Buy Stocks; Sell Bonds

Transcription

1 June 16, 2012 Buy Stocks; Sell Bonds Since the turn of the millennium, investors have experienced a -1% return in equities. Despite this miserable return, P/E 10, the ratio of prices to a 10-year moving average of earnings, at 21, remains overpriced by historical standards. While P/E 10 is way down from the peak of 44, reached in 2000 for the S&P 500, stocks still have at least 20% to drop, in order to reach the long-term average of The best time to buy any asset is when nobody wants it. By then you know a reversal, back to popularity, is likely close at hand. For those who can opportunistically remain nimble, this bounce presents a low-risk, high-return trade. By the law of averages, we also can count on a positive run in short-term valuations, after stocks have been highly oversold, and attitude towards them has been intractably pessimistic for so long. Just as fractals operate at every degree of trend, so too relative valuations, which determine stock prices. In other words, the undervaluation is at the same degree of trend as the unfolding waves of human emotion, described by the Wave Principle, as a progression of equity prices. As we know, the valuation pendulum never stops until it completes the follow-through from extreme over-valuation to extreme undervaluation, and then swings back again. Although stocks are no bargain, they have not been this attractive in a generation, and offer significant compensation for relatively low-risk. Certificates of guaranteed confiscation. Since 2008 over $1tn has moved from stocks into bonds, from everyone including the largest US pension funds, to herd-following retail investors. The only thing these safe haven seekers

2 are assured of is negative real returns. Once again, it can be said with a high degree of certainty, that bonds are certificates of guaranteed confiscation. Bonds in Germany, the US and Japan are more overpriced now, than at anytime in history, according to Burton Malkiel, author of the A Random Walk down Wall Street. Obviously when the 30-year T-bond yield is below 3%, with inflation running at 2%, it does not make sense to buy bonds. Even less for the 10-year bond yielding 1.5%. In fact, there has rarely been a better time to sell bonds, as we are doing in the inverse bond fund. Seen from long-term perspective, today's bond valuations are entirely emotional manifestations of the primitive, herding instinct, which nearly always leads to slaughter. From a historical perspective, the last time bond yields reached 1.5% was 1946, when financial repression was enforced to allowed the US to finance the WWII debt cheaply, while bond investors took the punishing capital losses. Although highly patriotic, they made as much sense then, as they do now. In the early 50's, bond yields started to rise and by the 1970 had risen to double digits. Once again history will likely repeat in obliterating bondholders. From 1946 to 1980 US debt to GDP ratio shrank from 122% to 30%. Currently dividends on equities are well above bond yields. Emerging Markets are even cheaper in relation to equity P/E ratios in developed markets. Until 2007, Emerging Markets multiples were valued at a 10% premium to developed markets, they now sell at a 10% discount. (a 20% valuation shift) As opposed to developed markets, where aging populations are making it difficult to rein in entitlement programs, emerging markets have younger populations, better fiscal balances, lower debt to GDP ratios. Although the Death of Equities was declared in Business Week in the 1970's, resulted in a spectacular comeback until 2000, we are no longer in a Bull Market so, the comparison is not valid longer-term. However, in the short-term, global equities are bound to at least bounce nicely with negligible risk, versus bonds and they inherently bear far less risk than the safe haven investments currently favored.

3 In the Daily S&P below you Diag > likely reaching the green shaded area, likely taking the form of a sub-fractal Diag > to indicate a dramatic reversal upon completion. Timer Digest S&P SPXU Inverse S&P 500; UPRO long S&P 500 Full pos SPXU average cost Sell all SPXU limit 58.75

4 The inverse S&P shows the magnification of the same chart inverted, where wave 3 is in process, and likely create a larger Diag > joining the start of waves 1 & 3; 2 & 4. Wave 3 is nearly complete and wave 4 should retrace to the area Timer Digest Bonds TMF 20-Yr long Treas Bond; TMV 20-Yr inverse Treas Bond Full pos TMV cost 71 Sell 1/2 pos TMV limit 68 Sell 1/2 pos TMV limit 79 Bond Allocator

5 TMF 20-yr. long Bond; TMV 20-yr inverse bond Pension 2/3 pos TMV cost 70.5 Sell 1/3 pos TMV limit 68 Sell 1/3 pos TMV limit 79 Traders Full pos TMV cost 71 Sell 1/2 pos TMV limit 68 Sell 1/2 pos TMV limit 79 Equity Allocator 35% DRV Inverse Real Estate; DRN Real Estate One Fund Strategy

6 Pension 2/3 pos DRV average cost 26.4 Sell 1/3 DRV limit Traders Full pos DRV average cost 26.4 Sell 1/2 DRV limit % EDZ Inverse Emerging Markets, EDC Emerging Markets Pension 2/3 pos EDZ cost 16.6 Sell 1/3 pos EDZ limit 19

7 Traders Full pos EDZ cost 16.6 Sell 1/2 pos EDZ limit 19

8 30% FAZ Inverse Financials; FAS Financials Pension 2/3 pos FAZ cost sell 1/3 FAZ limit Traders Full pos FAZ cost sell 1/2 FAZ limit 29.15

9 Alternate position long (VIX) TVIX, inverse (VIX),XIV below) ½ pos TVIX cost 6.8; Sold 1/2 TVIX 8.5 Buy ½ pos TVIX limit 7.25 GTC (corresponds with 9.9 on XIV

10 To view the long-term public charts, where you can view the full long-term charts shown magnified above, click: if you are a subscriber to stockcharts, I would appreciate your vote, voting now is or subscribers to stockcharts only, and found at the top of the first page, at the right corner.