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Reasonable Doubt

The current bull market, now in its 6th year of existence, has been called the least respected of all bulls.  Investors simply refuse to give it due credit, nor invest much of their hoards of cash paying nearly zero.  Behind all the disrespect, there has been that underlying assumption of guilt that all the gains are just smoke and mirrors, created and maintained by the grand Fed experiment in Quantitative Easing, and ultimately doomed to fail spectacularly.  At this point, there has to be some reasonable doubt creeping into the minds of the minds of the prosecutors.  This market is not guilty. 

Heading to Euphoric?


I presented this slide at our annual meeting last month, making a case that the current level of skepticism reigning over the financial markets was not a condition that we often see at major market peaks.  More often the end comes once everyone believes that we are in a new era of prosperity (“This time is different”).  It ends when cash is invested fully and expectations for future gains are the only expectations.  Sir John Templeton was quite right.  Consequently, I made my case that given the very “neutral” view (47%) of the stock market in recent surveys, we are not yet to the end of this this bull market and won’t be until we see some sense of euphoria or “very positive”  survey results. 



Market Response to the End of QE

You've certainly read by now that the market was in no way surprised or affected by the Federal Reserve’s announcement regarding ending their bond buying program at their last meeting.   Quite the contrary.  Stocks pushed out to all time new highs.  The prosecutors claimed that it was all because of the Fed via an increasing Federal balance sheet running closely in sync with the rise in equity prices.  I’ll offer this very excellent set of charts from Bespoke in defense of the market. Yes prices have risen with the money supply (Fed Balance Sheet) but also in sync with Consumer confidence, the labor market and Consumer Spending just like every bull market in history.  Thank you to www.bespoke.com

Gold, The Ultimate Store of Wealth?

The prosecution’s theme suggesting it’s all because the Fed has also led many astray in the form of investments in precious metals like gold and silver.  The noise here was deafening in 2011 after several years of 20% annualized gains in the shiny stuff.  The logic was as follows;  Gold and silver can’t lose as the Federal Reserve is purposely printing money and devaluing the US dollar to artificially prop up the US economy and the financial markets.  Scandalous!  In early 2012, we made several broad and loud announcements to sell Gold and Silver as it appeared the US dollar was seeking a bottom.  Beyond a few failed trades lasting not more than a week or two, we have not touched gold or silver since.    As of late 2011, Gold has now lost more than -38% while the S&P 500 has gained nearly 80%.   This is the ugliest chart out there.  The gold miner’s index (GDX) is shown in Red, the S&P 500 index in Green.  Notice the very painful break of support for GDX in the last couple weeks in the lower right corner. 

Finally, now I am seeing some capitulation selling so I would be surprised to see another short term low developing soon, but this is not likely an opportunity to buy gold and silver or mining stocks as the US dollar has just started moving higher.  Macro trends associated with currencies are long affairs.  As I’ve said before, more money has been lost by investments in gold and silver than any other “thing” (I won’t call it an asset class). 

Closing Arguments

The bull market in stocks is still alive and fueled on solid fundamental evidence.  True, valuations are not cheap anymore and clearly at some point in the future, perhaps the not so distant future, stocks will put in a longer term peak.  They will do so in reference to hard evidence that the US economy is beginning to decelerate not because the Federal Reserve has become an enemy.  Those who have proclaimed this bull market as guilty and failed to embrace the trends as they are, have failed to participate in one of the greatest opportunities to create investment wealth in our country’s history.  Sadly, I fear that some portion of the prosecution might be ready to jump sides to the defense as they join the “Euphoric” just in time for the real market peak to emerge.  This can be an ugly business especially for those who cannot accept conditions that fly in the face of their convictions (political, religious, etc).  Ego has no place in the investing world. 

The defense rests

Have a great week

Sam Jones