates the borderline between expansion and contraction. Eurozone PMI fell from 56.2 in August to 53.8 in September — the biggest decline since November 2008.
The renewed panic in the eurozone is doing little to bring hot money back to the greenback. The dollar index is up ever so slightly this morning, just barely above 80 again.
Yet hot money isn’t exactly fleeing to gold, either. It’s merely holding its own this morning, still near record territory at $1,292. Silver clings to the $21 level.
For the moment, the refuge of choice appears to be U.S. Treasuries. The yield on a 10-year note is back below 2.5% this morning.
The dispute over the relative value of the dollar and the Chinese yuan, simmering all year, is getting closer to a boil.
Since Beijing depegged the yuan from the dollar in June, the yuan has risen about 2%. That’s nowhere near enough for proto-protectionists on Capitol Hill. So tomorrow, the House Ways and Means Committee votes on a bill expanding the Commerce Department’s powers to slap tariffs on Chinese imports.
Chinese premier Wen Jiabao says the crusaders in Congress will rue the day they get what they want, if that means a 20-40% rise in the yuan. “We cannot imagine how many Chinese factories will go bankrupt, how many Chinese workers will lose their jobs, and how many migrant workers will return to the countryside,” Wen said yesterday during a speech in New York.
China is formally denying that it’s cut off exports of rare earths to Japan. We can’t help but think of that saying about “no rumor should be considered confirmed until it’s officially denied”… and as such, we won’t completely dismiss The New York Times story that Chinese customs officials are intervening at portside to stop shipments of the minerals to Japan.
If this is for real, and it drags on long enough, it’ll be mighty hard for Japan to keep making hybrid cars, solar panels and a host of other high-tech.
Blame it on a border dispute: Earlier this month, two Japanese coast guard ships discovered a Chinese vessel fishing in the East China Sea — in territory controlled by Japan but claimed by China. The ships collided, Japan took the captain of the Chinese vessel into custody and China may or may not have responded with the export ban, depending on whom you believe.
“Rare earths are a fast-moving, fast-evolving, technology-critical field,” says Byron King, who reminds us China controls 95% of world production. “The bad news is how far behind we in the West are. It's not just mining and milling, either, where the Chinese are leading the world. The Chinese pretty much control the physical and intellectual value chain.
“Rare earths are a tiny fraction of the size of, say, the gold and silver investment space. And as investments, rare earths are microscopic compared to, say, oil and gas.” Which is why the handful of rare earths projects outside of China have such explosive investment potential. Byron named three tiny companies in his most recent issue of Energy & Scarcity Investor.
You can read that issue as soon as you sign up for a membership in the Equity Reserve… and get lifetime access to all our stock recommendations. Here’s where to get started.
“I am a doctor and I own my own business,” writes a reader continuing our “America: Love It or Leave It” dialogue. “As a Purple Heart Vietnam vet, I have bled for my country and over the last 42 years fought the good fight.
“I used to feel like your reader that says stay and fight. Over the last two years, I have stayed, fought and watched this once-great nation spiral down the toilet. There comes a time when the reality finally hits me so hard I have to finally admit the inmates have taken over the asylum and it is time to bail out. I live in Hawaii. We had one sane person running for mayor, and he got a 18% of the votes.
“All I can do at this time is thank God for the great life He has given me, pack my bags and head for a great life in another country. I know I am not alone in this exodus. It will be interesting to see what is left when the rest of the producers leave and the entitlement leaches have no one but each other to suck dry.”
“I've lived in Canada for 40 years and am a U.S. citizen,” writes another reader, “I can't ‘get out’ of U.S. citizenship due to the larcenous fraudulent EXIT TAX. I would be taxed twice on all my assets. Once by the U.S. on the deemed disposition at exit, and again by Canada when assets are actually liquidated.
“The U.S. is unreasonable, larcenous and unfair. I am a financial prisoner and not a free person! None of my assets were made in or from the U.S. I owe the U.S. nothing. In fact, I did my U.S. military duty (with an honorable discharge), including one year in Vietnam.”
The 5: Ah yes, the exit tax. This little gem, enacted in 2008, means if you want to give up your U.S. citizenship, your entire net worth will be taxed as if it’s this year’s income. But that alone isn’t enough to give up on the idea of expatriation…
“I am back in the U.S. for 12-18 months to launch the American side of a company. I worked in international public health in the early and mid-’80s and saw that in many ways, there are excellent alternatives to living in the U.S. In 2004, when I realized that there weren’t enough intelligent votes left in the USA to do what was needed, I sold it all and left again: Costa Rica.”
“Great move, except that in the last five years, the crime rate and cost of living in Costa Rica have escalated, the crime in particular. If the C.R. government has done something about the crime when I am ready to leave the U.S. again, then back to Costa Rica.
“Otherwise, my shortlist includes Panama, Ecuador, Uruguay, Argentina, Israel and Thailand. Nicaragua is also nice, but the infrastructure in the other places is better. ”
The 5: Indeed, we’re leading our next expedition to Rancho Santana on the Pacific Frontier in Nicaragua, Dec. 15-19. Rumor has it Bill Bonner will be joining us. But that’s an unconfirmed “Bill sighting.” The past tours we’ve lead have been fantastic and a lot of fun. If you’re interested in details, check out the site and email Marc Brown at: MARCB@RANCHOSANTANA.COM for details. Tell him Addison sent you.
Regards,
Addison Wiggin
The 5 Min. Forecast
P.S.: Gold is on everyone’s mind these days. As such, our friends at U.S. Global Investors just put together a nifty timeline demonstrating gold’s role throughout history. Just drag the gold nugget across your screen to cover thousands of years… and discover a few things you never knew.
For instance, did you know the first real “gold rush” in the United States took place in North Carolina? Check it out here.