New Market Highs and Very Little Value

I have been scanning the markets for values. As we know, almost nothing on our “Very Short List” are in the buy zone right now. Even by widening the net, there is very little out there with a favorable risk to reward ratio. Sure, we can trade if we want, but we’re up against high frequency trading machines, hedge funds, proprietary traders and the networked day traders (many ex-industry). On top of that, there is no certainty in the world right now other than “slow growth forever.”

Last week we saw S&P 500 earnings continue to come in weakly. While the the downtrend for the half of companies reporting so far was only negative 3.8% versus an estimate of negative 5.3% according to FactSet, that is hardly encouraging. The bar had been set so low for earnings that not beating estimates would have been catastrophic. The other half of companies report this week and in the next couple weeks.

When earnings have gotten this bad over the past 50 years, we have seen a 20% correction EVERY TIME. Those buying heavily into the stock market right now are buying at historically high valuations by virtually every measure. Here’s a chart from Jesse Felder that makes the point about falling earnings and corrections:

Earnings and Corrections


Could it be different this time? Sure. Central banks are so accommodative that it is beyond comprehension most days. QE, ZIRP, NIRP and possibly “helicopter money” could offset the structural secular trends of aging demographics and global debt forever. I doubt it because forever is a might long time, but who really knows.

Earnings aren’t just a problem in the U.S. It’s much worse overseas. According to FactSet, Asian earnings are down 19% so far this quarter and European earnings have fallen 14%.

Earnings in the energy sector are terrible as well and with oil prices weakening again could get even worse. I do like natural gas stocks intermediate term and the developing weakness could be our opportunity to get into the assets we have targeted. Our oil exposure will be incidental to our natural gas exposure and I am comfortable with that level given the lower prices we are likely to buy at soon.

If earnings don’t pick up soon, and I don’t think they will until next summer, then we will get that bigger correction. I will be a buyer at key support levels, scaling in with several small buys, because I fully expect even more QE and eventually helicopter money. As subscribers know, we believe there are some specific places that helicopter money will be directed. One of those places is infrastructure spending – the U.S. won’t hand out much or any “go shopping” money again, ala, George W. Bush. 

Global Risk 

The Fed minutes stated that short-term risks were dissipating. I don’t find that to be true at all. 

Europe is going to have to deal with a very bad situations in banks of southern Europe soon. The U.K.’s decision to Brexit could end up being prescient even if it was approved largely by prejudiced votes of some people. 

China and Japan both have severe growth problems.

It will be a miracle of China’s overcapacity can be offset by consumer spending without a major correction and real recession. China’s numbers are so fudged they should package it and sell it at fairs. 

Japan is so befuddled they don’t even know what sort of experimental monetary policy to try anymore. They have paused to do a comprehensive review of their economic policies. If they are smart, they will ignore the financial markets and let whatever happens there happen, in the meantime, they need to fund their transition to a sustainable and smaller economy. I wish them the best of luck, but it’s probably going to be another 20 years of struggle there.

Because of lower oil prices, Russia and the Middle East are in bad shape. Russia in particular carries the risk of becoming belligerent somewhere in order to distract the citizens from Putin’s failing economic policies. Nothing like a good fight to get the juices flowing. The Baltics better beware. Hopefully Russia just comes to its senses and starts cooperating with the rest of the world. They really do have the potential to be a powerhouse economically if they could get over their governance problems.

I worry that Saudi Arabia is about to become much more aggressive as well. They have armed themselves to the teeth and if their economy deteriorates further, then they could be on the march as well. Ideally, Iraq would stabilize and Iran would stand down so that Saudi Arabia didn’t feel so threatened. What are the odds?

Short Answer on Investing

I like continuing to wait for straight pitches down the middle. As it stands, almost everything is at the ankles or shoulders, sure, you can swing, but it’ll be tough to get a hit.


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