How Old is the Current US Stock Market Rally Compared to Others Since 1900?

Found this interesting chart on Greg Guenther’s Rude Awakening free daily newsletter. The message of the chart is that the current stock market rally is not as old or as long as 6 or 7 of the last 13 rallies since 1903. A rally is defined as a stock market run after a 30% drop. Obviously, the numbers would be much different if you defined a rally as an upward run after, say, a 20% or 25% drop. Still, something worth noting… especially since the Fed continues to push low interest rates and more US dollars into the sails of the market.

 

Bonds are Trying to Stabilize

For the last couple of weeks, various bond prices have been trying to stabilize. If the Fed succeeds in this effort, then there is a firmer footing under stocks for another run to new highs.

However, if interest rates begin to rise again, look out.

Historically, on average, one out of three years is down for the Dow Jones Industrials. The last down year we had was 2008. So, we are due, unless the Fed can continue working its magic.

Be sure to manage your portfolio risk here. As I’ve said previously, I do not believe in the “Great Rotation”

Where We Stand at the Half

DescriptionYTD % Gain
SPDR S&P 50014.6%
iShares MSCI EAFE4.2%
Vanguard Extended Market Index ETF20.2%
iShares MSCI Emerging Markets-13.1%
iShares Core Total US Bond Market ETF-4.5%
SPDR Barclays International Treasury Bd-9.0%
iShares Barclays 7-10 Year Treasury-6.6%
iShares Barclays 20+ Year Treas Bond-12.8%
SPDR Gold Shares-28.9%
iShares Silver Trust-45.5%
Market Vectors Gold Miners ETF-49.5%
Global X Silver Miners ETF-50.8%

The table above shows the Year to Date performance of various asset classes that we have used in our portfolio over the last couple of  years. As you can see, only three have shown a profit so far in 2013. If you just do a simple average of those returns, you get a -15%. Actually, we’re doing quite a bit better than that, with client portfolios averaging around -3% to -6% year-to-date 2013.

The primary reason for the dip is my strategic decision to hold on to the gold and silver mining ETF’s and continue to buy a little more as they fall. SIL is down -63.7% from the top in May 2011, and GDX (gold miners) is down -65.3% from its top in September 2011. We started accumulating them in late May 2013. Other than those positions, we are holding mostly cash, approximately 60% to 70%, based on the methodology and the behavior of the markets. The last time the mining stocks bottomed in 2008, they rallied 200-300% over the next couple of years, so I expect a very nice bounce when we find a bottom. It could be weeks or months, but these prices combined with the irresponsible central bank behavior create a very rare opportunity for us to make a lot of money over the next 3-5 years.

If you have any questions, please give me a call.  I feel very good about our positioning for what I expect to be a very volatile Summer and Fall 2013.

I Don’t Believe in the “Great Rotation” – Watch Out for a Drop in Stocks

Some market pundits are talking about the coming “great rotation” from bonds into stocks, based on the idea that bond prices are near 300 year highs. The idea is that people will move their money over to stocks because the yield in bonds is too low to justify the risk of holding the bonds if/when interest rates start to rise and bond prices start to fall. I think that is nonsense.

The fallacy here is the belief that bond and stock prices can move in opposite directions for extended periods of time. Sure, during a crash or a melt-up, both assets may move in the same direction for awhile, like they did during the 2008 crash, or like they did after Qualitative Easing announcements. However, the prices of stocks are ultimately (theoretically) based on what smart people believe future corporate profits to be. If interest rates go up, then cost of capital is higher, then growth and growing profits is more difficult. If smart people calculate that future profits and growth will be hurt by rising interest rates, they will lower their valuation of the stock market’s fair price, and sell those stocks.

Stock and bond prices have both moved up since the beginning of QE (quantitative easing) and I believe they will both move down as QE ends, or loses it’s effectiveness.

I would not be surprised to see a 20% or more drop in stocks from here if bond prices (and interest rates) do not stabilize.

Bonds are Crashing

The new jobs report today was considered positive. Stocks are up while real assets are down. However, bonds are crashing. The ETF for long-term US Treasuries is down -2.5% just today… more than a years return on 10 years US treasuries. Hopefully, nobody thinks of bonds as “low risk” anymore. The US dollar is up quite a bit versus other global currencies and gold. Of course, we are in a holiday weekend, so the markets may be overreacting due to the lower volume of trading.

Thinking ahead, if bond yields, and interest rates continue to rise, our national debt service costs will spike, thus putting the US in a much worse financial position than we already have. This cannot be good for our economy, or for the US dollar in the long run.

Moving Back In

Based on our models, we are moving back in to Emerging Markets and US Real Estate, which have been out of the portfolio for a couple of months (and been clobbered in the meantime). Also, we are re-opening positions in US stocks which were just closed in the last week or so. Finally, the commodities position is being re-opened. We are still betting against long term US treasuries.

In summary, it seems as if we have a temporary respite from the selling. Perhaps the world is beginning to believe the central bankers won’t stop printing money just yet!

Interesting Times

I won’t bore you with a long description of the bad news from around the world. We have enough bad news right here in the good old US of A. We now have around 48 million people on food stamps, around 20 million people who are unemployed or underemployed, and another 10 million people on permanent social security disability. That may sound a lot like a depression to you and me, but, according to Ben Bernanke, the economy is looking up, and he is hoping to cut back on the printing of $85,000,000,000 US dollars each month. The Fed says inflation is very low, but John Williams at ShadowStats.com says inflation is really 6.5%/year if we calculated inflation the same way the US Government did in the 1980’s (yes, our leaders have been changing the way thing are measured to make them look better than they are and hold down the costs of Social Security).

How does this affect our portfolios? Well, our models right now indicate 100% cash. As I’ve written before, we are holding on to the mining company stocks even though they are falling like, well, rocks! When you include the mining stocks in our portfolio models, the models calculate between 19% (conservative accounts) and 30% (aggressive accounts) for those stocks, with the rest in cash. That’s our strategy for now, until some asset classes start to come back.

I would not be surprised if the Fed blinks soon, and talks about INCREASING the money printing. Time will tell.

Where Does the US Dollar Go Next?

As investors and traders around the world have dumped all asset classes to raise cash, the US Dollar has rallied sharply for the last two days against other major currencies. But I don’t think this is going to last very long. Why?

Our very large national debt means very large interest payments which, until the last couple of months have been at record LOW interest rates. Now, what happens when a large debt with large payments at low rates suddenly becomes a large debt with humongous payments at ever-higher rates?

Nothing Good (for the US Dollar).

Our Methodology is Raising Cash Today – Things Could Get Ugly

Well, even though Helicopter Ben told us yesterday that the Fed would continue printing money at the rate of $85,000,000,000 / month, the markets are reacting as if he had taken away the punch bowl. Perhaps this reaction is because Bernanke said that if the economy kept trending up like it has recently, the Quantitative Easing would be wound down over the next 12-18 months. All asset classes are getting absolutely taken to the woodshed today.

As of the end of the day today, our methodology takes us out of all asset classes except cash. As I previously wrote everyone, I will hold the precious metals related ETF’s, because, though, yesterday they started trending down again, they have been falling for a year and a half. In fact, I increased our percentage in these assets another 1-2% this afternoon.

So, in summary, most people are 70% in cash or more, with 10-25% in precious metals related ETF’s.