What Not To Buy In Today’s Stock Market

Authored by Vitaliy Katsenelson via RealInvestmentAdvice.com,

Dear reader, if you are overcome with fear of missing out on the next stock market move; if you feel like you have to own stocks no matter the cost; if you tell yourself, “Stocks are expensive, but I am a long-term investor”; then consider this article a public service announcement written just for you.

Before we jump into the stock discussion, let’s quickly scan the global economic environment.

The health of the European Union did not improve in the last year, and Brexit only increased the possibility of other “exits” as the structural issues that render this union dysfunctional went unfixed.

Japan’s population has not gotten any younger since the last time I wrote about it - it is still the oldest in the world. Japan’s debt pile got bigger, and it remains the most indebted developed nation (though, in all fairness, other countries are desperately trying to take that title away from it). Despite the growing debt, Japanese five-year government bonds are “paying” an interest rate of –0.10 percent. Imagine what will happen to its government’s budget when Japan has to start actually paying to borrow money commensurate with its debtor profile.

Regarding China, there is little I can say that I have not said before. The bulk of Chinese growth is coming from debt, which is growing at a much faster pace than the economy. This camel has consumed a tremendous quantity of steroids over the years, which have weakened its back — we just don’t know which straw will break it.

S&P 500 earnings have stagnated since 2013, but this has not stopped analysts from launching their forecasts every year with expectations of 10–20 percent earnings growth... before they gradually take them down to near zero as the year progresses. The explanation for the stagnation is surprisingly simple: Corporate profitability overall has been stretched to an extreme and is unlikely to improve much, as profit margins are close to all-time highs (corporations have squeezed about as much juice out of their operations as they can). And interest rates are still low, while corporate and government indebtedness is very high — a recipe for higher interest rates and significant inflation down the road, which will pressure corporate margins even further.

I am acutely aware that all of the above sounds like a broken record. It absolutely does, but that doesn’t make it any less true; it just makes me sound boring and repetitive. We are in one of the last innings (if only I knew more about baseball) of the eight-year-old bull market, which in the past few years has been fueled not by great fundamentals but by a lack of good investment alternatives.

Starved for yield, investors are forced to pick investments by matching current yields with income needs, while ignoring riskiness and overvaluation. Why wouldn’t they? After all, over the past eight years we have observed only steady if unimpressive returns and very little realized risk. However, just as in dating, decisions that are made due to a “lack of alternatives” are rarely good decisions, as new alternatives will eventually emerge — it’s just a matter of time.

The average stock out there (that is, the market) is very, very expensive. At this point it almost doesn’t matter which valuation metric you use: price to ten-year trailing earnings; stock market capitalization (market value of all stocks) as a percentage of GDP (sales of the whole economy); enterprise value (market value of stocks less cash plus debt) to EBITDA (earnings before interest, taxes, depreciation, and amortization) — they all point to this: Stocks were more expensive than they are today only once in the past century, that is, during the dot-com bubble.

In reference to this fact, my friend and brilliant short-seller Jim Chanos said with a chuckle,

“I am buying stocks here, because once they went higher . . . for a year.”

Investors who are stampeding into expensive stocks through passive index funds are buying what has worked - and is likely to stop working. But mutual funds are not much better. When I meet new clients, I get a chance to look at their mutual fund holdings. Even value mutual funds, which in theory are supposed to be scraping equities from the bottom of the stock market barrel, are full of pricey companies. Cash (which is another way of saying, “I’m not buying overvalued stocks”) is not a viable option for most equity mutual fund managers. Thus this market has turned professional investors into buyers not of what they like but of what they hate the least (which reminds me of our political climate).

Less than 10 percent of actively managed funds are outperforming their benchmarks (their respective index funds) on a five-year trailing basis. Unfortunately, the last time this happened was 1999, during the dot-com bubble, and we know how that story ended.

To summarize the requirements for investing in an environment where decisions are made not based on fundamentals but due to a lack of alternatives, we are going to paraphrase Mark Twain:

“All you need in this life [read: lack-of-alternatives stock market] is ignorance and confidence, and then success is sure.”

To succeed in the market that lies ahead of us, one will need to have a lot of confidence in his ignorance and exercise caution and prudence, which will often mean taking the path that is far less traveled.


tmosley CajonRat Thu, 10/12/2017 - 10:36 Permalink

Spoofy is far less of a problem that compromised exchanges.Bitcoin exchanges that get compromised are shunned. Other sectors have no choice. If they want to participate, they have to use the government mandated exchange, no matter how corrupt.This is how crypto is changing the world.

In reply to by CajonRat

mb Thu, 10/12/2017 - 09:20 Permalink

 naysayers been saying the same thing for 10 yrs since the crash what they dont realize, is that rigged market will NEVER go down, thats why its rigged. Everything depends on it always going UP.  So it will. The feds playbook is massive QE.  Until its expended at levels that will blow your mind....the game aint over.  

Blue Dog Thu, 10/12/2017 - 10:16 Permalink

The stock market is being pumped by cheap money from the Fed. Along with direct purchases by the federal government's Exchange Stabilization Fund. The stock market goes up on "good" economic news. It goes up on bad economic news. Everyone needs to know is that ALL the economic statistics are fake. Real GDP adjusted for real inflation has been negative quarter after quarter for years. There are trillions and trillions of debt across the planet that can never be repaid. The stock market is being propped up to preserve the illusion that the economy is doing well. I don't have a dime in the stock market. We cashed out our 401k a year ago, paid the penalty, and paid off the mortgage. We have no debt. 80% of our savings is in precious metals, 18% in cash, and 2% in Bitcoin. 

JibjeResearch Thu, 10/12/2017 - 10:35 Permalink

Many monkeyassed clown talked about the index, the boobs, the biatchezz...Look, mutual funds are for suckers.  They take your money, make money... when they lose money, they will lose your money first...  Money ends up here: Stock, Bond, Commondity, FX, and a special class of asset called Cryptocurrency: it's a currency and a stock.You can still be in any of they assests when the market is low or high because when we look at the market, we are looking at the average or the whole.  People that look at the maket this way, they tend to called themselves as the experts.  I called them the monkeyassed clown.I'm in stock and cryptocurrency.  I don't buy Index because index is for ass-clown, ass-clown followers, and the experts.I bet on Nokia because of 5G.  It's cheap, pays dividend, stable, and the potential growth is great because the future is 5G.  Even if the market crashes, Nokia will not be flat out of business.  It might go down a little/some..  The risk is low and the reward is high.  This is what a nobody-stock investor called value stock.  Intitutional ownership is about 6%, this tells me that those morons have not caught on this stock, thus, good to get in now.. before those ass-clown get on the ship...Any questions... biatchezzz...?Bawwahhahahahahahhahahaha  

moneybots Thu, 10/12/2017 - 10:58 Permalink

"Regarding China, there is little I can say that I have not said before. The bulk of Chinese growth is coming from debt, which is growing at a much faster pace than the economy." Which means it isn't really growing.

2banana Thu, 10/12/2017 - 11:35 Permalink

The real question is "what is not in a bubble?"  Off the top of my head:UraniumCoalTurkish equities and currencyThe poundOil drillersOil pipelinesMinersFeel free to add your own.