Posted by: Dr Churchill | December 8, 2013

Party’s Up

Man’s chief purpose…

The purpose is the creation and preservation of value.

This, is what gives meaning to our civilization, and the participation in this is what gives significance, ultimately, to the individual human life…

The individual contribution, the work of any single generation, is infinitesimal; the power and glory belong to human society at large, and are the long result of selection, conservation, sacrifice, creation, and renewal — the outcome of endless brave efforts to conserve values and ideas, and to hand them on to posterity, along with physical life itself. Each person is a temporary focus of forces, vitalities, and values that carry back into an immemorial past and that reach forward into an unthinkable future.

The preservation of Capital is something like this too.

Along this holistic line of Thought comes this old Chinese saying that goes something like this:
”Do not waste your time trying to break a rock of obstacles, but overcome it instead by taking a high jump.”

Something like that, is what my advise is now for PE Long Term Investors, Institutionals, and Foreign Direct Investment managers.

I’m not going to tell you to buy bonds and not to buy stocks anymore. Nor am I going to set you loose on the Emerging Markets bandwagon anymore than I would sent you to ski off-piste amidst the wolves and the bears…

We all know there is an overheated market in the City and in Wall Street same as is in FSB and in the old Bund or Pudong. It’s a rich blood market and it sits directly across the river from the old financial and business conservative ethos of solid value Investor principles. Yet — there are still a few pockets of value out there, and the last days of a bull market just about always bring the biggest gains — but we always know better than to stay inside a theatre ready to burst in flames.
A ”Reversal of fortune” is playing in that theatre right now and you have to start preparing for the worst.

I know it’s hard…
Everyone loves a bull market until it turns bearish. It’s all fun and games until someone gets hurt. That’s when all the talk about the next hot stock ceases, and the conversation switches to wealth preservation.
It’s an all-too-familiar pattern that’s close to repeating itself once more.
How do I know?
The signs are everywhere.
Here are three prominent signs of this changeable weather trends:

A) Retail Swagger = The biggest market-top giveaway is the behavior of retail investors. Remember, a bull market has three phases: a) The Accumulation Phase: This is the period at the end of a downtrend when informed investors – hedge funds, money managers, politicians, etc. – start snatching up shares on the cheap. b) The Public Participation Phase: As that happens, public fear and apprehension towards investing subsides, and retail investors re-enter the market. c) The Excess Phase: Finally, momentum picks up and exuberance takes over. When that happens, a bear market is born, as the informed investors from Phase 1 bail out and leave retail investors holding the bag.
Right now, I’d say we’re somewhere early in Phase c.
If you want proof, consider that investors have poured $277 billion into stock-based mutual funds and ETFs this year. That’s nearing the $324 billion that went into these funds in 2000 – just before the bubble burst.
Conversely, investors have been pulling money out of bond funds at the fastest pace since, well, 2000. These funds have reported outflows of $31 billion. Again, that’s nearing Y2K levels, when $50 billion was pulled out of bond funds. The bottom line: Beware the herd.

B) Wall Street Cheerleading: Going back to the three phases of a bull market, you’ll recall that Wall Street traditionally is a first mover. That means big investment houses got in early – we’re talking March 2009 and prior. For four years now, they’ve been sitting back and reaping the rewards. So is it any surprise that banks reported a record $42.2 billion in profits in the second quarter? And that was after taking in a record high $40.3 billion in the first three months of the year. Now (surprise, surprise) the world’s largest money manager, BlackRock, is encouraging investors to stick with stocks. BlackRock says we should look past Fed taper worries and that central bank policy remains favorable for stocks. They do not care about the party coming to an end.
However — I do not continue to expect that short-term rates will remain low for long. Low rates, in turn, help maintain high corporate margins, supporting the long-term case for stocks — but that is unsustainable long term.

I’ve got some more good news for you: If Wall Street’s biggest players are telling you to stick with stocks, you’re probably better off doing the opposite.

C) Historical Precedent: They say he who does not learn from history is doomed to repeat it. Well, since 1928, the average duration of a bull market is 57 months, and the average return is 165%. This one has matched that average. It’s now 57 months running with a return of 164%. It no doubt has a bit further to go to, but it’s probably safe to say that it’s not going to match the decade-long run we saw in the 1990s. It’s more likely to falter as soon as the Fed’s expansive monetary policy becomes untenable. Remember, the Fed is pumping $85 billion into the financial system each month. That’s the biggest force driving stock prices. Many investors – some big, some small – are simply betting that the Fed’s quantitative easing programs will extend further into the future than anyone expects. But that’s a loser’s game.


The party is nearing it’s end. Of course there’s no telling precisely when the Fed will take away the punch bowl, but it will happen.

Sooner rather than later.

And when it does, the market will plummet.

Rest assured, the Wall Street Value Investors will all be well out of the market by then.

But what about you ?


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