In December 2014, the deteriorating market for metals and a suddenly floundering oil price pulled the resource-heavy TSX Venture Index to an all-time low. 

Big board indices such as the S&P 500 are still reaching new highs each week, yet this is the second longest bear market since 1932 for gold stocks according to Barron’s Gold Mining Index (BGMI).

While it is difficult to discern if today’s market is truly the absolute bottom, the similarities in media headlines, the tone of discussion, and overall sentiment are reminiscent of bear markets past. That is why, in this infographic, we look at some of the major headlines at market bottoms over the past 35 years including those from the most recent downturn.

When it comes to companies such as those that make up the TSX Venture, it can be incredibly hard to judge fundamentals as there are no earnings or steady revenue growth for most companies. As a result, these markets are driven by greed and fear even more so than other sectors. 

It’s important to be a contrarian and to go against the herd mentality. This doesn’t mean going against the grain no matter what, but it means thinking and acting with conviction based on fundamental market truths – regardless of what other people say.

We know that markets, especially those tied to natural resources, tend to be highly cyclical. With the large capital investments and timelines required to advance projects, massive supply challenges must be corrected in subsequent cycles. This can lead to either a rush to buy or sell, and therefore bull and bear markets.

We also know that investor sentiment is largely a psychological phenomenon that can be tied highly with emotions rather than fundamentals. The media can be a big part in echoing or reinforcing this sentiment. 

Take a look at the headlines in bear markets bottoms over the last 35 years – do you think we’ve reached a similar place yet in this cycle?

Click Image for Larger View

Tech earnings have been in focus over the past week, and the results have not been exactly electric. On the positive side, Twitter (TWTR) surged 16.4 percent on a top- and bottom-line beat and upward guidance.LinkedIn (LNKD) gained 10.7 percent on solid revenue. On the downside, extreme sports and drone camera maker GoPro (GPRO) snapped 13.3 percent on disappointing guidance, Pandora(P) dropped 17.2 percent on missed revenue and Yelp (YELP) plunged 21 percent on slower user growth.

Quick note on the latter: Personally I lost all my faith in review sites like Yelp and TripAdvisor (TRIP) after discovering you could go on Fiverr.com and pay for freelancers to swarm your restaurant or service with positive reviews. Here’s a lady on Fiverr who provides “natural” customer reviews on video for your website for $5. Or here’s a person who will provide Google or Amazon.com reviews for your product or service for $5; her grammar is not great, which I suppose is considered naturalistic. Can’t help but notice these fake reviewers have reviews on their pages, which I guess you have to assume are fake too!

While the big indexes were strong last week, they did not break through their overhead resistance on Friday despite the good jobs news, having been emphatically rejected like a Hakeem Olajuwon in pinstripes at the 2,075 level of the S&P 500 and the 17,950 level of the Dow.

The most ominous rejection by the way is on the Nasdaq 100, as shown above. Unlike its sister indexes, the NDX has suffered the indignity of three straight highs that were lower than previous highs, a classic pattern of despair. As you can see, this happened three other times in the past two years just before the bottom really dropped out.

The notoriously puckish hedge fund manager and market historian Vic Niederhoffer likes to say that such patterns only become obvious the moment they are about to change. So in that spirit, I will note that a Powershares QQQ Trust (QQQ) above 105 probably, and above 106 certainly, would bust the bearish pattern and break the spirit of sellers.

*****

A recovery in oil, driven by a rebound in the euro (and drop in the U.S. dollar), was the primary driver for West Texas Intermediate crude posting its best one-week performance since 2011. This, in turn, powered a short-covering surge in energy stocks and helped lift the overall market, including the QQQ.

Another catalyst has been a positive reaction to falling U.S. drilling rig counts even though analysts say that producers are merely focusing fewer rigs on more productive fields. Baker Hughes data showed that rig count was down 30 percent since October to levels not seen since December 2011.

Analysts at Merrill Lynch warned that much lower oil prices would be necessary to generate production cuts, suggesting this is merely a dead-cat bounce ahead of deeper declines. Morgan Stanley also noted that the rigs pulled so far were mostly low-yield vertical rigs. And Citigroup highlighted that despite the falling rig count, production and inventories continued to grow.

Earlier in the week, government data showed that crude inventories ended at the highest level in about 80 years, so it all fits together into a mosaic that suggests more crude-oil surprises and volatility likely lay ahead.

*****

To be sure, the labor market’s recent accelerated progress is great news for Main Street, with workers on the verge of enjoying leverage over employers for the first time since the Great Recession. But investors worry this will gut corporate profitability and accelerate monetary policy normalization. Count on Wall Street, in other words, to see the cloud behind every silver lining.

Stocks are certainly not acting like they want to rip higher, as tech bull favorites like Facebook (FB), Gilead Sciences (GILD), Alexion Pharma (ALXN), Tesla(TSLA) and Intel (INTC) are mired down in heavy mud, while there are only a handful of major growth names showing any vitality; the latter includes retailers Costco(COST), Home Depot (HD), CVS Health (CVS) andKroger (KR); techs NXP Semiconductor (NXPI) andElectronic Arts (EA); and defense contractorsTransDigm (TDG) and Northrop Grumman (NOC).

Bulls may find their courage now that the interest-rate hike outlook is becoming more clear, oil prices are firming up and bonds are pulling in. My research suggests that they should find a way to break through resistance and move higher, but there could well be some more churning first. After all, when you’re in a range, the most likely scenario is more range-bound action that frustrates bulls and bears equally.

Here are two above-and-below markers to watch: A close in the S&P 500 above 2,094 would lead to panic buying and a good old fashioned melt-up, with bears screaming all the way. A close below 99.50 in the QQQ could lead to panic selling and a swift 5 percent-plus move lower.

Best wishes,

Jon Markman

In This Week’s Issue:

• Weekly Commentary
• Strategy of the Week
• Stocks That Meet The Featured Strategy

In This Week’s Issue:

– Stockscores Active Trader Webinar – Tuesday Feb 17 6pm PT, 9pm ET
– Stockscores’ Market Minutes Video – Take the Money and Run
– Stockscores Trader Training – The Getting Started Area of Stockscores
– Stock Features of the Week – 

Stockscores Active Trader Webinar
Tuesday Feb 17 6pm PT, 9pm ET
Click here to register

Stockscores Market Minutes Video – Take the Money and Run
How you trade a trending market is different than a choppy trendless market. Do you be patient with the winners or take the money and run? That and this week’s market analysis.
Click here to watch

Trader Training – The Getting Started Area of Stockscores
Within the Stockscores Education Center resides the Getting Started videos. These are free video lessons that highlight basic investing and trading concepts as well as provide an overview of how to use some of the tools on Stockscores.com. There are 11 titles on a variety of topics that you can watch right now by going to Stockscores.com, clicking on the Education tab and opening the Getting Started area. Here are a few samples of what you will find there, as well as direct links to each video:

The Stockscores Tour
Stockscores.com has the tools and services to make you a better stock trader. This video provides an overview, highlighting powerful tools like the Market Scan and Chart Viewers and how they work together. Plus, a look at the services that can help you become a more profitable trader.

Introduction to the Stock Market
Are you new to stock market investing? Get started with this video which explains how stocks are priced and the importance of information when predicting future price change.

Charting Basics
Every investor can benefit from a basic understanding of stock charts and the message they contain. This video provides an introduction to charting, establishing a base for more advanced charting concepts taught in other Stockscores videos.

Charting on Stockscores
Stockscores.com provides powerful, attractive and easy to use stock charts for investors and traders. This video shows how to get the most out of the Stockscores charts and will teach you how to set your default view, change settings and utilize the fast time frame links on each Stockscores chart.

Stockscores Market Scanner
The Stockscores Market Scan tool allows you to filter thousands of stocks using dozens of filters. A massive time saver, the Market Scan will give you an edge by finding strong stocks before the rest of the market catches them.

The Stockscores Watchlist and Portfolio Creators
The Stockscores Watchlist Creator allows you to create a list of stocks to view as charts, in a price table or to scan against using the Stockscores Market Scanner. You get the same functionality with the Stockscores Portfolio Creator plus the added ability to track the performance of your investments based on your purchase price and transaction costs.

For the investor who want to make decisions once a week, the Stockscores Simple Weekly is the ideal strategy. Utilize the Stockscores Market Scan and Charting tools to identify stocks that have the potential to outperform in the months ahead with only 15 – 30 minutes of work required each week. First, set your default chart to 3 year, weekly and then run the Stockscores Simple Weekly Market Scan. Inspect the charts in search of stocks breaking from predictive chart patterns. Here are some names I found this week.

1. ELNK
ELNK has broken its long term downward trend line and is now breaking up from a rising bottom, a good turnaround chart pattern. Support at $4.10.

2. ISBC
ISBC has been stuck under resistance at $11.20 for over a year but last week broke through that threshold, setting up for the start of a new upward trend. Volume was not great on the break. Support at $10.70.

3. FLEX
FLEX broke to new highs last week after stalling under $11.50 since the Spring of 2014. Volume was not great on the break. Support at $10.50.

4. MHLD
MHLD breaks out through $13 resistance and pays a dividend of 3.47%. I would like to see more volume in support of the break. Support at $12.45.

References

• Get the Stockscore on any of over 20,000 North American stocks.
• Background on the theories used by Stockscores.
• Strategies that can help you find new opportunities.
• Scan the market using extensive filter criteria.
• Build a portfolio of stocks and view a slide show of their charts.
• See which sectors are leading the market, and their components. 

Disclaimer
This is not an investment advisory, and should not be used to make investment decisions. Information in Stockscores Perspectives is often opinionated and should be considered for information purposes only. No stock exchange anywhere has approved or disapproved of the information contained herein. There is no express or implied solicitation to buy or sell securities. The writers and editors of Perspectives may have positions in the stocks discussed above and may trade in the stocks mentioned. Don’t consider buying or selling any stock without conducting your own due diligenc

Do you know why Warren Buffett recently added to his 60 million share position in Wal-Mart Stores Inc. (WMT:NYSE)? It’s not because the world’s largest retailer is an untold secret, or growing earnings at 35% annually (it’s not), or because Buffett got a sweetheart deal (he didn’t). It’s simple: Buffett bought more shares in Wal-Mart because the company is really, really big.

Yes, Wall-Mart is a solid company. But the law of large numbers tells us it is far more difficult to double profits from $17 billion than from a base of $1, $5, or even $17 million.

For Buffett, bigger is better

Toward the beginning of Buffett’s investing career, it wasn’t uncommon for the Oracle of Omaha to post 30% or 40% annual returns in Berkshire Hathaway’s (BRK-B NYSE:) equity portfolio. But as the size of the capital base at Buffett’s disposal grew larger, those stock returns began to shrink. “We do need to deploy cash, but we can’t put many billions to work every year in spectacular businesses,” Buffett said. “To move the needle at Berkshire, they have to be big transactions.”

In the aftermath of the 2009 and in recent years, Buffett’s biggest investments were in blue-chip behemoths like Johnson & Johnson (NYSE: JNJ), Wal-Mart (WMT:NYSE), and Wells Fargo (WFC:NYSE).

Those were all solid investments in great companies, to be sure, but it is unlikely they will propel Buffett’s portfolio to those 40% annual returns he generated in the past. And they certainly won’t help Buffett realize the 50% annual returns he famously stated he could achieve if he had less money to invest – and could invest in great small-cap stocks.

“Anyone who says that size does not hurt investment performance is selling. The highest rates of return I’ve ever achieved were in the 1950s. I killed the Dow. You ought to see the numbers. But I was investing peanuts then. It’s a huge structural advantage not to have a lot of money. I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that.” – Warren Buffet

Unfortunately, Buffett understands his predicament all too well. “Size is always a problem,” Buffett told The Wall Street Journal’s Jason Zweig. “With tiny sums [to invest], it’s extraordinary what you can find. Most of the time, big sums are one hell of an anchor.”

Anchors aweigh!

So what would Buffett buy if he weren’t relegated to the realm of blue chips? We think he’d be scooping up shares of great small-cap stocks. After all, they have historically outperformed large-cap stocks — a gap that has widened over the past 35 years:

Undoubtedly, Buffett could get these higher returns – and better. Unfortunately, it’s impossible for him to buy small-cap stocks. But before we get to why Buffett can’t buy small caps, let’s look at why small-caps outperform in the first place.

Massive potential returns

By definition, smaller companies have much more room to grow. With annual revenue of about US$480 billion, Wal-Mart probably won’t be tripling that number anytime soon. The relatively tiny independent auto repair shop operator, Boyd Group Income Fund (BYD-UN:TSX) on the other hand, one of the longest standing stocks on KeyStone’s Focus BUY List, has more than quadrupled its revenue over the past 6.5 years, increased earnings by more than 5 times, and its stock price skyrocketed as a result.

For comparison purposes, below we see that Wal-Mart was a decent buy in 2008 as the financial crisis hit and its shares traded in the $55 range. Over the past 6.5 years, the stock has returned around 75% including dividends.

But the Small-Cap’s gains are astonishing over the same period. The Boyd Group and its simple car repair business, which was recommended to KeyStone’s Premium Small-Cap Research clients in November of 2008 at $2.30, has seen it shares rocket to recently close at $46.70. In fact over that period, the company has created such strong cash flow it has distributed over $2.20 per share in distributions (dividends) to shareholders on top of the tremendous share price gains. Again it has paid us $2.20 in cash and we bought the shares for $2.30!

On top of their room to grow, small caps don’t attract much attention from Wall & Bay Street analysts. In fact in 2008, KeyStone was the only research firm covering the Boyd Group. This means savvy investors are more likely to find mispriced stocks when fishing in small-cap waters. It appears that Bay Street is finally beginning to catch on to the Boyd Group story, but there are still dozens of compelling small-cap companies monitored by just one or two analysts or zero — and many more that receive no analyst coverage at all!

Size Matters

So why doesn’t Buffett buy underfollowed small-cap stocks that could very well triple? It’s simple: He can’t.

Let’s revisit Buffett’s quote from earlier in the article: “We can’t put many billions to work every year in spectacular businesses,” Buffett said. “To move the needle at Berkshire, they have to be big transactions.”

Even after the Boyd Group had seen its’ share price rocket over 20 fold over the past six and a half years, its market cap is just $764 million. Only about $1.5 million worth of stock trades hands each day. Buffett couldn’t buy a stake in the company without driving the share price up significantly. And even if he were to buy the company outright, that $764 million purchase would barely register in Berkshire’ US$360 billion investment portfolio.

In other words, researching a small-cap company like the Boyd Group, no matter how promising its prospects, simply isn’t worth Buffett’s time.

But it’s definitely worth our time

Individuals who invest dollar amounts in the thousands should be scouring the markets every day for the next Boyd Group. It’s the only way to even approach those 30% or 40% annual returns.

But be forewarned: Just because a company is small and underfollowed does not guarantee Boyd Group -like returns. Consider the case of Canadian frac water tanks provider Poseidon Concepts Corp., a former high-flying small cap that traded to $15 but crashed to zero when the market discovered its business was more than flawed with limited barriers to entry. Thankfully, the company never met our criteria, which has grown stronger overtime.

That’s why in addition to great growth prospects and limited (or no!) analyst coverage, our team of experts at KeyStone’s Small-Cap Research seeks out small caps that have:

• A strong balance sheet
• Positive cash flow
• Attractive Valuations
• Potential for a dividend (or dividend increase)
• A management team with a significant share ownership.
• A business we can understand.
• Operations in relatively safe jurisdictions.
• A positive industry outlook or niche outlook.
• Potential for hidden assets
• Market-beating potential over the next three to five years.

One of our top picks (3 in total) from our January 2015 Cash Rich Small-Cap Report, a high growth small-cap software developer, has already seen its share price jump over 80% on news of a major contract win. We continue to see the potential for further price gains from this small-cap tech leader.

2/4/2015
EXTRUSION & AUTOMOTIVE MANUFACTURER REPORTS STRONG START TO 2015, DIVIDEND INCREASES 20%, ACCRETIVE ACQUISITION/EXISTING BUSINESS EXPANSION POWER GROWTH, OUTLOOK POSITIVE FOR 2015

1/16/2015
CASH RICH COMMUNICATIONS SOFTWARE & HARDWARE PROVIDER POSTS STRONG 2015, NEAR-TERM OUTLOOK IMPACTED BY LONG-TERM INVESTMENT SPEND – MAINTAIN RATING (NEW CLIENTS ESTABLISH HALF POSITIONS)

1/14/2015
CASH RICH ON-DEMAND TV SOFTWARE AND SOLUTIONS SMALL-CAP REPORTS SIGNING MAJOR CONTRACT WITH EUROPEAN TIER 1 CABLE OPERATOR, SHARES SURGE 30% – MAINTAIN SPEC BUY RATING (FOCUS BUY)

12/24/2014
CASH RICH MICRO-CAP, STRONG CASH PRODUCING UNIQUE TECHNOLOGY DRIVEN COMPANY, ZERO DEBT, LONG-TERM FOCUS– INITIATE COVERAGE

12/24/2014
CASH RICH SOFTWARE MICRO-CAP BREAKS INTO PROFITABILITY WITH STRONG BALANCE SHEET, CASH GENERATION AND POTENTIAL CONTRACT CATALYSTS IN 2015 – INITIATE COVERAGE

The Dow shot up 212 points, or 1.2%, yesterday. Gold was flat. 

The biggest challenge is to figure out what to laugh at first. So many frauds. So much nonsense. So little time. 

Last week, Zero Hedge reported that a bubble was inflating in the burger business. 

Shake Shack Inc. – which was taken public last week – was initially priced at between $14 and $16 a share. But a pre-IPO frenzy pushed the IPO price to $21 a share. 

Then things got really silly… 

On its first day of trading… for no apparent reason other than that investors had taken leave of their senses… the share price jumped to a peak of $52.50 – a 150% increase. 

Shake Shack is a milkshake and hamburger joint. According to Zero Hedge, the company’s “EBITDA multiple” – a more sophisticated version of the price-to-earnings ratio – is 108. 

Think of EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) as a quasi-estimate of free cash flow. 

At an EBITDA multiple of 108, investors are willing to pay 108 times the free cash flow Shake Shack produces. 

The Double ShackBurger sells for $7.99. So to put it another way, a $10,000 investment gives you the equivalent, in cash-flow terms, of about 11 hamburgers. Maybe they’ll give you fries with that. 

What’s so special about the Shake Shack’s burgers? 

We don’t know. But we suspect it has more to do with the heady flavor of the stock market than the taste of its fries.

Lies, Lies, Lies

According to Bloomberg, from March 2009 through June 2014, the S&P 500 has risen 4.7% a quarter – about five times faster than US GDP. That’s the biggest gap since at least 1947.

One company can increase earnings even in a stagnant economy. But when stock prices rise – which are supposed to reflect earnings growth – in aggregate more than GDP, you have to ask: Where is the money coming from? 

We can tell you – from QE money and accounting shenanigans. 

The numbers are embellished by “adjustments” that hide real costs. Report the figures according to GAAP (Generally Accepted Accounting Principles) standards, and earnings for the last quarter were 5% lower than those a year ago.

Today’s 5.6% official jobless rate is a “Big Lie” too, according to the CEO of Gallup, Jim Clifton:

There’s no other way to say this. The official unemployment rate, which cruelly overlooks the suffering of the long-term and often permanently unemployed as well as the depressingly underemployed, amounts to a Big Lie.

I hear all the time that “unemployment is greatly reduced, but the people aren’t feeling it.” When the media, talking heads, the White House and Wall Street start reporting the truth – the percent of Americans in good jobs; jobs that are full time and real – then we will quit wondering why Americans aren’t “feeling” something that doesn’t remotely reflect the reality in their lives. And we will also quit wondering what hollowed out the middle class.

Based on demographic trends, I suggest the real unemployment rate after weeding out disability fraud, forced retirement, kids hiding out in school for lack of a job, and those who are not counted as unemployed simply because they gave up looking is more like 9% than 7%.

Competitive Disadvantage

Why so few jobs?

You probably thought the “renaissance” in US manufacturing was bringing an employment boost. 

Foreign labor costs were rising, according to the storyline, even in China. US labor costs have gone down. And with all that cheap oil and gasoline so handy, US factories were about to kick butt. 

In a poll, it was revealed that even US manufacturers believed it – with 57% of them saying the “renaissance” was real.

But guess what? The renaissance in US manufacturing… it’s counterfeit too. TheGlobalist magazine reports:

At the end of 2013, there were still 2 million fewer manufacturing jobs and 15,000 fewer manufacturing establishments than in 2007, the year before the Great Recession, and inflation-adjusted manufacturing output (value-added) was still 3.2% below 2007 levels.

Although the US manufacturing sector has grown since 2010, resulting in 520,000 new jobs and 2.4% real value-added growth, almost all of this growth has been cyclical in nature, driven by just a few industries that contracted sharply during the recession.

When the worldwide price of oil went down, it went down for the Chinese too. Despite rising wages in China, labor costs there are still only about one-eighth of those in the US. 

And a stronger dollar doesn’t make those US costs go down; compared to the rest of the world, they go up.

The US still has a competitive disadvantage in manufacturing, in other words. And it’s not likely to go away any time soon.

Tomorrow – even more quackery!

Regards, 

Bill

Market Insight:

It’s Not Just Burger Companies That Are Pricey

By Chris Hunter, Editor-in-Chief, Bonner & Partners

It’s not just burger companies that are expensive these days… 

The so-called q ratio for the US stock market is at its second highest reading going back to 1900. 

The q ratio – developed by late Yale and Harvard economics professor and Nobel laureate James Tobin – is one of the simplest valuation tools out there. 

Tobin reckoned the combined market value of companies listed on the stock market should be roughly equal to the replacement cost of their combined assets. 

If the cost of replacing companies’ assets was lower than their market capitalization – a q ratio of 0-1 – it implied the stock market was undervalued. 

If the cost of replacing companies’ assets was higher than their market capitalization – a q ratio of more than 1 – it implied the stock market was overvalued. 

Over the long run, the average q ratio for the US stock market has been 0.68… meaning investors have been willing to pay, on average, slightly more than the replacement costs of companies’ assets to own shares. 

But the current q ratio is 1.11 – 63% above its long-term average… and higher than at any point in history bar the tech bubble in the late 1990s and early 2000s.

Does this mean the US stock market is about to crash?

The q ratio isn’t a market-timing indicator. Extremes can last many years, as was the case in the 1990s.

But investors would have been well served buying US stocks at lows in the q ratio – in the early 1920s, early 1930s, early 1950s and early 1980s – than at peaks in the late 1920s, late 1960s and late 1990s.

The troughs all preceded bull runs. Each peak preceded a major bear market…

Will “this time be different”?

That’s certainly the line mainstream market pundits are feeding mom-and-pop investors.

At Bonner & Partners we’re not so sure….