CrossCurrents and Caution

10/06/2014 9:00 am EST


Alan Newman

Founder, Crosscurrents Publications, LLC

The prospects for US stock prices are extremely poor; frankly, the consensus that stocks are headed higher, perhaps much higher in the next five years, scares us half to death, cautions Alan Newman, of CrossCurrents.

Strategists are pinning their forecasts on the dependability of earnings growth; however, companies can create the illusion of growing just by buying their own shares, which has been the case for much of the last few years.

Since the bottom in March 2009, companies have spent roughly $2.3 trillion to repurchase their own shares, one-sixth of the entire increase in total market capitalization.

Buying shares does absolutely nothing for growing a corporation's business and creating new jobs. It does, however, increase earnings per share.

Therein lies the rub. Increased earnings typically lead to higher stock prices. More interest is generated and multiples expand. The cycle perpetuates and the happiest of all are the corporate executives who are able to dispose of stock via options granted at far lower prices.

At the same time, strategists totally ignore the fundamental significance of valuation extremes and record leverage. Strange, since the exact same circumstances prevailed at the peak in March 2000 and again in October of 2007.

The primary difference this time is a compliant Fed, completely dedicated to the theory that inflated asset values will create jobs and wealth. The evidence is just not there.

We are seeing the most leveraged stock market since 1929, leveraged far higher than in 2000 or in 2007. Liquidity has never before been this negative.

Meanwhile, the stock market is now mostly mechanical trading.  Active management gladly takes a backseat nowadays, since responsibility no longer requires actually analyzing stuff. Press a button, buy the index. Valuations do not matter anymore.

It's the most bizarre stock market in history. We maintain the position that stock prices cannot be relied upon; given the extreme short-term horizon for participants, they can no longer represent fair value.

Stocks fail as an investment vehicle because the long-term is of no consequence. The criteria by which stocks should be evaluated just does not matter anymore. Thus, any price is acceptable.until-like March 2000 or October 2007-it is not.

Walgreen (WAG) has suffered a huge breakdown, the kind of gap that generally distances supporters of the shares for quite some time. The uptrend of the last two years has clearly broken and the shares should eventually head lower.

When a market and retail giant such as Walmart (WMT) starts to underperform, you know something is very wrong. After years of great growth, sales were up a scant 1.6% in the last fiscal year.

As to Netflix (NFLX), we hate the shares. We expect Bank of America (BAC) to soon run out of steam. Apple (AAPL) still looks weaker. We are still negative on HSBC Holdings PLC (HSBC) and Best Buy (BBY).

We are very much still in the super bull market camp for gold bullion and especially gold mining stocks. The prospects for fiat money are not encouraging. The shares of many gold mining companies are now extremely attractive.

We cannot guarantee an immediate turnaround but believe the odds favor a rally in bullion. We would continue to accumulate the shares of those companies including Newmont Mining (NEM), Eldorado Gold (EGO) and Goldcorp (GG). These positions are not so much an investment as it is insurance.

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