Friday, June 26, 2009

Red Flag - Heavy Insider Selling

Earlier this week data was released that showed corporate insiders were selling their stock at a rapid rate to take advantage of the recent stock market rally.

The Wall Street casino operators keep sending their mouthpieces on to CNBC air telling the retail public investor to buy, buy, buy because the "green shoots" of economic recovery are appearing everywhere.

Meanwhile, corporate insiders - executives who really know what is going on with their company and how the economy is impacting their company - are saying sell, sell, sell and are thankful for the higher prices they are receiving for selling their stock.

Insider selling has been a fairly accurate gauge in this decade on stock market peaks. The current level of insider selling has climbed to the level last seen in mid-2007. Mid-2007 was when the broad stock market peaked, credit markets began to freeze and the ferocious bear market began.

Insider selling reached its all-time high back in the first quarter of 2000, back when the 18-year bull market in stocks reached its climax. It was also the point in time that also served as the official demarcation point between "dotcom" and "dotbomb". So insider selling is not something to be ignored by investors.


I ran across something interesting this week. It was a chart showing the Dow Jones Industrial Average, adjusted for inflation, from 1925 to the present. It can found at

This chart showed that the current market valuation is right in the middle of the historic price range band. So don't believe the people who tell you the stock market is cheap right now.

But then the chart really gets interesting. Looking at the chart one can see that the two previous declines within the historic price range band took a long time to complete.

The first decline lasted approximately 20 years, from 1929 to 1949, and the second decline lasted approximately 17 years, from 1965 to 1982.

We are in the midst of the third decline on the chart. Let's hope it does not take as long for this decline to end. Depending if you use either 2000 or 2007 as the peak of the market, we would talking about the years from either 2017-2020 or 2024-2027 as the end of the bear market. Not a pretty "picture".

Tuesday, June 23, 2009

The 1930s, 21st Century-Style

Many financial market participants still talk about a second Great Depression. They speak of a great wave of devasting 1930s style deflation washing over the United States.

These people seemed to have not noticed how the world has changed since the 1930s. On the plus side, today we have the emerging markets with billions of people moving up the economic ladder rapidly.

These economies are not over-leveraged with debt as is the US. These economies are moving rapidly away from an "export to the US" model and are now focusing on internal consumer demand, and therefore should continue to grow nicely no matter the problems in the US.

On the negative side, the 1930s was a relative time of plenty with regard to the supply of commodities (no, I haven't forgotten about the Dust Bowl). Today, due in large part to the emerging markets, key commodities such as oil are relatively scarce and will most likely continue to rise in price, no matter the economic conditions in the US.

I believe the most important difference between now and the 1930s is our money - the dollar. At the beginning of the Great Depression, the US dollar was still a gold-backed currency.

Every dollar in circulation HAD to be backed-up by an equivalent amount of gold. This is why the Federal Reserve at the time could not add much money into the economy. They were restricted by the amount of gold that the US had in its vaults.

We are now, of course, off the gold standard and the Federal Reserve can and is printing up untold trillions of dollars. I always remember Mark Twain's famous line about how history doesn't repeat, but it does rhyme. I believe this time we will "rhyme" and have a bad economy but instead of with deflation, we will have high inflation.

Since I touched on gold, I wanted to once again speak about gold's value as a financial insurance policy. To me, gold is not an investment but an insurance policy against financial calamities. It should be looked at in the same way as people look at home or health insurance.

Here are some interesting facts to back up my point. In October 2000, the S&P 500 was trading at a level of 1379, while gold hit a multi-year low at $263.80.

Since then the stock market has been a disaster with the S&P 500 down by a third currently to the 918 level. During this time, gold has risen to a current price above $930 - a gain in excess of 250%!

Even a small allocation to gold (insurance) in your portfolio would have helped preserve some of your wealth during this bear market.

Will gold continue higher? I would say yes - a slow, steady climb. I will only change my opinion on gold if I finally see true reforms being instituted in the financial markets. The latest "reform" package presented by President Obama this week was laughable at best - more "business as usual" for Wall Street, with the foxes still in the chicken coop.

Friday, June 19, 2009

Rising Treasury Yields Threaten the Economy

The last few months we have seen the casino operators on Wall Street attempt to get their casinos up and running again. They are trying to see how much "dumb money" they can get to invest again into the US stock market.

While this is going on, there is something significant going on with the real economy that Wall Street is ignoring. The yields on all but the very shortest-term Treasuries has climbed sharply. From its low of 2.04% in mid-December, the yield on the 10-year Treasury has soared to nearly 4%.

The 10-year Treasury rate has a direct impact on mortgage rates. Higher mortgage rates threaten to cut off any incipient recovery in the housing market rather quickly.

Why are interest rates climbing? Wall Street is telling you it's because the economy is recovering rapidly and you'd better run out and buy stocks now.

The real reason behind the rate rise is fear. Overseas investors are becoming scared to death of US economic policies. Please recall from prior articles how key overseas investors are to interest rates, the US dollar and our economic future.

Overseas investors are seeing annual trillion dollar deficits for the US for at least several years. This is scary enough but what the Federal Reserve is doing has these investors terrified.
The Federal Reserve is following a policy of what is called quantitative easing which is fancy term for printing trillions of dollars out of thin air with nothing to back them up.

The worry among overseas investors is that either: 1)the US will inflate their way out of debt with very high inflation rates. This way when the debt is paid back years down the road, it will be with dollars that are worth little; or 2) the US will simply renege on its debt and not pay it back at all.

The US has been following a policy of devaluing the dollar and inflating their way out of debt for decades. Readers should recall a fact from a prior article - that a dollar today buys only 20 cents worth of goods as compared to 1970. Overseas investors are worried that the US may go into overdrive in devaluing the dollar.

So right now, led by the largest holder of US Treasuries - China, overseas investors are following a similar game plan. They are selling longer-term maturities such as the 10-year Treasury. This selling is forcing these Treasuries down in price and higher in yield.

Overseas investors are then parking the money from these sales into short-term 3-month and 6-month Treasury bills. In other words, overseas investors do NOT trust the US over the longer-term.

In the sad-but-true column, Treasury secretary Tim Geithner recently went to China to beg the Chinese not to sell Treasuries. While there he gave a speech at a major Chinese university. He said that the US dollar was sound. After he uttered those words, he was laughed off the stage by everyone in attendance. Well, he at least he a profession he fall back on - as a comedian.

Tuesday, June 16, 2009

Boom Times Are Back - With a Twist

Recent months have been a vindication for people like me who believe that future economic prospects are far brighter outside the US. In the US, Japan and Europe there is little good economic news. However, in so-called Third World countries like China, Brazil, and India economic growth continues to power ahead.

In these countries, the financial system is not over-leveraged and dysfunctional, governments are not burdened under a growing mountain of debt, and consumers are not trying to rebuild battered balance sheets.

Look at the US - it is struggling to sell its IOUs (Treasuries) and this is forcing interest rates higher. In fact, the US will have to borrow $13 TRILLION this year alone. The US budget deficit is expected to surpass 13% of GDP, the highest level since World War II and the only enemy we're fighting seems to be the bankers on Wall Street.

Look at some of the emerging markets - the largest banks in the world are now in China,the largest consumer auto market in the world is now in China. Last month retail sales in China rose at a 15% rate. Oil imports into China rose sharply, helping to push global oil prices higher.

Brazil will soon be swimming in oil riches as it is being called the next Saudi Arabia. Of course, the US will be shut out from that oil after Wall Street refused to lend Brazil funds for the vastly expensive oil projects. Who stepped up and helped the Brazilians - why, China, of course!

While the US economy struggles this year, China's economy is expected to grow at 7%, India at 6%, and Brazil at 3%. Look at global stock markets over the past six months - the US roughly back to where it started the year, as is London, while Tokyo is up 7%. Meanwhile, China's Shanghai index is up 45%, India's Sensex index is up 44%, and Brazil's Bovespa index is up 38%.

Commodity markets have followed the emerging markets higher as demand for all sorts of commodities from these countries continues to be strong. Commodities enjoying strong gains this year include everything from oil to soybeans to copper to sugar to gold to coffee. Americans have to realize that when it comes to the prices of commodities such as oil, they are becoming more and more marginalized.

The US does remain the richest and most powerful nation on Earth. However, history teaches us that all great global powers eventually decline as they enter a period of slow growth as the nation become overburdened with debt and characterized by a devaluing currency. Is the US entering such a period?

Friday, June 12, 2009

The Stock Market and Retirees

Perhaps the group most at risk during the current period of financial markets turmoil are retirees or near-retirees. Unlike younger generations, this generation cannot afford to wait for stocks to rebound in the "long-term".

For retirees, financial ruin means that they outlive their assets. The largest risk of financial ruin for retirees lies in the stock market. If a retiree is forced to liquidate assets during a down stock market cycle, the results could be devastating.

Here is why. Many financial advisors will use an average annual 4% withdrawal rate for retirees from their pool of assets, which is a reasonable assumption. Now using this assumption, let's look at the prior bear market cycle to the current one.

For 17 years, beginning in 1966, the stock market was flat and the economy experienced the highest inflation on record. There are few financial advisors who use this period for their glossy illustrations. Here is why they don't.

According to William Bernstein's 2002 book - "Four Pillars of Investing" - NO asset allocation model avoided bankruptcy when a 4% withdrawal rate is applied to a $1 million portfolio using stock market returns from that time period! Simply stated, if retirees were in the stock market at that time with a large portion of their assets, they were wiped out.

We may perhaps be facing a similar time period and most retirees were ill prepared for the current bear market. Data from the Employee Benefit Research Institute showed that more than 30% of rear-retirees or those in their early retirement years had more than 80% of their money invested in stocks at the beginning of the current crisis.

According to mutual fund firm T. Rowe Price, if a person gets negative returns in the first five years after retirement, the odds of outliving your money over the next 30 years more than double from 26% to 57%. Unfortunately, I'm sure there are many retirees who now fall into that category.

The problem is that both retirees and their financial advisors made a mistake which is very common in all human beings. Human beings have a tendency to extrapolate whatever the current trends are indefinitely into the future. Think California housing bubble.

People expected the good times to continue and for the bull market in stocks to go on and on. Obviously, it did not. Any person approaching their retirement years with a nest egg today should keep in mind the lesson from the last bear market - that any investor liquidating principal in a down market can't rely on the "long-term" to bail them out.

Please feel free to contact me directly with comments or questions about this article.