Tuesday, October 30, 2018

“Investment success doesn’t come from 'buying good things,' but rather from 'buying things well.'” --Howard Marks



BUY BECAUSE IT'S A BEAR (October 30, 2018): During any market topping process you hear almost nothing about the possibility of a bear market, even a mild one, since investors are so excited about the potential upside and become irrationally complacent about losing money. One shared characteristic of 2000, 2007, and 2018 is that very few bothered to consider the potential downside risk. This was especially true in 2018 since we had experienced U.S. equity bull markets which had lasted for roughly 9-1/2 years and seemed as though they might continue forever--or at least as long as Donald J. Trump was the U.S. President. Recently the dialogue has changed so that many investors are asking whether we are in a bear market. While there isn't a consensus on that issue, investors are far more worried and many have been "reducing risk"--a phrase which is utilized primarily to justify selling something at a low price which should have been sold much earlier at a high price when investors had been so pleased with their results that they weren't even bothering to log into their accounts. Analysts have become increasingly bearish for technical or other reasons, with a few holdouts insisting that we are still in a bull market and that therefore you shouldn't sell too much.


I have an entirely different viewpoint: it is precisely because we are in a U.S. equity bear market, and probably a severe one, that you should be buying now instead of selling. The biggest short- and intermediate-term stock-market rallies in history have generally occurred during bear markets. If the current bear market ends up being as dramatic as I expect it will eventually become, then the most unpopular shares including emerging-market securities and many commodity producers should perform especially well from now into early 2019 and perhaps in some cases into early 2020 depending upon what happens next year. Bear markets almost always provide the best trading opportunities for those who aren't afraid of short-term capital gains. With the lower U.S. taxes which will persist at least through 2020, you also shouldn't fear short-term capital gains which as a U.S. resident will be taxed at their lowest levels in several decades.


Bear markets tend to be badly misunderstood.


If you were to ask most investors about bear markets then they would give wildly inaccurate responses based upon their emotional memories rather than fact. For example, the bear market of 2007-2009 was the most severe since the Great Depression. It began with the Russell 2000 completing a double top with nearly matching highs on June 1, 2007 and July 9, 2007. Many other U.S. equity indices topped out later as they often do, with the S&P 500 reaching its highest intraday point on October 9, 2007 while the Nasdaq did likewise on October 31, 2007. The U.S. stock market experienced several sharp plunges during the first part of its bear market and rebounded sharply after each one. By the middle of August 2008, roughly 14-1/2 months after the Russell 2000 had ended its uptrend, most investors had no fear of an extended downtrend and thought that we were still in a bull market. This was true even into early September 2008. Only after the huge collapse from the 1303.04 intraday peak for the S&P 500 on September 3, 2008 through its November 21, 2008 intraday bottom of 741.02--a total plunge of more than 43%--did investors finally wake up and realize what was happening which of course was far too late to be able to sell at favorable prices. Not that this stopped anyone, as we had all-time record outflows from most U.S. equity funds during the lowest points in the fourth quarter of 2008 and the first quarter of 2009 when for two weeks the S&P 500 was trading below its November 2008 bottom.


The 2000-2002 bear market was similar; almost no one acknowledged it even in January 2002 when it had been underway for nearly two years. Investors are attuned to being overly optimistic when they should be pessimistic and vice versa, which is an important lesson today when fear and gloom have quickly taken over where they had been almost nonexistent several weeks ago. Talk about a crash, pending doom, and similar topics which had been completely absent two months ago are now being routinely debated in the mainstream financial media. In all previous bear markets this was what had happened prior to each strong bear-market rebound, and that is what is likely to occur this time also. The past almost always repeats itself with some variations--some refer to this process as rhyming with the past.


The Russell 2000 Index and VIX have been demonstrating classic signs of a sharp "surprise" recovery for stock markets worldwide.


The Russell 2000 Index consists of U.S.-headquartered companies 1001 through 3000 in total market capitalization. This is in contrast to the much more widely-followed S&P 500 Index which represents companies 1 through 500 in total market capitalization. While almost no one tracks the Russell 2000 unless they own it in the form of a fund such as IWM, it is important because it serves as a valuable leading indicator. In 2007 and 2018, as well as in past bear-market preludes including 1929 and 1972, mid- and small-cap U.S. stocks began to decline more substantially than their larger-cap counterparts as a warning that a major bear market was beginning. Look at how the Russell 2000 or IWM behaved after August 31, 2018 versus the S&P 500 or SPY over the same period of time. Indeed, I had pointed this out in my last update and some readers dismissed it as being unimportant--just as they had done in prior bear markets. The Russell 2000 following its high on August 31, 2018 has dropped far more than the S&P 500 until recent days when it has been more energetically recovering from intraday lows and reversing its previous underperformance to outperform most other U.S. equity indices. If this outperformance continues then it will confirm that a rebound is imminent and will likely intensify. At some unknown future point the Russell 2000 will start underperforming again over a period of weeks and this will tell us that it is time to do some selling in preparation for the next downward wave. Since we are likely in a severe bear market for U.S. equities, any downward wave could become the "big Kahuna" and must therefore be respected. However, since everyone now is worried about a big drop, we will end up with some big up days instead until once again investors have lost their fear of potential significant losses. While we will surely have some sharp short-term pullbacks whenever investors are becoming overconfident, we will not likely resume the bear market until some point in early 2019--and perhaps later in 2019 if it takes time for investors to become fully complacent once again.


Just as almost no one is watching the Russell 2000 versus the S&P 500, the VIX is badly misunderstood as a leading indicator.


One reason it was so compelling to purchase U.S. equities when they were bottoming around November 19-21, 2008, and again in late February and early March 2009, is because lower lows for the S&P 500 were encountered by lower highs for VIX rather than higher highs. In other words, VIX peaked in October 2008 and made a lower high in November 2008 even though the S&P 500 and most U.S. equity were much lower during the third week of November 2008 than they had been at any point in October 2008. Then, in late February and early March 2009 when the S&P 500 finally broke below its November 21, 2008 bottom of 741.02, VIX continued to form significantly lower highs. This means that the most informed participants, who are those who tend to hedge with options and other derivatives, were becoming increasingly sure that we were approaching a worthwhile buying opportunity for U.S. equities when the public was most afraid of participating and was making all-time record outflows from most U.S. equity funds.


VIX touched 89.53 on October 24, 2008 which was its top for the entire bear market. On November 20, 2008 it reached 81.48 which was considerably lower; the S&P 500 ended up bottoming the following day. On March 6, 2009 when the S&P 500 completed its infamous nadir of 666.79, the intraday high for VIX was only 51.95 which was enormously lower. We appear to be having similar behavior in October 2018 although of course the future is always unknown especially in the short run. VIX had reached 28.84 on October 11, 2018; when the S&P 500 was much lower during the afternoon panic on October 29, 2018, VIX only rose to 27.52. If this pattern of lower highs for VIX continues then it increases the likelihood that a rebound for the U.S. stock market is approaching.


Investors fear sharp downward spikes but those often mark intermediate-term bottoms especially when they are followed by intraday recoveries.


Investors tend to become the most frightened by sharp downward moves which are followed by meaningful percentage rebounds, including the behavior in the afternoon on Monday, October 29, 2018. However, that is when investors should become most bullish since that is how bottoming patterns are classically formed. Sharp drops are very effective in knocking out sell stops, while subsequent rapid rebounds ensure that those who were stopped out will have to pay higher prices in order to re-establish their long positions. The more sudden the pullbacks and the more energetic the subsequent intraday recoveries, the more likely that a rally is closely approaching. Repeated downward spikes tend to especially unnerve investors who will often be induced to sell when they should be buying.


The upcoming winners will not mostly be the previous top performers or favorites--it will be assets like SCIF which had become most irrationally undervalued due to herd following.


Throughout 2018 investors have been frantically chasing outperformance. After nearly all risk assets began the year with sharp gains, most emerging-market shares and commodity producers started significant downtrends in January 2018 which have persisted until the past month. Investors responded to this behavior by progressively selling more and more of whatever was underperforming in order to buy more and more of whatever was outperforming. This kind of activity is common whenever we are transitioning to a major bear market. As a result, numerous sectors have lost one-third or more of their January 2018 peak valuations. I have begun to purchase these and in general they have been holding up much better than most other risk assets. A classic example is SCIF, a fund of 210 small-cap companies headquartered in India. This fund had climbed to an intraday high of 72.57 on January 12, 2018, and then slid as low as 36.58 on October 8, 2018--a total decline of (72.57 - 36.58) / 72.57 or nearly 49.6%. Since then it has resisted the pullback for most other global risk assets and has been moving generally sideways. Whatever might or might not be happening with such a large group of Indian companies, it is surely the case that the selling is due to investors acting out of disappointment, fear of additional losses, wanting to own something else which seems to be surging, and similar emotional reasons. This is precisely the kind of investment that I am eager to find especially when fear has gripped the global financial markets and almost everything is likely to rebound for an unknown period of weeks or months.


Other emerging-market stocks and bonds will likely rally in upcoming months along with most commodity producers.


When the word China is mentioned, what is the first thing you think of nowadays? Is it ancient temples, their amazing rate of growth in recent decades, or the complexity of their government organization? Most likely the first word you thought of was "tariffs" which even kids know about these days. It is astonishing how so many investors are convinced that because of tariffs the Chinese stock market should be as depressed as it has been in 2018. ASHR, a fund of Chinese equities which had soared to 34.89 on January 26, 2018, sank to a low of 22.00 on October 18, 2018. Like SCIF and many other emerging-market funds it has held up well since then compared with U.S. equities, but this pullback had been (34.89 - 22.00) / 34.89 or almost 37%. Surely some minor tariffs can't account for such a huge loss; the impact has been entirely psychological. If people think there is a reason to sell, even if that reason hardly warrants such an overreaction, then they will sell first and ask questions later.


Gold mining and silver mining shares remain unpopular and undervalued.


Most emerging-market government bonds and the shares of precious metals producers simultaneously bottomed on September 11, 2018. GDXJ, a fund of junior gold mining shares, touched 25.91 which had marked a 2-1/2-year low. This fund has begun to rebound and has formed several higher lows since then including 26.25 on September 12, 26.74 on September 14, 26.79 on September 27, and 26.92 on October 10, 2018. It is probably close to completing another key intraday high in preparation for a more energetic move higher. During past U.S. equity bear markets including those in 1929-1932, 1972-1974, and 2000-2002, gold mining and silver mining shares were among the biggest winners once those bear markets began to be recognized by investors. At the turn of the century when GDXJ did not yet exist but the index HUI was already in existence, HUI skyrocketed from its intraday nadir of 35.31 on November 15-16, 2000 to an intraday high of 154.99 on June 4, 2002--a total increase of 438.94%.


The bottom line: purchase the most undervalued emerging-market securities and energy shares as I have listed under my disclosure below--not because we are "still in a bull market" but because these shares generally outperform strongly during the first year of a true U.S. equity bear market.


Most investors are "reducing risk" or "considering buying once we have clarity." Once we have clarity it will be too late to make purchases at compellingly low valuations; the financial markets are almost always most volatile whenever we are completing any kind of bottoming pattern in order to discourage all but the most experienced traders from taking advantage of the best prices. Investors already disliked emerging-market and energy shares which have mostly fallen by irrationally large percentages since they had topped out in January 2018 as investors sold underperforming emerging-market securities in order to purchase their outperforming U.S. counterparts. Lately the outflows have mostly become intense with dozens of emerging-market equity funds losing between one-third and one-half of their net asset value from their respective January 2018 peaks, while an increasing number have been quietly forming higher intraday lows. Following a one-year period of increasing inflows into energy shares after they had bottomed amidst wide unpopularity in late August 2017, investors have recently given up on those also. Gold mining and silver mining shares remain unpopular and have finally been forming several higher lows following their 2-1/2-year bottoms including GDXJ touching 25.91 at 9:55 a.m. on September 11, 2018.


Disclosure of current holdings:


Due to the recent panic, I have gradually closed all of my short positions and completed this process in the afternoon of October 29, 2018. During the past week I have been progressively purchasing the most undervalued emerging-market equity funds which have been among the biggest losers since their respective January 2018 peaks, including SCIF (small-cap India), EZA (South Africa), ASHR (Shanghai A-shares), EPHE (Philippines), SEA (sea shipping), and ARGT (Argentina). As the pullback on October 29 intensified during the afternoon I began to buy OIH (oil services) and FCG (natural gas production) in small quantities. Other worthwhile funds which I am considering for purchase include IDX (Indonesia), ASHS (small-cap Shanghai A-shares), PAK (Pakistan), EGPT (Egypt), and AFK (Africa).


From my largest to my smallest position, I currently am long GDXJ, the TIAA-CREF Traditional Annuity Fund, TLT, SIL, ELD, GDX, URA, I-Bonds, bank CDs (some new), money-market funds (some new), SCIF (all new), EZA (all new), ASHR (all new), EPHE (all new), SEA (all new), GOEX, VGPMX, BGEIX, OIH (all new), ARGT (all new), FCG (all new), RGLD, WPM, SAND, and SILJ. I have no remaining short positions.


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 maybe in 2020. During the 2007-2009 bear market, most investors in August 2008 still didn't realize that we were in a crushing collapse, and I expect that well into 2019 most investors similarly will think that the U.S. equity bull market is alive and well. After reaching its all-time zenith on August 31, 2018, the Russell 2000 Index and related funds including IWM generally underperformed their larger-cap counterparts into late October 2018; similar behavior had ushered in the major bear markets of 1929-1932, 1973-1974, and 2007-2009. Meanwhile, the Nasdaq climbed to an all-time peak in nominal terms on August 30, 2018--although the Nasdaq never surpassed its March 10, 2000 intraday zenith in inflation-adjusted terms and perhaps never will. There is also a little-known megaphone formation in which the S&P 500 has been making higher highs and lower lows since 1996. A two-thirds loss from its recent zenith would put the S&P 500 near 980 and I believe that its valuation will become even more depressed to create all-time record investor outflows before we eventually and energetically begin the next bull market. Far too many conservative investors took their money out of safe time deposits; the incredibly long bull market has left them completely unprepared for a bear market. Die-hard Bogleheads will probably resist unloading for awhile, but when they are perceived to be blockheads and become disillusioned by their method they will be among the biggest net sellers of passive equity funds. Because so much money exists today in exchange-traded and open-end funds, as they decline in value they will be forced to destroy shares which will compel them to sell their components, thus depressing prices further and creating more share destruction in a dangerous domino effect.


Very recent extreme fear combined with lower highs for VIX is likely signaling an intermediate-term rebound for some unknown period of months into 2019. I have therefore gradually closed my short positions and have purchased the most undervalued shares which are primarily emerging-market securities and gold/silver mining shares, with energy shares finally becoming worth buying also.


I plan to update my web site more often and I appreciate Seeking Alpha reprinting these updates.


All of my updates are posted originally on my blog at truecontrarian.com and are then reprinted by Seeking Alpha which has a nicely-moderated forum for making comments. If you want to see my ideas as close as possible to when I am writing them then be sure to go to my web site first because it will take time for Seeking Alpha to be able to properly reformat them for publication.

Thursday, October 18, 2018

“Now, it's that dispersion that's at the moment probably the most interesting opportunity in the market — start putting money to work in the losers and start taking a preference in the winners, because there's probably going to be a mean reversion in both sectors going either way over next 12 to 18 months.” --Ralph Jainz



RIPE HARVEST FOR ASSET PAIRS (October 18, 2018): Most investors are used to thinking about the financial markets as a collection of individual decisions. Should I buy more of this or sell some of that? However, often the most important clues can be found when there are unusually outsized ratios between assets which have been closely correlated for decades or longer. Commodity producers generally move in tandem, so it is rare to have energy shares being so strongly desired while gold mining and silver mining shares and their funds including GDXJ until very recently had been dramatically out of favor. Investors continue to strongly favor high-yield U.S. corporate bonds which are sporting their lowest-ever spreads relative to U.S. Treasuries, while shunning the government bonds of numerous countries including the United States and some especially attractive yields from emerging-market government paper. Stocks which comprise numerous passive indices have mostly become notably overpriced, while those which are scarcely represented in indices can be undervalued. U.S. assets of all kinds tend to be close to all-time record highs, while many emerging-market securities have fallen by more than one-third or in some cases by nearly half since January 2018. The U.S. dollar has become a widely-desired currency worldwide while the Swiss franc (which can be purchased via the fund FXF) and many emerging-market currencies are near multi-year lows. These irrational divergences have created some compelling investment opportunities.


Investors love energy assets even though the shares of the producers have steadily been lagging the commodities themselves since January 2018.


One of the least-logical developments of 2017 was the outflow from energy commodities and the shares of their producers until the final week of August, when 1-1/2-year lows were completed and investors finally began purchasing these again. Today, the situation is almost the exact opposite with investors eager to own this sector even though many funds of energy producers including FCG, OIH, and KOL have been steadily forming lower highs since January 2018. When any sector of commodity producers makes lower highs while the commodities themselves are forming higher highs, this is almost always a negative divergence which is followed by lower valuations for the entire sector. According to the Daily Sentiment Index, at the close on October 1, 2018 there were 96% of futures traders who were bullish toward crude oil. It is likely that with investors just as eager to own energy shares today as they were reluctant to participate last summer, they will be disappointed once again with subsequent underperformance.


As much as investors adore anything connected with energy, they are avoiding anything related to precious metals.


Many precious metals and the shares of their related funds slid to 2-1/2-year bottoms in recent weeks with GDXJ touching 25.91 on September 11, 2018. Commercials in gold and silver, which are those who trade gold and silver futures while actually holding the physical metal--mostly miners, jewelers, fabricators, and similar industry professionals--have actually gone simultaneously net long gold and silver for the only time in history. Usually commercials are net short because they want to partially or fully hedge their often-large inventories to protect themselves against losses in the event of a price decline for precious metals. If they not only aren't hedging, but are actually betting on a higher price, then that shows the highest degree of confidence in their history that they have nothing to fear on the downside. At the same time that commercials have been steadily buying, most investors were making all-time record outflows from GLD and related bullion funds. We also had intensified insider buying of gold mining and silver mining shares by top corporate insiders when GDXJ was below 30.


At almost their exact multi-year lows during the late summer, the Vanguard fund VGPMX sold off most of its gold mining and silver mining shares to purchase other kinds of securities; when a major financial player like Vanguard is surrendering then you know a major rally must be closely approaching. By an interesting coincidence, the last time Vanguard made such a radical change for this sector was almost at the exact bottom at the turn of the century after which the original fund holdings would have quintupled in value in less than 19 months.


If we have begun a bear market for U.S. equity indices then this could signal a powerful uptrend for this sector. Previous major surges higher occurred during late 1972 through early 1974 and during November 2000 through early June 2002 when HUI and other gold-share indices had soared.


Investors adore overpriced U.S. high-yield corporate bonds but are shunning undervalued government bonds of many countries including the U.S. and emerging markets.


When you hear investors' reasons for purchasing U.S. high-yield corporate bonds which have their lowest spreads ever to U.S. Treasuries of similar maturities, the reason usually given is that these investors are desperate for yield. Besides being desperate they must also be poorly informed, since many government bonds especially in emerging markets have higher yields than U.S. high-yield bonds--plus the historic default rates especially during recessions are substantially lower for foreign government bonds than for U.S. high-yield corporate bonds. There is currency risk in owning bonds which are not denominated in U.S. dollars, but this can also become currency gain when the U.S. dollar is dropping in value which it is likely to do versus most currencies from now through perhaps the summer or autumn of 2019. One reason that U.S. high-yield corporate bonds are so widely owned is that many employers offer them for their employees' retirement accounts, whereas buying foreign government bond funds requires self-directed effort. I give a list of several emerging-market government bond funds near the bottom of this update. Most investors don't appreciate that if default rates merely return to their average historic levels then it will lead to huge losses for U.S. high-yield corporate debt. In a recession the total pain could roughly approximate the collapse for U.S. high-yield corporate bonds during the second half of 2008 when many high-yield bonds and related funds lost roughly half their value.


Here is a recent useful link about non-U.S. bonds:


Almost everyone thinks that safe U.S. Treasury yields are going higher.


Perhaps because the U.S. Federal Reserve is committed to gradually raising the rate at which banks borrow money overnight from each other or from the Fed, they have concluded that all U.S. government interest rates will move higher. It is much more likely that, after climbing to their highest points since the early summer of 2014, long-dated U.S. Treasury yields for the 10- and 30-year bonds will move lower--and perhaps a lot lower over the next couple of years. As with gold and silver, evidence can be found in the traders' commitments where commercials have established their greatest-ever net long position in the 30-year U.S. Treasury bond since July 3, 2007--about 11-1/2 years ago. Such a rare lopsided reading is not likely to be merely a coincidence, and illustrates that those who are most closely connected with this asset are especially bullish toward long-dated U.S. Treasuries and expect their yields to retreat rather than rising further. The easiest way for investors to participate is by purchasing TLT--or else ZROZ which is roughly twice as volatile as TLT in both directions without using artificial leverage. ZROZ is a fund of long-dated U.S. Treasury zero-coupon bonds, while TLT consists of actual 30-year U.S. Treasuries which were purchased in recent years and are sold once they have 25 years remaining to maturity.


U.S. equities are highly popular, while emerging-market shares have mostly been slumping after achieving multi-year highs in January 2018.


Emerging-market shares enjoyed spectacular gains for two years after they had mostly slid to multi-year lows on January 20, 2016. Since then they have entered outright bear markets in many cases including China, India, South Africa, and several smaller countries including Egypt and Argentina where they have dropped by one-third or more. SCIF, a fund of 210 small companies in India, fell by almost exactly half from its January 2018 top to its recent intraday low. Many theories have been offered to explain "why" this odd divergence has become so glaring in 2018, but the primary explanation is that as emerging-market equities have continued to generally underperform while U.S. shares have been outperforming, most investors want to sell what "isn't working" in order to purchase what seems as though it is still going higher. It has nothing to do with logic or common sense or anything resembling rational trading decisions--just as most of the fluctuations for emerging markets in recent decades have had little or nothing to do with logical behavior. There are several ways to capitalize upon this situation by doing the opposite of the thundering herd and buying emerging-market stocks while selling U.S. equities. Some emerging-market bourses have already begun to rebound from important bottoms which in many cases have represented key higher lows when compared with their deeper nadirs from January 20, 2016. As with gold mining and silver mining shares or with government bonds, it often makes sense to purchase assets which are trading near one- or two-year lows while remaining above previous support levels.


Securities which are heavily represented in passive U.S. equity and high-yield bond funds are among the world's most overpriced assets.


It has become so popular for ordinary investors to take money out of bank accounts and other safe time deposits--often yielding above 2% in recent months--to put into fluctuating U.S. passive index funds that this Boglehead approach is often taken for granted as a sensible and even a safe strategy for the long run. Near a market top in anything it seems secure to be heavily invested, whereas that is always the most dangerous time to participate. Conversely, following a severe bear market when it is safest to make purchases, most investors are afraid to do so. Because so many investors blindly pile into their 401(k) equity fund choices or other passive index funds, the shares which comprise the most indices are the most frequently bought and many of these have become wildly overpriced. Meanwhile, assets which are more difficult to purchase and are less popular simply because they aren't represented in many of the most widely-bought funds tend to be almost forgotten and in some cases have become worthwhile bargains. This is partly a warning for the overall market because it means that most people couldn't care less whether their portfolio consists of worthwhile holdings or not; they want to participate at any price with blatant disregard for the serious risks which these investments entail. Already we have experienced two major bear markets for U.S. equities since 2000. With many of the most popular securities more overvalued than they have ever been in history in both absolute and relative terms, the likelihood of a decline of two-thirds or more will force investors to question their basic investment philosophy and to punish them for being part of a massively overcrowded trade. Many of those who have been buying near the 2018 peaks will end up making all-time record withdrawals near the next bear-market bottoming pattern. Such record outflows will assist us in knowing when to gradually buy when almost everyone else wants to sell.


A few other analysts have noticed recent rare disparities and have commented on them--here are two which make worthwhile reading.


Below are two links about how unusual today's disparities are and why it is worthwhile to capitalize upon them. The first one concludes in the final paragraph that a contrarian approach is ideal for such an environment:


The next article is more academic and was discovered outside of the mainstream financial media:


The bottom line: purchase gold/silver mining shares, government bonds, and the least popular emerging-market securities while selling the most overowned U.S. stocks and high-yield corporate bonds.


Most investors want to sell whatever has been underperforming since January 2018 in order to buy whatever has been outperforming. It is important to do the exact opposite in many cases, because we have all-time record disparities between assets that have powerful historic correlations with each other and will sooner or later return to their long-established interrelationships. No one wants to be among the first to make the switch, thereby causing many disparities to become more extreme than they have been in several years and in some cases in several decades. If we began a bear market for U.S. equities when the Russell 2000 topped out on August 31, 2018, which is becoming increasingly likely, then global asset reallocation is going to be a major theme of the next couple of years.


Disclosure of current holdings:


Because of an unprecedented investor surge into risk assets in January 2018, I unloaded most of my long positions that month. Half of my total liquid net worth is in cash consisting of U.S. Treasury money-market funds and high-interest guaranteed time deposits. 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 what will eventually become a historic collapse and should end perhaps around 2020. The election of Donald J. Trump as U.S. President led to a "yuge" surge in investors' expectations which following a surge to all-time record highs will become transformed into the most severe overall U.S. equity bear market since 1929-1932. The absurd popularity of cryptocurrencies until December 2017 and marijuana shares during 2018, the first with no intrinsic value and the second behaving as a classic late-cycle bubble, were characteristic of a generational peak such as we had previously experienced for tulips, canals, railroads, internet shares, and Beanie Babies. I purchased more GDXJ several times as it completed a classic head-and-shoulders bottom, with GDXJ falling to a 2-1/2-year nadir of 25.91. I also added repeatedly to TLT near its lowest points since July 2014--including this morning--while shorting IWM near its all-time highs in late August 2018. I have also purchased ELD repeatedly after having sold all of it in January 2018. In addition to ELD, other funds of emerging-market government bonds including PCY, LEMB, and SOVB are also worthwhile; select those which are commission-free with your broker.


From my largest to my smallest position, I currently am long GDXJ (some new), the TIAA-CREF Traditional Annuity Fund, TLT (many new), SIL (some new), GDX (some new), ELD (some new), HDGE, URA, I-Bonds, bank CDs (some new), money-market funds (some new), GOEX, VGPMX, BGEIX, RGLD, WPM, SAND, and SILJ. I have short positions in IWM, XLI, AMZN, NFLX, NVDA, IYR, FXG, and SPHD, in that order, largest to smallest.


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 maybe in 2020. 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 an increasing number of former leading sectors which have been forming lower highs for several months. After reaching its all-time zenith on August 31, 2018, the Russell 2000 Index and related funds including IWM have generally underperformed their larger-cap counterparts which also ushered in the major bear markets of 1929-1932, 1973-1974, and 2007-2009. Meanwhile, the Nasdaq climbed to an all-time peak in nominal terms on August 30, 2018--although the Nasdaq never surpassed its March 10, 2000 intraday zenith in inflation-adjusted terms and perhaps never will. The number of daily 52-week lows on U.S. exchanges sometimes surpasses the number of daily 52-week highs even though most large-cap U.S. equity indices are much closer to their all-time highs than they are to their lowest levels during the past year. Semiconductor shares have been a leading indicator since the 1960s and have been flashing danger signals. The strongest intraday behavior usually occurs just after the opening bell when amateurs are the most eager buyers, while closed-end fund discounts have been progressively climbing from their lowest levels since the 2007 topping pattern. Some all-time record inflows were recorded during the first quarter of 2018 along with the most bullish net investor sentiment in many surveys throughout their multi-decade histories. VIX has been forming higher lows since the start of 2018. There is also a little-known megaphone formation in which the S&P 500 has been making higher highs and lower lows since 1996. A two-thirds loss from its recent zenith would put the S&P 500 near 980 and I believe that its valuation will become even more depressed to create all-time record investor outflows before we eventually and energetically begin the next bull market. Far too many conservative investors took their money out of safe time deposits; the incredibly long bull market has left them completely unprepared for a bear market. Die-hard Bogleheads will probably resist unloading for awhile, but when they are perceived to be blockheads and become disillusioned by their method they will be among the biggest net sellers of passive equity funds. Because so much money exists today in exchange-traded and open-end funds, as they decline in value they will be forced to destroy shares which will compel them to sell their components, thus depressing prices further and creating more share destruction in a dangerous domino effect.

Monday, August 6, 2018

“1.00 invested in those firms with the most negative ETF flow in January 2006 grows to 3.48 at the end of December 2017, compared to 1.40 for those firms with the highest ETF flow.” --Deutsche Bank



ALL IS DIVIDED INTO THREE PARTS (August 6, 2018): As is often the case in the early stages of a U.S. equity bear market, several typical characteristics can be observed. Hardly anyone thinks we are in a U.S. equity bear market and that is par for the course. As a result of an unusually lengthy bull market for U.S. equities, unsustainable distortions have been created which almost everyone thinks is permanent even though current valuations are highly unstable and unsustainable. Recognizing what should be bought and sold today is an important step in being one of the few investors to make money during the next several years.


If it's a real bear market then almost no one believes that it exists even after a year or more since it began.


Almost no one believed that we were in a U.S. equity bear market in March 1930, January 1974, January 2002, or August 2008. Hardly anyone today thinks that we are in a bear market and perhaps this will continue to be the case as late as the second or third quarter of 2019. Only when it becomes far too late to sell U.S. equities and high-yield corporate bonds at favorable prices will most investors realize what they should have done. The first step is to observe characteristic signs which have heralded past bear markets for U.S. equities. History almost always repeats itself with minor variations.


Assets which haven't experienced bear markets since early 2009 are especially overpriced and are vulnerable to huge declines.


One set of assets today is ridiculously overvalued; these consist primarily of the most popular sectors which have been in bull markets mostly since the end of 2008 or the beginning of 2009. Passive index funds of U.S. equities and U.S. corporate bonds tend to be especially overpriced since investors have gotten into the habit of purchasing them almost without thinking about their valuations or future prospects. Once formed, habits are difficult to change. Since we have had such mild pullbacks for most U.S. equity and corporate-bond sectors since late 2008 or early 2009, investors have almost no concern about the possibility of a dramatic decline or with how much more they are paying in 2018 than they had done several years ago for the same assets. The bear markets of 2007-2009 and 2000-2002 seem emotionally distant and irrelevant to the current situation, making a repeat performance especially likely.


If a frog is slowly boiled then it won't recognize that the temperature is far too high to be safe; if stocks climb steadily and persistently then investors similarly lose their concern about possible losses and will get boiled alive. Most investors barely bother to examine their portfolios except perhaps to check their total balances to make sure that they are still going up. If you still own wildly overpriced securities, it is essential to gradually sell them especially when they have enjoyed extended gains.


U.S. real estate is roughly as dangerously overvalued as it had been at the 2005-2006 bubble peak, except there is a different and more perilous geographic distribution.


Even at the highest points in 2005-2006, there were no U.S. neighborhoods where the average housing price divided by the average household income exceeded 8. Today there are many neighborhoods where these ratios have surpassed 10 and some where they have moved above 11 as compared with historic averages of 3:1 which even Julius Caesar would recognize since this ratio hasn't changed through the millennia. The most glaring overvaluations tend to be concentrated in the most popular cities for real estate as an investment rather than as merely a place to live. In 2010-2012 there were numerous regions of Arizona, Nevada, Florida, and elsewhere with ratios of housing prices to average household incomes of 1.5 or below; today there are almost no such bargains below 3. Because prices have mostly been increasing for about seven years, people have become accustomed to them and don't stop to think how absurd they are relative to logic or fundamentals. During the bear market from October 2006 through October 2011 the average U.S. house lost 34% of its value; the total pullback from now through 2022 or 2023 is likely to be greater in many cities since valuations especially along the West Coast of the U.S. are mostly higher than they were at their 2006 peaks. In cities such as Seattle, San Francisco, and Los Angeles, prices are higher today than they had been at their 2006 tops even after you adjust for inflation.


Precious metals mining shares are an especially undervalued sector.


During any topping process, investors won't sell because they are convinced that they will come out ahead "in the long run" by being nearly fully invested. Assets which are out of favor often become even more unpopular as investors want to crowd into whatever has been outperforming. As a result, gold mining and silver mining shares have moved mostly flat after having roughly tripled from January 20, 2016 through the summer of 2016 and then surrendering roughly half of those gains before the end of 2016. Hedge funds have never been more net short gold, while commercials (miners, fabricators, jewelers, and others who use physical gold in their lines of business) in the most recent traders' commitments were net short fewer than 48 thousand contracts which is more extreme than the 99th percentile of historic readings. From their lows of January 20, 2016, funds like GDXJ have gained far more than gold bullion, while from their intraday lows of February 9, 2018 funds like GDXJ have moved higher while gold bullion has dropped over one hundred U.S. dollars per troy ounce. This bodes well for the upcoming year, especially since commercials in nearly all non-U.S. dollar currencies are heavily betting on a falling greenback from now into 2019.


Besides GDXJ, worthwhile alternatives in this sector include SIL, SILJ, GDX, SGDJ, and SGDM. Vanguard is significantly reorganizing its VGPMX fund to drastically reduce its exposure to gold mining and silver mining companies after having maintained its investment consistency for decades; such rare events tend to occur just before major rallies.


Long-dated U.S. Treasuries are also notably undervalued.


You might think that an asset like the 30-year U.S. Treasury which has gained more than every other sector worldwide since September 1981 and which has thus been in a bull market for nearly 37 years would be very popular with investors. You would be wrong, since for whatever reason everyone seems to think that U.S. Treasuries are in bear markets. TLT dropped to 116.09 on May 17, 2018 and may have completed its latest higher low at 118.07 on August 1, 2018. Especially whenever investors are finally selling their overpriced assets, investors won't have many places to go. U.S. Treasuries are highly liquid and will end up absorbing much of the asset reallocation which is exiting previously-popular assets.


Emerging-market government bonds could yield even higher total gains than U.S. government bonds.


While TLT and other funds of long-dated U.S. Treasuries are worth buying at current levels, a strong argument can be made for purchasing government bonds of emerging-market countries. There have been geopolitically-inspired selloffs of numerous emerging-market currencies since January 2018. Most of these declines are temporary because geopolitical events, no matter how exciting, rarely affect corporate profits or other economic fundamentals. Countries which have experienced the greatest percentage losses for their currencies are in the favorable situation of having lower U.S.-dollar wages for their employees in those countries, while continuing to sell their goods and services at the same U.S.-dollar prices. This will lead to expanding profit margins which will translate eventually into significant gains for those countries' stock markets. While emerging-market stocks will often drop during downtrends for U.S. equities, emerging-market government bonds tend to perform best under the same circumstances. Funds of emerging-market government bonds including ELD have fallen from important highs in January 2018 to retest their lowest points since the early months of 2016. Many investors are unfamiliar with this asset class. This gives an ideal opportunity to accumulate bargains, diversifying among emerging-market countries which have experienced the greatest percentage declines due to spectacular headlines but little actual change in their economies.


Some assets fit into a third category where they are neither low enough to buy nor high enough to sell.


Emerging-market equities are generally much cheaper than U.S. equities, but especially after having moderately rebounded in recent weeks I am mostly avoiding them for now. I wouldn't sell them but I wouldn't buy them either. The same is true for most energy shares and their funds including FCG, OIH, and KOL which had been especially unpopular in the summer of 2017 but rebounded strongly from August 2017 through January 2018 and have remained trendy throughout 2018. Unlike gold mining and silver mining where the shares of the producers have been far outperforming bullion prices for most of 2018, crude oil and related commodities have frequently set multi-year highs during 2018 while the shares of energy producers have mostly made lower highs since January 2018. This is a negative divergence which is pointing the way lower for both energy commodities and the shares of their producers. I am also mostly avoiding mining companies which are not connected with gold or silver; these and their funds including REMX, COPX, and XME had soared to multi-year highs in January 2018 but like energy shares have mostly been forming lower highs since then. Uranium shares and their funds including URA have remained strongly out of favor in recent years and might be worth holding for another year.


Since U.S. midterm elections are scheduled for November 6, 2018, the U.S. financial markets are likely to become more volatile out of concern about the results.


It is usually the case that midterm U.S. elections create uncertainty and therefore often lead to a stock-market pullback in the months leading up to the election--until the final weeks when investors become more excited about the upcoming end to uncertainty and push prices higher. That is one reason why the stock market often drops to October lows during midterm years as we had previously experienced in years including 2002, 1998, and 1990; the 1994 and 1982 bottoms were in August rather than October. Hardly anyone has been discussing this topic, thereby making it increasingly likely that it will become an important factor. This could be especially true in 2018 since both the Senate and the House of Representatives following the November 6, 2018 elections could end up with either Democratic or Republican majorities (assuming that the two Senate independents continue to caucus with the Democrats) while the margins of victory could be quite narrow. VIX has been frequently dropping below 12 which is likely also signaling upcoming U.S. equity weakness, along with a diminishing number of new 52-week highs and frequent intraday strength near the opening bell. The least-experienced investors tend to place market orders outside of regular trading hours which crowd together at the open and thereby trigger stops, often causing the highest prices to occur shortly afterward. This is common behavior during a topping pattern.


A correction for U.S. equity indices could significantly alter the behavior of all three asset classes.


I believe that we will experience double-digit corrections possibly exceeding 20% for U.S. equity indices and high-yield U.S. corporate bonds as they retreat toward important intermediate-term bottoms during the second half of 2018. This will probably be followed by a multi-month rebound to lower highs by the first or second quarter of 2019.


Deeply-undervalued assets, including gold/silver mining shares, long-dated U.S. Treasuries, and emerging-market government bonds, could rally moderately during the next few months as U.S. equities are mostly declining. If government bonds from any country become unusually popular then they might even be worth selling later in 2018; otherwise, most assets in this category could end up outperforming sufficiently to gain investors' attention and encourage new net inflows. If these inflows become substantial and are combined with heavy insider selling during 2019 then it might be necessary to sell some or all of these assets next year.


Assets in the in-between sectors, including energy and emerging-market shares, will mostly decline along with U.S. equities during the next few months and could thereby present some compelling buying opportunities later in 2018 in anticipation of a rebound into the first half of 2019.


The bottom line: Since nearly everyone wants to be fully invested in the most popular sectors, remain heavily in cash and only purchase the least-popular securities.


Whenever the herd is closest to being unanimous it is most dangerous to run with them. While most investors are eager to hold popular Nasdaq shares, stick with gold mining and silver mining shares along with long-term government bonds of both the U.S. and emerging markets. If you have real estate which you can sell then do so since housing prices are likely to be substantially lower by 2022-2023 especially where the ratios of housing prices to average household incomes are currently highest.


Disclosure of current holdings:


Because of an unprecedented investor surge into risk assets in January 2018, I unloaded most of my long positions that month. Half of my total liquid net worth is in cash consisting of U.S. Treasury money-market funds and high-interest guaranteed time deposits. 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 what will eventually become a historic collapse and should end perhaps around the middle of 2020. The election of Donald J. Trump as U.S. President led to a "yuge" surge in investors' expectations which following a surge to all-time record highs will become transformed into the most severe overall U.S. equity bear market since 1929-1932. The absurd popularity of cryptocurrencies until December 2017, with no intrinsic value, was characteristic of a generational peak such as we had previously experienced for tulips, canals, railroads, internet shares, and Beanie Babies. I purchased more GDXJ below 32 several times and also added to TLT below 119 while shorting IWM at and modestly below 170. After having sold ELD near 40 in January 2018 I have been buying it below 35. Other funds of emerging-market government bonds including PCY and SOVB are also worthwhile; select those which are commission-free with your broker.


From my largest to my smallest position, I currently am long GDXJ (some new), the TIAA-CREF Traditional Annuity Fund, SIL, HDGE (some new), GDX, TLT (some new), ELD (some new), URA, I-Bonds, bank CDs (some new), money-market funds, GOEX, VGPMX, BGEIX, RGLD, WPM, SAND, and SILJ. I have short positions in IWM (some new), XLI, AMZN (some new), NFLX, NVDA, IYR, FXG, and SPHD, in that order, largest to smallest.


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 probably during 2020. 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 forming lower highs for several months. The S&P 500, the Dow Jones Industrial Average, and several other large-cap U.S. equity indices haven't surpassed their all-time tops of January 26, 2018 even though they have come close. The Russell 2000 has retested nearly matching intraday highs during the past several weeks, while the Nasdaq climbed to an all-time peak in nominal terms on July 25, 2018--although the Nasdaq never surpassed its March 10, 2000 intraday zenith in inflation-adjusted terms and perhaps never will. The number of daily 52-week lows on U.S. exchanges sometimes surpasses the number of daily 52-week highs even though most large-cap U.S. equity indices are much closer to their all-time highs than they are to their lowest levels during the past year. Semiconductor shares have been a leading indicator since the 1960s and have been flashing danger signals. The strongest intraday behavior usually occurs just after the opening bell when amateurs are the most eager buyers, while closed-end fund discounts have been progressively climbing from rarely-experienced lows. Some all-time record inflows were recorded during the first quarter of 2018 along with the most bullish net investor sentiment in many surveys throughout their multi-decade histories. VIX has been forming higher lows since the start of 2018. There is also a little-known megaphone formation in which the S&P 500 has been making higher highs and lower lows since 1996. A two-thirds loss from its January 26, 2018 zenith would put the S&P 500 near 950 and I believe that its valuation will become even more depressed to create all-time record investor outflows before we eventually and energetically begin the next bull market. Far too many conservative investors took their money out of safe time deposits; the incredibly long bull market has left them completely unprepared for a bear market. Die-hard Bogleheads will probably resist unloading for awhile, but when they are perceived to be blockheads and become disillusioned by their method they will be among the biggest net sellers of passive equity funds.

Wednesday, April 25, 2018

“Investing is the intersection of economics and psychology.” --Seth Klarman



AU WOW (April 25, 2018): Investors in 2018 have been behaving very differently than they have done in recent years. We started with a surge for many risk assets to new all-time highs, followed by choppy daily behavior which is common during bear markets for U.S. equity indices and is serving as a warning that the nine-year bull market for U.S. equity indices is transitioning to an ursine scenario. Most investors are not familiar with bear-market patterns, of which a common one is that any bear market consists of two major stages. In the first stage, investors who took a substantial percentage of their money out of bank accounts and other safe time deposits to purchase various fluctuating assets--even when their former favorites have become far less reliable--aren't eager to put their money back into the bank. Partly they perceive such an action as admitting failure, and partly the lengthy bull market has convinced most investors that they can make significant percentage gains as long as they're in the "right" securities. It is the first stage of a bear market where investors are most eager to buy something with which they aren't familiar, as long as that asset has been outperforming most other assets and has recently received increasingly favorable media coverage. In this essay I will examine one sector which I think is ripe for receiving major inflows during the upcoming year.


It will probably be a year or more before most investors pile back into safe havens.


During the final months of a bear market, it enters a second stage where investors finally realize too late that asset valuations have plummeted and are anxiously crowding into the safest havens available. However, we will probably not reach that stage of the current bear market for roughly another year or more. This leaves plenty of time for asset reallocation.


Since January 20, 2016, most commodity producers have outperformed the S&P 500, the Nasdaq, and similar funds of U.S. equities.


It is not widely known by the public, but the sectors with the greatest percentage gains from their intraday lows of January 20, 2016 are primarily commodity producers and emerging-market shares which are closely connected with commodity production. Funds including KOL, COPX, REMX, XME, LIT, EPU, and EWZ, all of which I had sold in January 2018, far outpaced nearly all other sectors worldwide with many of them more than tripling from their lows within two years. Another sector which has roughly doubled from its January 20, 2016 nadir has been gold mining and silver mining shares. These had more than tripled initially from their lows, including GDXJ and SIL, with SILJ more than quadrupling, but have generally underperformed since the summer of 2016 and have gone mostly sideways since the final months of 2016. This lengthy flat period has knocked out nearly all of those who had jumped aboard the bandwagon hoping for a quick buck, with periodic sharp pullbacks causing most other uncommitted holders to get out of this sector during the past 1-1/2 years. Exchange-traded funds in this sector including GDXJ and GDX experienced all-time record net outflows in 2017. Meanwhile, media coverage has been generally neutral to bearish except when there has been a recent upsurge when there will be a brief flurry of positive coverage which disappears as soon as prices head lower again.


Gold mining and silver mining shares will likely be among the biggest percentage winners during the upcoming 12-month period.


What evidence is there that gold mining and silver mining shares are likely to outperform once again as they had done during the first half of 2016? One clue can be found in the relative behavior of GDXJ, a fund of mid-cap gold mining shares, versus GLD, a fund of gold bullion. Whenever gold mining shares are about to enjoy a truly powerful rally, they will dramatically outperform gold bullion. Whenever a period of weakness in this sector is about to become more pronounced, GDXJ will underperform GLD. Therefore, let us examine how these two funds have performed in recent months relative to each other to see what is likely to happen next.


GDXJ has dramatically outpaced GLD from their respective intraday lows of February 9, 2018.


On February 9, 2018, GDXJ completed an important higher intraday low at 29.88. On the same day the intraday low for GLD was 124.39. As of the close today, April 25, 2018, GDXJ was at 32.78 while GLD closed at 125.41. Therefore, the total percentage gain for GDXJ has been (32.78-29.88)/29.88 or just over 9.7% while GLD has climbed by (125.41-124.39)/124.39 or just over 0.8%. The exact ratio between these two is more than 11.8 to 1. This ratio is far above the historic average for mid-cap gold mining shares which tends to average roughly three through the decades (since GDXJ hasn't existed for such an extended period of time, older indices like HUI and XAU or the even more venerable closed-end fund ASA should be used to compute historic averages). Besides being far above average, this ratio has risen dramatically from where it had been in the second half of 2016 through early 2018, and is on par with where it had been in the early months of 2016 and during other periods when this sector was enjoying some of its most pronounced uptrends.


During past bear markets, investors have often embraced gold mining and silver mining shares except during the final months of those bear markets.


During the last bear market in 2007-2009, gold mining and silver mining shares were notable winners from the summer of 2007 through the middle of March 2008. In 2000-2002, this sector soared from the last week of November 2000 through early June 2002 before sharply sliding along with just about everything else in the final months of that bear market. In 1973-1974, gold mining and silver mining shares similarly enjoyed very strong gains until the final months of that bear market where they plummeted along with just about everything else. Other past bear markets have also experienced visible reallocation from previous favorites into the precious metals sector. There could be several reasons for this behavior including how investors behave when the U.S. Treasury yield curve is generally flattening or how investors tend to act prior to an impending recession. Rate hikes near the end of bull markets also tend to be accompanied by gains for precious metals and the shares of their producers. In my opinion, historic parallels are much more important than reasons. With a consistent pattern of this sector outperforming at some point during a bear market for U.S. equity indices, combined with the recent outperformance of these shares relative to bullion, a classic bullish setup appears to be underway.


I am a personal fan of GDXJ, but SIL, SILJ, GDX, GOEX, ASA, and many other funds in this sector are also compelling.


GDXJ and GDX are the most liquid exchange-traded choices in the gold mining sector, with each of them trading millions of shares daily. There are several companies which can be found in both GDXJ and GDX, with GDX mostly emphasizing the largest global producers while GDXJ includes some small producers and many mid-cap shares. I expect GDXJ to generally outperform GDX for the same reason that mid-cap indices in any sector usually gain more than large-cap shares during most bull markets usually until their final stages. With silver being even more out of favor than gold, funds of silver producers including SIL and SILJ could gain more than gold mining shares as they had done during the months after January 20, 2016. As long as any fund is concentrated entirely in gold mining and silver mining shares, there should be significant gains especially once there have been recent increases which will create a rise in positive media coverage. Being human, many investors don't want to participate in anything until they see others doing likewise. If you wait for this sector to become popular again then prices are likely to be well above their current levels.


Adjusted for dividends, GDXJ almost exactly touched 50 in both August 2013 and again in August 2016, and was roughly thrice as elevated near the end of 2010 and in April/September 2011.


Adjusting for all dividends which are generally paid annually near the end of the year, GDXJ reached 50 in August in both 2013 and 2016. Perhaps it will make another August visit in 2018 to that level. In both 2013 and 2016, U.S. equity indices thereafter achieved new all-time highs which diminished investors' interest into switching into gold mining and silver mining shares, thereby causing them to decline afterward. If U.S. equity indices don't set new all-time highs later in 2018, then investors are likely to accelerate their reallocation into alternatives rather than switching back into their former favorites. If this occurs, then the price of GDXJ could end up anywhere from roughly 75 to 150. The latter price, adjusting for dividends, had been reached near the end of 2010 and again in both April and September of 2011. Unlike gold bullion which ascended to its all-time high in September 2011, GDXJ made a lower high that month which confirmed that both were set for a major downtrend.


Psychology will determine the extent of any extreme in the financial markets including how high gold mining and silver mining shares climb toward their bull-market tops perhaps in the first half of 2019.


The final high for gold mining and silver mining shares in the current cycle, which might be reached in roughly one year, will be much more influenced by the level of excitement and other emotional considerations rather than due to fundamentals.


Disclosure of current holdings:


Because of the unprecedented investor surge into risk assets in January 2018, I unloaded most of my long positions that month. Half of my total liquid net worth is in cash consisting of U.S. Treasury money-market funds and high-interest guaranteed time deposits. 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 what will eventually become a historic collapse and should end in the final months of 2019 or the first half of 2020. 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 will become transformed into the most severe overall U.S. equity bear market since 1929-1932. The absurd popularity of cryptocurrencies until very recently, with no intrinsic value, was characteristic of a generational peak such as we had previously experienced for tulips, canals, railroads, internet shares, and Beanie Babies. During the winter I purchased more GDXJ below 32 several times and once below 30. I recently bought more TLT below 117.50 and shorted more IWM above 155.00.


From my largest to my smallest position, I currently am long GDXJ, the TIAA-CREF Traditional Annuity Fund, SIL, HDGE, GDX, TLT (some new), URA, I-Bonds, bank CDs, money-market funds, GOEX, VGPMX, BGEIX, RGLD, WPM, SAND, and SILJ. I have short positions in IWM (some new), XLI, AMZN, NFLX, NVDA, IYR, FXG, and SPHD, in that order, largest to smallest.


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 forming lower highs for several months. The Russell 2000 and its associated funds including IWM have made several key lower highs since the all-time intraday top for this index on January 24, 2018. The number of daily 52-week lows on U.S. exchanges sometimes surpasses the number of daily 52-week highs even though most large-cap U.S. equity indices are much closer to their all-time highs than they are to their lowest levels during the past year. Semiconductor shares have been a leading indicator since the 1960s and have been flashing danger signals. The strongest intraday behavior usually occurs just after the opening bell when amateurs are the most eager buyers, while closed-end fund discounts have been progressively climbing from rarely-experienced lows. Some all-time record inflows were recorded during the first quarter of 2018 along with the most bullish net investor sentiment in many surveys throughout their multi-decade histories. There is also a little-known megaphone formation in which the S&P 500 has been making higher highs and lower lows since 1996. A two-thirds loss from its January 26, 2018 zenith would put the S&P 500 near 950 and I believe that its valuation will become even more depressed to create all-time record investor outflows before we eventually and energetically begin the next bull market. Far too many conservative investors took their money out of safe time deposits since they didn't want guaranteed yields near one percent; they have no idea what to do during a bear market. Die-hard Bogleheads will probably resist unloading for awhile, but when they are perceived to be blockheads and become disillusioned by their method they will be among the biggest sellers of passive equity funds.

Sunday, February 4, 2018

“When the tide goes out you can see who isn't wearing a bathing suit.” --Warren Buffett



WILE E. COYOTE LOOKS DOWN--OOPS! (February 4, 2018): In the famous Road Runner cartoons, Wile E. Coyote is frequently tricked into going off the edge of a huge cliff. However, nothing bad happens immediately--until he looks down. Once he realizes that there is nothing below him but air, he collapses in a heap toward the ground far below, always landing with a satisfying thud. This is exactly what occurred in January 2018 as investors smashed all previous benchmarks to make all-time record withdrawals from safe time deposits in order to purchase fluctuating assets. Many historic benchmarks approached or set new all-time extremes including sentiment surveys and valuation measures. This was equivalent to Wile E. Coyote surging off the mountain's end, but just as in the cartoon nothing terrible occurred immediately. Then the coyote couldn't help but look down, and during the past week the collapse began. Unlike the cartoon it will take roughly two years before we hear the sound of the U.S. stock market finally hitting the earth far below. Whenever that occurs, we will almost certainly experience all-time record outflows which crush the previous records from the first quarter of 2009, along with incredibly bearish sentiment, massive insider buying, and the media telling everyone why it will take years for the U.S. stock market to recover. Naturally this will be followed by one of the strongest multi-month rallies in history.


Almost no one is talking about the possibility of a multi-week correction, thereby making it far more likely to occur.


Have you heard a lot about how the past week's pullback was a "healthy" event, as though it were as necessary as eating tofu or bean sprouts? Whenever a bear market begins in earnest, most observers are convinced that it's actually a good thing. In retrospect I doubt that many people believe that the 1929-1932, 1973-1974, 2000-2002, or 2007-2009 plunges were healthy or nutritious. In a parallel to Newton's Third Law, one extreme is usually followed by a nearly equal and opposite extreme. Many measures of U.S. equity valuations have never been higher in history or had closely revisited multi-decade overpricings, so now we are going to progressively move toward the reverse situation in which we are likely to suffer the lowest price-earnings, price-to-book, and other measures since the Great Depression. The dividend yield on the S&P 500 had slid so steeply that it had moved significantly below the yield on the 2-year U.S. Treasury note.


Bears have been almost completely ignored even though they have impressive ammunition in their corner.


The bull market for U.S. equities, partly since it had existed for nearly nine years, made more and more participants convinced that all negative information could be ignored. Now that investors are able to purchase U.S. Treasuries and other safe time deposits at their highest yields in a decade, investors will have a valid reason to get out of the stock market in order to pounce on these yields. Because new all-time highs for the Dow Jones Industrial Average, the Nasdaq, and the S&P 500 occurred so frequently, investors began to take them for granted and to ignore whatever else was occurring in the financial markets. Many yields on safe time deposits soared with almost no attention being paid to this occurrence. Whenever an important financial development is being widely ignored it usually proves to be far more important than something which everyone is following. Even "boring" bank certificates of deposit are paying nearly two percent for one year and more than two percent for longer maturities.


Watch for important intermediate-term bottoms on the way down, and a multi-decade array of buying opportunities in roughly two years.


Bear markets don't nearly resemble anything close to a straight line. Many commodity-related and emerging-market assets experienced lengthy bear markets which began around April 2011 and mostly ended on January 20, 2016. Those bull markets are mostly incomplete but are being interrupted as these assets slide lower along with nearly all other global risk assets. Eventually fear will reach a typically elevated level while classic leading sectors like IWM and perhaps SMH will begin to form higher lows which are mostly ignored as fund outflows reach multi-year highs. Whenever that happens, which could perhaps occur this spring but could happen at almost any time, it will become timely to purchase whichever energy, mining, and emerging-market shares have become the most oversold and undervalued while continuing to form additional higher lows in their bull markets. These purchases could yield significant double-digit gains by the first several weeks of 2019 when they will likely complete their respective bull markets about one year after most U.S. equity indices have ended their multi-year uptrends in early 2018.


Everyone is used to allegedly buying on dips which will therefore lead to ruin.


When a bull market continues for nearly nine years, investors begin to "learn" habits which later prove to be highly destructive during the subsequent bear market. One of these is the mantra to "buy on dips" which in real life never happens; investors hate to buy into weakness. Instead of buying on dips they end up chasing the rallies which follow the dips. In a bear market, uptrends tend to be especially sharp and powerful so investors will be consistently buying following all huge up days as they become convinced that the previous pullback was "the bottom." They will be repeatedly disappointed as U.S. equity indices continue to form lower lows instead of higher lows, but they will keep buying into the rallies which follow all pullbacks. Finally, when the bear market is almost over roughly two years from now, investors will have been so thoroughly discouraged by losing money over and over again that they won't buy when prices are forming their lowest points of the cycle probably near multi-decade bottoms. This is what happened in both 2002 and 2009 as investors gave up on the idea of buying at all and ended up making dramatic outflows instead.


My object all sublime I shall achieve in time--to let the punishment fit the crime.


Here is one little-appreciated fact about the financial markets: they will always harm the greatest number of investors. The markets waited for the maximum intensity of inflows before starting to move lower. Whenever there have been recent massive outflows the next rebound will begin. Before the final bottom of the bear market we will have by far the biggest outflows so that most investors sell just before the biggest percentage gains occur. This pattern has been true for centuries and is an inherent feature of the financial markets which they usually don't teach you in school when you are learning about the glories of capitalism.


The U.S. dollar is likely to rebound significantly versus European currencies.


The same investors who were wildly bullish toward the U.S. dollar when it was completing a major topping pattern versus European currencies at the start of 2017 are now almost unanimously bearish toward the greenback. Therefore, expect the U.S. dollar to score meaningful gains against the euro and nearly all European currencies during the next several weeks or months as U.S. equity indices are retreating. If you see the U.S. dollar forming an important intermediate-term high and then begin to progressively retreat, it will probably be signaling that the U.S. stock market is set to rebound.


The January 2018 tops will end up being all-time record highs in many cases when measured in inflation-adjusted terms.


It is likely that some U.S. equity indices aren't going to revisit their recent nominal levels for several more years. Just as the March 2000 highs for many technology indices including the Nasdaq may never occur again in real terms, some January 2018 peaks may never be retouched again in inflation-adjusted valuations. Record overvaluations are usually followed by record undervaluations.


Disclosure of current holdings:


Because of the unprecedented investor surge into risk assets in January 2018, I unloaded nearly all of my long positions starting on the first trading day of January and ending on February 1, 2018. The only shares I am still holding are my gold mining, silver mining, and uranium mining shares, along with a modest allocation to U.S. Treasuries and an increasing collection of short positions especially in IWM which tracks the Russell 2000. About 4/7 of my total liquid net worth is in cash consisting of U.S. Treasury money-market funds and high-interest guaranteed time deposits. 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 what will become a historic collapse and should continue for roughly two years altogether. 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 until very recently, with no intrinsic value, is highly characteristic of a generational peak in anything from tulips to worthless canal/railroad/internet shares. I recently bought some HDGE, while my largest recent short additions have been IWM which tracks the Russell 2000 and XLI which is invested in industrials; both briefly soared to new all-time highs.


From my largest to my smallest position, I currently am long GDXJ, the TIAA-CREF Traditional Annuity Fund, SIL, HDGE (many new), GDX, URA, I-Bonds, TLT (some new), bank CDs, money market funds, GOEX, VGPMX, BGEIX, RGLD, WPM, SAND, and SILJ. I have short positions in IWM (many new), XLI (some new), AMZN (some new), NFLX (some new), NVDA (some new), IYR, FXG, and SPHD, in that order, largest to smallest. I sold all of my KOL, XME, EWZ, REMX, NGE, RSX, GXG, ELD, FCG, OIH, SEA, NORW, VNM, PGAL, EPU, and FTAG, and I very recently covered my short position in XLU.


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 on February 2, 2018 moved below its December 4, 2017 intraday high and thereby surrendered two months of gains in 1-1/2 weeks. The number of daily 52-week lows on the New York Stock Exchange sometimes surpasses the number of daily 52-week highs even though most large-cap U.S. equity indices are much closer to their all-time highs than they are to their lowest levels during the past year. Semiconductor shares have been a leading indicator since the 1960s and have been flashing danger signals. The strongest intraday behavior usually occurs just after the opening bell when amateurs are the most eager buyers, while closed-end fund discounts have been progressively climbing from rare lows. January 2018 was accompanied by all-time record inflows and by the most bullish net investor sentiment in many surveys throughout their multi-decade histories. 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 from its recent zenith would put the S&P 500 near or below 950. I believe that such an event is nearly certain but almost no one currently thinks that the S&P 500 below one thousand 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, 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.