“The way to make money from investments, above all else, is to buy the losers, not the winners”

POITOU, France – Yesterday, the Dow rose another 165 points – or about 1%. 

No pre-Christmas panic this year. 

Tomorrow, we will reach into the archives for a visit with Christmas Past. 

Today, however, we give you a little Christmas Present. 

A Grotesque World

We have been trying to understand the Fed’s position… and its new “tightening” cycle. 

The Fed is trapped, we concluded. 

When adverse conditions appear – a bear market or a recession – it won’t be able to stay the course. 

Since adverse conditions are guaranteed, sooner or later, the Fed can never return to “normal.” It has created a grotesque financial world. 

Now, it will have to live with it… and be destroyed by its own monster. 

How? 

Faced with a new crisis, it will bring out new “tools,” new tricks, new experiments. These will be merely variations on the fundamental magic – creating money out of thin air. 

Exactly how, when, and to what effect will this develop? 

We wish we knew! But it is bound to be exciting. 

Another depression? Dow 50,000? A pack of gum for $25? 

Anything is possible. 

Put on your seat belts. Sock away some Krugerrands. Offer your neighbors some Christmas cookies and eggnog. What else can you do?!

Diehards and Lost Causes

But here’s another Christmas present… 

It’s nothing new. And we didn’t spend a lot of money on it. But it’s the thought that counts. 

Here goes… 

When you go to buy a stock, you might ask yourself: Is this stock likely to go up? 

But that’s the wrong question. 

You don’t know whether it will go up or not. No point pretending. 

The right question: Has this stock gone down enough? 

Now, we’re getting somewhere. Now, we’re harnessing our natural, very becoming modesty and putting our ignorance to work for us. We don’t know the future. But we can know the past. 

And it is not for nothing that we are a friend to underdogs, diehards, and lost causes. It pays! 

Thirty years ago, at an investment conference, there was a scalawag analyst from Germany. He showed a chart where a stock had gone up steadily for 10 years. He pointed to the bottom, left side, and in a thick accent explained his system: 

“Ja, you see, down heer? Vee buy.” 

Then, pointing the upper right hand corner opposite… 

“Und up heer, vee sell. Zat vay vee never lose money.” 

A hand went up. A listener had a question: 

“But what happens if the stock doesn’t go up?” 

“Ah, zen,” he replied without a moment’s hesitation, “vee don’t buy it.” 

He was right. The winning formula is “Buy low. Sell high.” And there’s only one side of that formula you can completely control: buying low. 

The way to make money from investments, above all else, is to buy the losers, not the winners. 

Everybody stumbles. So the longer you see some hotshot walk down the street without stumbling, the greater your certainty that there’s a banana peel waiting for him. 

What you want are stocks that have already stumbled. Not ones that have some kind of serious motor problem… not cripples… not brain damaged… not derelict companies or defunct technology stocks. 

Of course, you want normal companies in decent health… but which have had a string of bad luck, or made some bad “life choices” and are now getting themselves back together. 

You want something that is cheap.

Dust on Its Jeans

Near the beginning of last year, we looked around for a stock market with dust on its jeans. Almost everything was absurdly smug, upright, and expensive, in our opinion. 

But we found one exception: Russian stocks. 

“…cheap on all measures,” we wrote last March, “…the most value you can get.” 

We suggested a trade: Sell U.S. stocks. Buy Russian stocks. 

So, how would you have made out if you’d bought Russian stocks? We put the question to Bonner & Partners researcher Chad Champion. 

Bill: “So Chad, Russia has done reasonably well. If someone had taken my suggestion and bought a Russian stock market ETF, how much would they have made?” 

Chad: “Uh… Bill… I hate to tell you this, but they would be down 14%. That’s about 10% more than the S&P 500.” 

Bill: “Well, never mind.” 

Of course, you gotta give it time!

118%… 170%… Gains

Generally, buying cheap is the way to go. 

And “quant” investor Mebane Faber, of Cambria Investment Management, proved it. 

Faber did a study over, roughly, the last 100 years. He wanted to know what happened when the stock market fell on its face. Specifically, after stocks had gone down for three consecutive years… what next? 

A year or two is usually all it takes to correct mispricing. So, a three-year slide is rare. But when it happens, there is almost always a powerful bull market afterward, with average gain in the fourth year of 30%. 

Faber further studied industry groups, sectors, and overseas stock markets. Everywhere, he found the same phenomenon: When a market had gone down enough, it was ready for a big move to the upside. 

When U.S. industry sectors, for example, had dropped 80% or more, the average return over the next three years was 170%. 

Foreign stock markets: Same thing. If they went down 80% or more, they’d have an average gain of 118% three years later. 

So, what is down 80%? What’s despised? Where are the losers? Gold? Commodities? Emerging markets? 

Here’s one that stands out: Greece. 

Talk about a loser! 

Greek stocks are down 98% since 2007 in U.S. dollar terms. That is a record of investment failure and extreme loss that is hard to beat. What are the odds that Greek stocks will be substantially higher three years from now? 

We don’t know. Wrong question. All we know is that you get a lot of stock for your money. That’s all we really know. And all we need to know. 

What else? 

Russia! 

The dividend yield on the Russian stock market is about 4% to 5%. And the average Russian stock is selling at about half its liquidation value, with the market down from 2008 even in ruble terms. 

Russian stocks may not rise in 2016. Or 2017. But they’re bound to go up sometime. 

And if they don’t… 

…don’t buy them. 

Merry Christmas… or happy holidays – as you prefer. 

Regards, 

Bill

Market Insight

Investors who sold energy stocks and bought stocks that benefit from higher consumer spending did well this year. 

As you can see from today’s chart, the S&P 500 Energy Index is down 25% so far in 2015. 

It tracks stocks involved in the oil and gas business. 

Meanwhile, the S&P 500 Consumer Discretionary Index is up almost 9%. 

It tracks stocks – such as Amazon, Nike, Disney, Home Depot, Starbucks, and McDonald’s – that depend on consumers having some extra money in their wallets to spend on non-essential items. 

One theory to explain this is that lower heating and gas costs leave consumers with more money to spend elsewhere.

Further Reading: If you’re as worried about the credit “monster” the Fed has created as Bill is, consider signing up for a risk-free trial subscription to his monthly publication, The Bill Bonner Letter. 

Bill recently told subscribers why the feds won’t be able stop the next meltdown… how it could affect your personal life and the life of your community… and even how to go “off the grid” without moving out of your home. Learn more here.

Merry Christmas everyone! Articles and commentary resume Monday December 28th. Stock Market  holiday schedule for U.S. and Canadian exchanges below:

Thursday, Dec 24 — Christmas Eve
US and Canadian markets are open only half-day. Both close at 1pm EST – that’s 10am PST. 

Friday, Dec 25 — Christmas Day
US and Canadian markets are closed for Christmas. 

Monday, Dec 28 — Boxing Day (in lieu of)
Moneytalks.net resumes articles and commentary as US markets are open normal hours. Canadian markets are closed for Boxing Day. 

Tuesday, Dec 29

US and Canadian markets are open regular hours.

Robert Zurrer
Editor
moneytalks.net

zurrermoneytalks@shaw.ca

Much the same way many experts felt that the NYSE was issuing a series of death signals, there are just as many who share the same sentiment towards the signals the Global BBC 30 Index is supposedly issuing.  This index is thought to provide a more accurate reflection of what is going on in the markets as it is based on the economic data of 30 of the world’s largest companies.  In today’s world where manipulation is the order of the day, over-reliance on such an index might not be the most prudent of actions. It has, however, confirmed that volatility levels have surged to the moon, but of course, we already knew this would occur as this was predicted well in advance by the Market volatility indicator (V-indicator). 

Let us examine the situation from a mass psychology perspective before we go into the technical outlook. Overall the world expects things to get worse. Commodities prices are in the toilet, salaries when inflation is factored in have been flat or dropping for decades.   In fact, one estimate states that over 75% of Americans are living pay check to pay check; according to this article, the actual figure is 76%.   Overall the world is in a pessimistic mood, and it’s during such times that opportunity comes knocking. 

The global BBC 30 index is not indicating an imminent market breakdown; instead, it is showing us that the world has changed.  This index is not going to trend in unison with all the markets, for it is not representative of one single nation.   

There are three ways to look at any given situation.  The two the masses are trained to follow and adopt are:

• The glass is half empty which signifies that you are negative 
• The glass is half full which illustrates that you are an optimist.

Our opinion on this retarded form of psychology is that it’s utter rubbish, for neither one is correct. The only question that should ever pop into the mind of a rational being is “Am I thirsty or not”   if you are thirsty then you reach out and take a sip. If you are not thirsty, you move on and continue with your daily routine. 

In that sense taking a look at the above chart, what is the only question that should come to mind?  

Is the trend up? And the answer would be yes, and as the index has been trending upwards for the past five years, every pullback should be seen as a buying opportunity. 

The MACD’s are still not trading into the extremely oversold ranges, so further consolidation is warranted, and as the economy of some nations is weaker than the others, this index cannot be asked to keep pace with indices such as the Dow and NASDAQ.   There is a small chance that it could test 6500 ranges again though the mostprobable course of action is for it to put in a higher lower. The ideal scenario would call for a drop to the 6800 ranges and then a move to the 8000 ranges. Once it closes above 8375 on a monthly basis, it will provide the setup for a test of the 9000-9100 levels. Much like they were wrong with their proclamations of doom for the NYSE, the doctors of doom are doomed to share the same experience with the Global BBC 30 index.  

A great fortune in the hands of a fool is a great misfortune.
Anonymous

Intraday outlook (next 24 hours): neutral
Short-term outlook (next 1-2 weeks): neutral
Medium-term outlook (next 1-3 months): bearish
Long-term outlook (next year): bullish

The main U.S. stock market indexes lost 1.8-2.1% on Friday, extending their short-term uptrend, as investors continued their post-interest-rate-increase selling. The S&P 500 index got close to support level of 1,990-2,000, as it retraced its recent move up. The nearest important level of resistance is at around 2,040-2,050, marked by previous local lows. For now, it looks like a medium-term consolidation following October rally:

….click HERE or on the chart to continue reading analysis and much larger charts

Your best plays in what’s sure to be a volatile year ahead.

While U.S. markets have not done much of anything this year, 2015 will go down as another banner for the exchange-traded fund industry. In November, ETFs around the world added $28.2 billion in new assets, with the best ETFs coming in U.S. equity — they saw $21.4 billion of inflows, according to BlackRock data.

Yes, the largest ETF market is on pace for another year of record asset-gathering. And more than 200 new ETFs have come to market this year, confirming that the ETF business continues to experience exponential growth. Better yet, the quality of new products is improving as some rookie ETFs, with the appropriate seasoning, have the potential to become some real powerhouses.

Still, some ETFs are better than others.

With 2016 just around the bend, investors are (rightfully) looking to rethink and restock their portfolios — and that means hunting for the best ETFs to give a portfolio that right mix of potential and diversification. 

It’s not exactly easy to identify the best ETFs out there, considering that the markets are digesting a rate hike from the Federal Reserve. But we’ve done our homework and highlighted several funds that should lead investors forward in 2016.

……Here are the seven best ETFs to buy for 2016: