“an ongoing shift in the stock market’s leadership away from high flying concept and momentum stocks into more defensive sectors”

Rich Learning, Enjoyment, and Fun through Conversation

Sherry Turkle, a psychologist and professor at M.I.T., and the author of  “Alone Together: Why We Expect More From Technology and Less From Each Other” opines that, “Human relationships are rich; they’re messy and demanding. We have learned the habit of cleaning them up with technology. And the move from conversation to connection is part of this. But it’s a process in which we shortchange ourselves. Worse, it seems that over time we stop caring, we forget that there is a difference. We are tempted to think that our little ‘sips’ of online connection add up to a big gulp of real conversation…..But they don’t. E-mail, Twitter, Facebook, all of these have their places – in politics, commerce, romance and friendship. But no matter how valuable, they do not substitute for conversation……In conversation we tend to one another….We can attend to tone and nuance. In conversation, we are called upon to see things from another’s point of view.”

Aside from discussing the merits of conversation, I also examine an ongoing shift in the stock market’s leadership away from high flying concept and momentum stocks into more defensive sectors.

I am enclosing two reports. The first report Breakeven inflation – reflation time, and longer-term opportunities? is by my friend Laeeth Isharc who is one of the smartest and most intellectual individuals that I know of. Isharc opines that, “The consensus narrative is ….that inflation is not an immediate problem, and that the central bank knows very well how to defeat inflation once it becomes evident.” He, however, believes that, “these concerns over deflation and weak growth will turn out to be mistaken, that it will be more difficult to control inflation than most anticipate, and that tactically the timing and entry level are right to take the other side of the trade and bet on reflation by entering a long breakeven inflation position.”

The second report is by Jawad Mian who is a fund manager living in Dubai. He started recently a macro fund and a monthly newsletter service called Stray Reflections (jawad@stray-reflections.com). In his most recent reflections he discusses the possibility of shorting US internet and biotech stocks and his views about inflation.

Kind regards
Yours sincerely
Marc Faber

Russia conducted military exercises on borders with Latvia and Estonia. Putin believes that landmass is the nation’s greatest – not its economic ability. This is very old school and it seems to be everyone is trying to be the next Roman Empire. The problem is, Rome built roads, economies, and turned the lands it had conquered into emerging markets. They also made their captives Roman citizens and they shared on an equal basis with respect to rights. In other words, they constructed an economy, something nobody has done since. Russia can take Eastern Europe in a matter of days or weeks. Then what? Oppression is not power nor greatest and it will not bring peace as did Rome with its Pax Romana. The days of Empire are over and gone. Economic power is mightier than the sword.

The West is being outplayed by Russia on every front for the economy is declining and Russia can smell the blood. Then the likelihood of war in Asia cannot be ignored. As the economy turns down, we may yet see a war between China and Japan. As we pointed out in the Cycles of War report, that cycle of border clashes with China has also unfolded precisely on that cyclical study.

War correlates with the economy. WWI follows the economic decline of Europe and the 26 year Long Depression just as WWII followed the Great Depression. When things are booming, there is no major international war. Turn the economy down and it becomes time to get even for old wounds. In China the dislike of Japan for previous history runs deep to the point you could not really find even a Japanese restaurant in Beijing. Likewise, in Europe, the resentment against Stalin runs extremely deep.

With the Western economies turning down and no hope in hell of surviving the pension crisis, war is needed to escape the broken economic promises. This is a sad statement to even have to make. But the majority are just a herd of sheep and cannot see past the rear-end of the lamb in front of them.

I have hoped that publishing these studies we could help mitigate the coming crisis, but as I have said previously, you cannot manipulate a trend. It looks like all we can do is prepare for own survival. This is just the way government escape its failures – thinning the herd.

We will leave up the Cycle of War Conference for another two weeks.

More from Martin Armstrong posted April 6th, 2014:

Includes “10 Market Rules to Remember” by Bob Farrell, a Wall Street veteran who drew on some 50 years of experience in crafting his investing rules. After finishing a masters program at Columbia Business School, Bob Farrell started as a technical analyst at Merrill Lynch in 1957. Even though Farrell studied fundamental analysis under Gramm and Dodd, he turned to technical analysis after realizing there was more to stock prices than balance sheets and income statements. Farrell became a pioneer in sentiment studies and market psychology. His 10 rules on investing stem from personal experience with dull markets, bull markets, bear markets, crashes and bubbles. In short, Farrell has seen it all and lived to tell about it.- Editor Money Talks 

“At the start of the bull market we have all the paper and they have all the money. At the end of the bull market we have all the money and they have all the paper”.

Regardless of the number major “booms” and devastating “busts” the majority of investors/speculators are normally wrong in the end. History has provided us with valuable lessons, yet the key emotions of fear and greed combined with a dose of stupidity create extreme volatility in both directions and opportunities for those not swept up in the herd activity.

In the “social media” age we are literally now bombarded with conflicting messages, calls and sales pitches from a variety of marketing geniuses, self-proclaimed gurus and those simply looking to milk your wallet even further. I admit to being part of this epidemic from being a content provider in a world now drowning in content. Let’s face it the majority of “Tweets” these days will have all the longetivity of a male orgasm (unless your Justine Sacco), yet I can see some major issues ahead in the next “speculative bubble” which will be the first where rumours and Figjam will spread to thousands of people instantaneously via the little blue bird. As FOMO increases as with any bubble, you will see traditional blue chip investors swept up in the mania holding a portfolio of rubbish on margin.

Apart from speculative bubbles, the other danger to investors/speculators is too much information or TMI as many parents of teenagers would hear often. The three books I strongly recommend to my subscribers (along with Don’t Sweat the Small Stuff by Richard Carlson) are at the bottom of this article, however Bob Farrell’s 10 Market Rules to Remember are well worth expanding on and adding a more “speculative” feel to them. (Please note readers are welcome to take an obligation free trial to my newsletter at the end of the article)

Bob Farrell commenced his career at Merrill Lynch in 1957 following a period of study under the great value investor Benjamin Graham at Columbia University. In 1967 he became Chief Market Strategist (1967-1992), and remarkably prior to that for 16 of the 17 prior years he was the top ranked Wall Street analyst in predicting the direction of the stock market. His 10 Market Rules to Remember were published in 1992.

1: Markets tend to return to the mean over time.

The best measure of this on a broader basis would be the historical PE ratios for the S&P 500. There will be periods (sometimes protracted) where stocks are either undervalued or overvalued, however the risk/reward profile of buying equities during periods of undervaluation is much more attractive than rampant enthusiasm at/or near the top. Jordan Eliseo, Chief Economist for ABC Bullion recently presented a compelling case that equity valuations are “stretched” and this apparent in the slides below. (Jordan sourced the figures from Schiller Data).

For the junior resource/precious metals investor in Australia, the Small Resources Index (XSR) is a fantastic barometer of value and sentiment, and based on a 72.5% decline from January 1 2011 to June 25 2013 it could be argued that the risk/reward of accumulating quality juniors remainsextremely attractive. The XSR has been >6000 in both 2008 and 2011 yet at the time of writing was a measly 2129. Whilst it doesn’t mean that the index will roar ahead and surpass these levels in the short-term, it should provide some comfort for those contrarians happy to go against the herd and buy when others are selling.

2: Excesses in one direction will lead to an opposite excess in the other direction.

Unless you believe that “Mining is finished, and resources are dead”, there is an extremely compelling case that interest in base and precious metals equities will eventually return and overshoot to the upside. The downbeat attitude has been exacerbated by three horrific years illustrated by the XSR below, however those who believe that “Mortgage rates or junior resource stocks will never rise again” I believe could be in for a nasty shock. Sure the catch phrase emanating from China is all about the looming “Dining Boom” as opposed to the stuttering “Mining Boom”, but last time I looked we still need copper, nickel and zinc to build stuff whilst gold has been around for a mere 5000 or so years and I don’t see it going away anytime soon.

XSR 10 Year Chart: Source Iress

3: There are no new eras – excesses are never permanent

If this were the case we would all be wearing stonewash jeans and Hypercolour tee-shirts, whilst attending to our tulips (or tip-toeing through them). One of the greatest catch phrases of recent times was “The new economy” and whilst there are always a handful of companies that “survive and thrive” every boom is littered with pretenders, transformers and speculators obliterated through their own greed and stupidity. I enjoy the convenience of my 1kg Ultrabook, yet my major concern when working remotely from a local café is the availability of a power point as the advances in battery technology have failed to keep up. It isn’t all bad news though, as having your phone well into the red zone out on a night out with your mates can be a good thing provided you have access to a taxi rank.

Despite all the lessons in history we are still going to fall for the next major “fad” and declarations of a “new era”. How often do you here school yard chatter about the investor whose ancestors sold out at the top of the tulip, railroad and electronics bubble, whilst his timing in tech, retractable syringes, childcare, uranium and Steve Madden shoes was impeccable?

4: Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways.

Who would have thought that Fortescue Metals Group (FMG) would rise from 9c to a high of $136 (still trading around $53 eqv) or Paladin (PDN) roar from 0.008c (eight tenths of 1 cent) to an all-time high of $10.80 in April 2007? When you are in depressed market you tend to believe that every upward price movement is all you are going to get and this is why many junior resource stocks are now struggling after a 30-40% bounce. The great precious metals stock bubble of 1978-1980 is long forgotten and speculators are now satisfied in selling a chronically undervalued gold junior for 5.2c after acquiring the shares for 5c. Buying at the top of a bubble will lead to similar results but in reverse. Bad news takes time to be digested amongst larger investors, and whilst daytraders will move in and have their fun, the risk/reward of catching a falling knife is one or two price steps up for a 100% wipe-out should the company be suspended never to return.

“I can assure readers that stupidity to the upside will return to the junior resource sector and once paranoia is replaced with reality you will start to see a number of quality juniors trade around their rightful intrinsic value. Major mineral discoveries in Australia tend to be as rare as a three-star Adam Sandler movie and he is about due”

5: The public buys the most at the top and the least at the bottom.

Ever seen a Boxing Day sale where ladies fall over each other to buy shoes 700% more expensive than the previous week? This is the beauty of the stock market where contrarians are able to buy stocks cheaply (often on their own) that have thrown up a technical sell signal or whose market depth is as attractive has a taking a dip in a brown tinged ocean. It all gets back to fear, greed, the fear of missing out (FOMO) and ultimately stupidity. It is a lonely place buying at/or near the bottom, whilst you are likely to be ridiculed for taking profits in a stock that is heavily discussed on the financial forums and invites are already been sent out for the $5 party. Positive feedback is what drives markets higher and until that hairdresser, cobbler, baker or taxi driver starts making regular risk free profits the general public are still miles away.  

6: Fear and greed are stronger than long-term resolve.

During the Dotcom bubble I remember clients buying a stock at 10c then becoming over anxious when it dipped to 9.5c or failed to move in an immediate time frame. With investors/speculators now drowning in TMI, we have concerns over Crimea, China, interest rates, employment numbers, European growth rates, and a potential short-term oversupply in copper which all create “fear” and “anxiety” and cloud our longer-term judgement. When stocks start to run and we start high-fiving fellow investors, the lessons learnt during bear markets are thrown out, with many rushing into leveraged and exotic products to “turbo charge” their gains. This pattern of greed and stupidity will then repeat itself with new themes, stock promoters and eager participants waiting to part with their money.

7: Markets are strongest when they are broad and weakest when they narrow to a handful of blue chip names.

Junior resource/precious metals investors will know all about this. The ASX 200 has enjoyed a stellar rally which has been the result of strong gains in the banking, telco and industrial sectors, yet apart from a number of high-growth opportunities it has been tough going in the smaller caps and in particular the miners. With the average PE ratio of the S&P 500 around 25x (as per previous slide) it could be argued that there has been some strength in the broader US market, whilst the Australian market is now dominated by the so-called “Yield chasers”

8: Bear markets have three stages – sharp down, reflexive rebound and a drawn-out fundamental downtrend.

The XSR chart from January 1 2011 (above) would highlight this perfectly. It has been an extremely challenging market for junior resource investors and apart from the odd major discovery or “fad” commodity, even the highest quality explorers and/or emerging producers have struggled for traction.  This had led to issues in raising capital and has seen a number of miners enter administration and liquidation. There have been some positive signs emerging of late with stocks getting a “sugar hit” from newsletter recommendations and daytraders keen to pursue bio/tech and resource trading opportunities and stocks putting on some impressive gains albeit from a low base.

9: When all the experts and forecasts agree – something else is going to happen.

Just when gold was going through $2,000 in 2012 like a dodgy vindaloo the price corrected and now we are faced with a mixture of both bullish and bearish calls. Just as major banks and forecasters upgraded their iron ore price targets we copped a nasty near-term correction. The most worrying call for the “Mortgage belt” is that interest rates are going to remain at record low levels for the foreseeable future and house prices will continue to rise due to high demand and low supply. Leading up to the GFC we were being led to believe that the market will continually rise to the overwhelming support from super fund inflows. I am sure that 35 out of 27 economists will be picking the next “Recession Australia had to have”.

10: Bull markets are more fun than bear markets.

I am guilty of overusing the following saying “If it flies, floats or f….., rent it” Bull markets are great fun where we all go out for long lunches, fight over the bill then normally end up at the casino or disco thereafter. Despite all the pain of previous bubbles, many continue to purchase “illiquid” assets or tax deductions such as luxury cars, boats, a nightclub, restaurant or sporting team (for the super successful) from a major liquidity event. The other major mistake many make is to re-invest profits in stocks heading south and fail to put any away for the tax department. Whilst the intention to squirrel away profits in cash, industrial stocks or precious metals is a noble one, boredom quickly sets in and portfolios are then decimated to chase the “effluent” that normally flows and runs much faster. The real test will now come from the “Buy and hold” investors who have done extremely well from doing nothing, but may start to fall into the temptation of chasing a little more excitement. Whilst bull markets lead to us feeling wealthier, part of a crowd and more attractive to the opposite sex, for the uneducated, fearful, greedy and stupid they are the worst events that could possibly happen to the individual and their families. There is a horse race or Keno game being run somewhere, it doesn’t mean you spend all night at the casino or an on-line betting site.

The three most costly words for many of us are “I love you”, however “This time is different” is often regarded as containing the four most expensive words in financial history. Bob Farrell’s “10 Market Rules to Remember” are essential reading for investors across all asset classes, yet are often discarded at the first sign of a major bull market, era or paradigm as we all become self-proclaimed gurus and mistake a bull market for brains.

Tony J Locantro

Email: tony@locantro.com

Website: http://locantro.com

For a free trial without obligation to Locantro’s Life please visit www.locantro.com

TOP THREE BOOK SELECTIONS FOR INVESTORS

1: One Up On Wall Street, Peter Lynch

2: The Winning Habits of Warren Buffett & George Soros, Mark Tier

3: Devil Take The Hindmost A History Of Financial Speculation, Edward Chancellor

Q: How much below the asking price can an offer be made to seem reasonable for the seller? I hear people saying 7-8% on average, but if I believe that the true value of the property is closer to -30% off the asking price – will it look like I’m trying to low-ball?

A: That is never the issue … offer and acceptance are a matter of negotiation, market conditions, terms and urgency of the seller’s need to sell and buyers ability to pay … etc.

In the US properties have been sold for a number of years at 50% below asking price.

In Vancouver for many years, nothing sold over asking.

You never find out a vendor’s condition until you try.

Much success,

Ozzie