Wealth Building Strategies

10 Wisdom-Based Wealth-Building Strategies

Posted by Gala Gorman

on Tuesday, 3 November 2015 22:52

UnknownWhile any approach to creating financial security must suit the values and needs of the individual, these are the Top 10 Wealth-Building Strategies that I believe will ensure that you can weather any storm life sends your way. 

1.Use the A-R-KTM Technique.

A.A is for Accumulating Assets. This may seem like a simple concept but in today’s challenging circumstances it is much too easy to spend everything you make and more.

B.R is for Retiring Debt. Debts aren’t called liabilities for nothing. You need to work towards reducing and eliminating debt when everyone else is focused on using every ounce of equity.

C.K is for Keeping Commitments. Once you make a commitment to yourself to apply the A-R-K TechniqueTM, you need to keep it! You build confidence in yourself and others this way.

…..continue reading 2 through 10 HERE

QE’s Creeping Communism

Posted by Peter Schiff - Euro Pacific Capital - Euro Pacific Capital

on Tuesday, 3 November 2015 20:47

imagesMost economists and investors readily acknowledge that the current period of central bank activism, characterized by extended bouts of quantitative easing and zero percent interest rates, is a newly-blazed trail in economic history. And while these policies strike some as counterintuitive, open-ended, and unimaginably expensive, most express comfort that our extremely educated, data-dependent, central bankers have a pretty good idea as to where the trail is going and how to keep the wagons together during the journey.

But as it turns out, there really isn’t much need for guesswork. As the United States enters its eighth year of zero percent interest rates, we should all be looking at a conveniently available tour guide along the path of perpetual easing. Japan has been doing what we are doing now for at least 15 years longer. Unfortunately, no one seems to care, or be surprised, that they are just as incapable as we have been in finding a workable exit. When Virgil guided Dante through Hell, he at least knew how to get out. Japan doesn’t have a clue.

 

Despite its much longer experience with monetary stimulus, Japan’s economy remains listless and has continuously flirted with recession. In spite of this failure, Japanese leaders, especially Prime Minister Shinzo Abe (and his ally at the Bank of Japan (BoJ), Haruhiko Kuroda), have recently doubled down on all prior bets. This has meant that the Japanese stimulus is now taking on some ominous dimensions that have yet to be seen here in the U.S. In particular, the Bank of Japan is considering using its Quantitative Easing budget to buy large quantities of shares of publicly traded Japanese corporations.

So for those who remain in doubt, Japan is telling us where this giant monetary experiment leads to: Debt, stagnation and nationalization of industry. This is not a destination that any of us, with the possible exception of Bernie Sanders, should be happy about.

The gospel that unites central bankers around the world is that the cure for economic contraction is the creation of demand. Traditionally, they believed that this could be accomplished by simply lowering interest rates, which would then spur borrowing, spending and investment. But when that proved insufficient to pull Japan out of its recession in the early 1990s, the concept of Quantitative Easing (QE) was born. By actively entering the bond market through purchases of longer-dated securities, QE was able to lower interest rates across the entire duration spectrum, an outcome that conventional monetary policy could not do.

But since that time, the QE in Japan has been virtually permanent. Unfortunately, Japan’s economy has been unable to recover anything resembling its former economic health. The experiment has been going on so long that the BoJ already owns more than 30% of outstanding government debt securities. It has also increased its monthly QE expenditures to the point where it now exceeds the Japanese government’s new issuance of debt. (Like most artificial stimulants, QE programs need to get continually larger in order to produce any desirable effects). This has left the BoJ in dire need of something else to buy. Inevitably, it cast its eyes on the Japanese stock market.

In 2010 the BoJ began buying positions in Japanese equity Exchange Traded Funds (ETFs). These securities, which track the underlying performance of the broader Japanese stock market, are one step removed from ownership of companies themselves. After five years of the policy, the BoJ now owns more than half the entire nation’s ETF market. But that hasn’t stopped it from expanding the program. In 2014, it tripled its ETF purchases to $3 trillion yen per year ($25 billion), and  the program may be tripled again in the near term. In just another example of how QE is a boon to the financial services industry, Japanese investment firms are currently issuing new ETFs just to give the BoJ something to buy.

However, these purchases have not proven to be particularly effective in doing much of anything, except possibly pushing up ETF share prices. But even that has been a mixed blessing. ETFs are supposed to be the cart that is pulled along by stocks (which function as horses). But trying to move the market by buying ETFs creates a whole other level of potential price distortions. It also tends to limit the impact to those holders of financial assets, rather than the broader economy. For this reason the BoJ is now contemplating the more direct action of buying shares in individual Japanese companies.

Such purchases would allow the Japanese government to accumulate sizable voting interests in some of Japan’s biggest companies. Equity ownership would then allow, according to an economist quoted in Bloomberg, the Abe administration to demand that Japanese corporations adhere to the government’s priorities for wage increases and heightened corporate spending. The same economist suggested, this “micro” stimulus provided by government controlled corporations may be more effective in spurring the economy than “macro” purchases of government bonds.

These possibilities should horrify anyone who still retains any faith in free markets. The more than four trillion dollars of government bonds purchased through the Federal Reserve’s QE program since 2008 now sit on account at the Fed. Although these purchases may have distorted the bond market, created false signals to the economy, and may loom as a danger for the future (when the bonds need to be sold), they are primarily a means of debt monetization, whereby the government sells debt to itself. But purchases of equities would involve a stealth nationalization of industry, and would represent a hard turn towards communism.

Many American observers will take comfort in their belief that the United States has already concluded its QE experiment and that we are heading in the opposite direction, toward an era of monetary tightening. This greatly misjudges the current situation.

The U.S. economy is slowing remarkably, and despite the continuous assertions by the Fed that rate hikes are likely in the very near future, I believe we are stuck just as firmly in the stimulus trap as Japan. The main difference between the U.S. and Japan is that Japan began this “experiment” from a much stronger economic position. Japan was a creditor nation, with ample domestic savings and large trade surpluses. In contrast, the U.S. started as the world’s largest debtor nation, with minimal savings, and enormous trade deficits. So if Japan, with its superior economic position, could not extricate itself from this trap, what hope does the United States have?

If the Fed is unable to raise rates from zero, it will also be have no ability to cut them to fight the next recession. So the next time an economic downturn occurs (one may already be underway), the Fed will have to immediately launch the next round of QE. When QE4 proves just as ineffective as the last three rounds to create real economic growth, the Fed may have to consider the radical ideas now being contemplated by the Bank of Japan.

So this is the endgame of QE: Exploding debt, financial distortion, prolonged stagnation, recurring recession, and the eventual government takeover of industry and the economy. This appears to be the preferred alternative of politicians and bankers who simply refuse to let the free markets function the way they are supposed to.

If interest rates were never manipulated by central banks and QE had never been invented, the markets could have purged themselves years ago of the speculative bubbles and mal-investments. Sure we could have had a deeper recession, but it also could have been much shorter, and it could have been followed by a far more robust and sustainable recovery.

Instead Washington has joined Tokyo on the road to Leningrad.

Best Selling author Peter Schiff is the CEO and Chief Global Strategist of Euro Pacific Capital. His podcasts are available on The Peter Schiff Channel on Youtube


Catch Peter’s latest thoughts on the U.S. and International markets in the Euro Pacific Capital Summer 2015 Global Investor Newsletter!

Finding Value in the Uranium & Oil Sector Today

Posted by Martin Katusas - The Energy Report

on Tuesday, 3 November 2015 20:12

Marin Katusa’s Transformative Vision of a Post-Fission/Denison Merger Uranium World

Investors have spoken, and they said they don’t want a merger of Fission Uranium and Denison Mines. In this interview with The Energy Report, Marin Katusa, founder of Katusa Research, shares his insight on why Fission investors rejected the deal and where he is finding value in the uranium and oil sector today. 

katusa-chart2

The Energy Report: What happened to the Fission Uranium Corp. (FCU:TSX)–Denison Mines Corp. (DML:TSX; DNN:NYSE.MKT) deal? Why did investors reject it and what does it mean for the junior uranium mining landscape?

 

Marin Katusa: Ross McElroy and his team have done a great job growing the Patterson Lake South (PLS) resource, which is turning out to be a world-class deposit. It is clear the majority of the Fission shareholders wanted the company to stay focused on its PLS project and didn’t believe the benefits of diversification, including access to a mill, the Lundin group and Wheeler River, outweighed the potential of the PLS deposit.

I had a great run early on with Fission. We tripled our money, and we sold, albeit a bit too early, but a profit is a profit. I think both Fission and Denison are still interesting opportunities, because both are much cheaper than they were before the deal was offered. I own neither currently. 

TER: What’s next for Fission? It isn’t going to try to take Patterson Lake to production, is it? Are there other suitors in the wings?

“I think Fission Uranium Corp. will keep drilling fantastic numbers.”

MK: It is difficult for an exploration company to take something like PLS to production; it rarely works. A completely different skill set is required. PLS will have a permitting hurdle, not to mention there’s no mill that could take their feed currently, so the company would have to build one, and that could cost as much as $1 billion ($1B). 

Fission could become an acquirer of other projects on the east or west side of the basin, or it too could become a takeout target by larger company, or perhaps even become a target of a hostile take out by someone like NexGen Energy Ltd. (NXE:TSX.V; NXGEF:OTCQX). That would be a very interesting result to the Fission saga. In a bear market, anything is possible. Perhaps the board changes at Fission, and the new board sees the benefits of merging with NexGen and a merger happens on friendly terms with NexGen. Anything is possible. In early 2014, we participated in the NexGen private placement, and the team at NexGen has done an incredible job. Tim Young, who is on my Top Ten Under 40 list, had incredible vision when he staked the properties NexGen holds today. It’s great to see young resource entrepreneurs doing so well. 

I actually think the two should merge, but I don’t think the current Fission board would like that to happen. The two management teams might not be a good fit. But if it did happen, it would make for a very interesting story. If that happened, the region could get very hot, and the other juniors could do quite well, such as Skyharbour Resources Ltd. (SYH:TSX.V). I currently do not own Fission or NexGen, so I don’t have any skin in this potential fight. I own a lot of Skyharbour.

Now, if Fission and NexGen did merge, the pounds between the two justify a mill of their own. Then it might use Asian money or Cameco Corp. (CCO:TSX; CCJ:NYSE) dollars. But in the near term, I think both companies will keep drilling fantastic numbers and move both projects forward. Building a uranium mine is not an easy task. Very few groups have the experience.

TER: Will Denison try to buy another Athabascan company?

MK: Definitely a possibility, or it could be bought out. Denison’s pattern has always been to look to increase shareholder value. The Lundin group is that rare breed that understands exploration and production. Very few groups have that level of power, ability and financial resources. One thing I’ve learned in 15 years of this business is never underestimate a Lundin group company. I definitely expect big things in Denison’s future.

TER: What is the uranium landscape looking like now? Where should investors look for value?

MK: The U.S. consumes just under 50 million pounds (50 Mlb) of uranium annually, and it produces less than 5 Mlb. So it’s importing over 90% of what it consumes. When one in five homes in the U.S. are powered by nuclear energy, that’s not a good formula for national safety. Half the uranium in the U.S. came from Russia for the last 20 years. Now only 25% can come from Russia by U.S. federal law. Sadly for the U.S., the difference is being made up not from Canada, not from Australia, not from U.S. production, but from Kazakhstan. That is going from a bad situation to an even worse one. In 2014 alone, the U.S. increased the Kazakh imports of uranium by over 80%. I think the U.S. has positioned itself in a tough situation here. The U.S. is still the largest consumer of uranium globally, and that’s not going to change. We are going to have a rude awakening shortly. Will it change in the next few months? No. But this is something that you’ll see getting a lot of media attention by 2019.

I have a whole chapter in my book, “The Colder War,” about the smart way to play uranium opportunities. Speculators and investors who want exposure to uranium should focus in North America. I’d avoid projects in Africa. South America has a few areas that I like. Paraguay has great potential. But, really, the value is in North America. It’s very difficult for a Western company or a Canadian publicly traded company to compete with what Russia and China are doing internationally, especially in Africa. So I would focus on the Athabasca Basin, where the grade is the highest in the world, and the rule of law protects shareholders. I am also a big supporter of the in-situ recovery (ISR) production in the U.S. I think the lowest-cost producers in the U.S. are a great place to be invested right now. If you have a long-term perspective, you want to have exposure to North American reserves, resources and production.

TER: While we’re talking about mergers and acquisitions, what does the possible Suncor Energy Inc. (SU:TSX; SU:NYSE) hostile takeover of Canadian Oil Sands Ltd.(COS:TSX)mean for the other players in the Canadian oil sands? 

oilsands1029-2

MK: Suncor has been a partner in Canadian Oil Sands’ project and would know it better than anyone else. It believes that Suncor can operate it better and, more importantly, it has the balance sheet to make the changes that are required. That’s why it’s going to get involved. What does it mean for the other players? The market took it initially as a positive, and now it’s selling off. The reality is that these oil sand projects are not low-cost production projects. They are very expensive projects. Building these massive cokers and other infrastructure takes billions of dollars. In the sub-$50 barrel of oil world where Canadian oil sands are discounted to West Texas Intermediate because it is heavy oil, investors have to be very cautious. If you want to play it, Suncor probably is the safest way. That’s why Berkshire Hathaway Inc. (BRK:NYSE.A) and Warren Buffett are invested in Suncor. Canadian Oil Sands popped big time on the news, but some of the other producers have not enjoyed the same attention. Suncor is not going to pay more for these other assets because it has its hands full right now. 

“Tim Young had incredible vision when he staked the properties NexGen Energy Ltd. holds today.”

TER: If, as you wrote in the article on your web site, Suncor becomes the OPEC of domestic Canadian oil, how might it use that power position to its advantage? 

MK: Suncor becomes the OPEC of Canada by controlling the large infrastructure in the oil sands. Suncor merged with Petro-Canada some years ago, which was a child of Pierre Trudeau’s national energy program. That gives Suncor an advantage over the other companies because of the vertical integration of upstream and downstream. Plus, Suncor is Warren Buffet’s largest oil play. He was against the Keystone pipeline that would have taken oil to the U.S. refiners because Canada hasn’t built the alternative pipelines east or west that it should have. That leaves Burlington Northern Santa Fe, which is owned by Buffet’s company, Berkshire Hathaway, to transport all that oil. Coincidence?

TER: Staying on oil, you recently returned from visiting Africa Oil Corp. (AOI:TSX.V). What got you interested in that story again? 

MK: I was in it very early, going back to the private company Turkana Energy in 2007. I was involved in a sale of the 10BB Block to Africa Oil back in late 2008. We were very large shareholders. We had over 300% gains, but it turns out I sold a little too early. We got out around the $3/share range, and then within nine weeks it went to $12/share. Then I waited years. I’m very close to the management team. I think the world of Keith Hill and Lukas Lundin. Let me be very clear here, Africa Oil has a world-class oil deposit. This is going to be a multibillion-barrel oil basin. There are fewer than 100 oil basins of that size in the world. It has multiple deposits within its basin. If you look at the money raised in the last 18 months for oil exploration by TSX-listed companies, Africa Oil alone has raised more money than all of the exploration-focused companies combined. It put $1B into the ground to derisk these assets. Because the price of oil has fallen so low, the price of Africa Oil’s shares have gone down as well, so it is a great deal right now. Ironically, if you’re a big oil company like Exxon Mobil Corp. (XOM:NYSE) or ConocoPhillips (COP:NYSE) or Chevron Corp. (CVX:NYSE), the assets of Africa Oil are more appealing at sub-$50 oil because they are such low-cost production assets. They are world-class assets and they’re not controlled by the OPEC nations. This type of asset becomes very appealing to large international oil companies. I believe within the next 12–18 months, Africa Oil will be able to attract a joint venture partner to fund the capital cost to put these assets into production.

TER: You are helping to produce the Silver Summit & Resource Expo in San Francisco at the end of November. What can energy investors learn from that conference?

MK: A few producing uranium companies we think are great opportunities will be on hand. Ross Beaty will be there with Alterra Power Corp. (AXY:TSX). Also, Ross Beaty will be inducted into the Hall of Fame on the Sunday night—a great tribute for a great man. I asked Ross to come down and speak at the conference, because investors focused on silver and gold will also likely see the opportunity in Alterra and, more importantly, learn from Ross, as he is one of the greatest Canadian resource entrepreneurs of all time. He will also be participating in an energy panel I am moderating with Amir Adnani from Uranium Energy Corp. (UEC:NYSE.MKT) and Frank Curzio from Disruptors & Dominators. Not to mention, there will be many fund managers and brokers in the Institutional portion of the conference. I am really looking forward to this conference.

TER: Marin, thank you for your time.

Read Marin Katusa’s thoughts on the metals mining space here.

Marin Katusa is the author of the New York Times bestseller, “The Colder War.” Over the last decade, he has become one of the most successful portfolio managers in the resource sector, such as his 2009 Fund Partnership (KC50 Fund LLC), which has outperformed the comparable index, the TSX.V by over 500% post fees. Katusa has been involved in raising more than $1 billion in financing for resource companies. He has visited over 400 resource projects in more than 100 countries. Katusa publishes his thoughts and research at www.katusaresearch.com.

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DISCLOSURE: 

1) JT Long conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and provides services to Streetwise Reports as an employee. She owns, or her family owns, shares of the following companies mentioned in this interview: none.
2) The following companies mentioned in the interview are sponsors of Streetwise Reports: Fission Uranium Corp., NexGen Energy Ltd. The companies mentioned in this interview were not involved in any aspect of the interview preparation or post-interview editing so the expert could speak independently about the sector. Streetwise Reports does not accept stock in exchange for its services.

3) Marin Katusa: I own, or my family owns, shares of the following companies mentioned in this interview: Alterra Power Corp., Africa Oil Corp., Skyharbour Resources Ltd. I personally am, or my family is, paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I determined and had final say over which companies would be included in the interview based on my research, understanding of the sector and interview theme. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview. 
4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts’ statements without their consent. 
5) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports’ terms of use and full legal disclaimer.
6) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their families are prohibited from making purchases and/or sales of those securities in the open market or otherwise during the up-to-four-week interval from the time of the interview until after it publishes.

 

 

Last Gasp Saloon

Posted by John P. Hussman, Ph.D.

on Tuesday, 3 November 2015 14:52

I’ve often emphasized that market peaks are not an event, but a process. One of the elements of that process, as I observed approaching the 2000 and 2007 peaks, and again during the extended range-bound period of recent quarters, is that deterioration in broad market internals — particularly following an extended period of overvalued, overbought, overbullish conditions — is a sign of increasing risk-aversion that typically precedes more extensive losses in the capitalization-weighted averages. 

Following an abrupt air pocket in the market during August, the capitalization-weighted indices enjoyed a strong rebound in October. Equal-weighted indices have strikingly lagged that rebound. Our own measures of market internals remain unfavorable, and trading volume has been persistently weak, suggesting that the rebound may be more reflective of short-covering than a resumption of the insistent yield-seeking speculation observed prior to mid-2014. Moreover, with the S&P 500 now within a couple of percent of its May record high, only 38% of individual stocks are above their own respective 200-day moving averages. Even among stocks that comprise the S&P 500 index itself, the majority remain below their own 200-day averages.

Historically, when the stock market has deteriorated internally following a recent period of overvalued, overbought, overbullish conditions, we know that market outcomes have been negative on average. But what if the S&P 500 Index falls below its 200-day moving average, and then recovers above it again? Doesn’t that recovery signal a resumption of the bull market? The answer largely depends on market internals.

If market internals recruit a great deal of uniformity across individual stocks, industries, sectors, and other risk-sensitive securities, then one has to infer that investors have recovered their willingness to speculate. That alone should at least shift the outlook to neutral, and — regardless of the level of market overvaluation — at least defer any immediate expectation of steep market losses, even if the risk of such losses remains.

On the other hand, if the recovery of cap-weighted indices like the S&P 500 is not confirmed by uniformity across a broad range of other securities, the historical evidence is that investors have generally been facing the last gasp of a bull market. The chart below should offer some perspective in that regard. 

wmc151102a

The difficult feature of the interim, at least for hedged equity strategies, is that as the “troops” diverge from the

“generals,” portfolios that aren’t comprised of the largest and most speculative stocks of the preceding bull market often underperform the indices during top formations. The same was true in the approach to the 2000 and 2007 peaks. If one is long a broadly diversified portfolio of stocks and hedged with a short position in the major indices, the result is a net portfolio loss — and that can feel excruciating if the major indices are advancing at the same time. All of that tends to reverse itself once the cap-weighted averages break down, or once market internals improve enough to suggest fresh risk-seeking among investors (though that sort of recovery is not typical at extreme valuations). In either event, the interim can be uncomfortable.

Emphatically, we can’t rule out the possibility that market internals could improve and support a more neutral or modestly constructive outlook. We also can’t rule out the possibility that this same process of breakdown and recovery could be completed more than once, as it was during the 2000 top formation. But without even a clear improvement in market internals, my impression is that this continues to be an outstanding opportunity for investors to at least rebalance their portfolios to align with their investment horizon and risk tolerance. 

Equities are essentially 50-year duration investments at current valuations, and even if investors are passive and don’t hold any view about future market returns at all, one of the basic principles of financial planning is to align the duration of ones assets with the expected horizon over which the funds are expected to be spent. A 40% allocation to equities contributes 20 years to portfolio duration. My sense is that many investors presently carry heavy equity allocations that are wholly inappropriate in relation to their investment horizons. For investors who take a full-cycle approach rather than a passive one, a more defensive stance is appropriate. We associate current conditions with negative average expected returns, coupled with risk that is highly skewed to the downside.

While we can’t be certain of a market peak until well after the fact, the sequence we observe here is all too familiar. I detailed this transition in real-time during the two prior valuation bubbles of the past 15 years. Despite the most extreme market valuations in history, I wrote in August 2000 “as long as trend uniformity remains modestly constructive, we have to view the market as being in an extended top formation. Historically, market crashes have emerged only after trend conditions have deteriorated measurably, and that will require renewed weakness in market internals. The prospective return from a bullish position is unlikely to justify the risk, so hedging is appropriate.” 

A few months later, in October 2000, I wrote “Historically, when trend uniformity has been positive, stocks have generally ignored overvaluation, no matter how extreme. When the market loses that uniformity, valuations often matter suddenly and with a vengeance. This is a lesson best learned before a crash rather than after one… On Friday September 1st, the S&P 500 rallied to a peak of 1520.77, capping a string of strong advances. Yet due to a deterioration of market action in a number of economically sensitive groups, our price trend model indicated that trend uniformity had shifted to an unfavorable condition, and we moved to defend our portfolios more fully against downside risk.” 

That September 1, 2000 peak turned out, in hindsight, to be the final high of the bull market on a total return basis. The stock market followed by losing half of its value. The Nasdaq 100 — comprising the largest and most speculative stocks of the preceding bull market run — collapsed by 83%. It seems remarkable how easily investors forget how market cycles have historically ended. Even a run-of-the-mill bear market decline wipes out more than half of the preceding bull market gains. 

Likewise, in July 2007, during the peaking process that preceded the 55% market plunge of the global financial crisis, I wrote:

“One of the best indications of the speculative willingness of investors is the ‘uniformity’ of positive market action across a broad range of internals. Probably the most important aspect of last week’s decline was the decisive negative shift in these measures. Since early October of last year, I have at least generally been able to say in these weekly comments that ‘market action is favorable on the basis of price trends and other market internals.’ Now, it also happens that once the market reaches overvalued, overbought and overbullish conditions, stocks have historically lagged Treasury bills, on average, even when those internals have been positive (a fact which kept us hedged). Still, the favorable market internals did tell us that investors were still willing to speculate, however abruptly that willingness might end. Evidently, it just ended, and the reversal is broad-based.”

Put simply, the central features of valuations and market action we observe today closely mirror what we observed, and warned of in real-time, at the 2000 and 2007 peaks. It stands repeating that our difficulty in the advancing half of the present market cycle was the inadvertent result of my 2009 insistence on stress-testing our methods against Depression-era data, after a market collapse that we fully anticipated. I’ve regularly detailed that narrative, along with the adaptations we introduced in mid-2014 to address those inadvertent challenges (see for example, A Better Lesson Than “This Time is Different”). 

Ignore all of this if you like, but we are convinced that this is how financial markets work. Valuations are the primary driver of long-term returns, and the risk-preferences of investors — as conveyed by the uniformity or divergence of market action across a broad range of individual stocks, industries, sectors and security types (including credit) — drive returns over shorter portions of the market cycle. 

At present, the valuation measures we find most strongly correlated with actual subsequent S&P 500 total returns suggest zero total returns for the S&P 500 over the coming 10 years, and total returns averaging only about 1% annually over the coming 12-year period. After inflation, we estimate negative prospective real returns on both horizons. Over shorter horizons, market internals, and the investor risk-preferences they convey, are the hinge that determines how stocks are likely to respond to a broad range of other factors, including valuations, interest rates, Fed action, and economic activity.

The combination of extreme valuations on historically reliable measures, the deterioration of market internals following an extended period of overvalued, overbought, overbullish conditions, and the weakening of leading economic measures, particularly on measures of new orders and order backlogs, has clear precedents historically, and those precedents are uniformly bad. The interim is uncomfortable for hedged equity strategies because internals typically break down before the capitalization-weighted indices do, but that too is a familiar feature of topping processes.

Importantly, and emphatically — if market internals improve, our near-term outlook will immediately shift to a much more neutral stance. Absent a clear retreat in valuations, we don’t see the likelihood of market conditions justifying a shift to a materially bullish outlook, but the immediacy of our downside concerns would be significantly eased were market internals to improve. We’ll respond to changes in market conditions as they emerge.

 

 

The foregoing comments represent the general investment analysis and economic views of the Advisor, and are provided solely for the purpose of information, instruction and discourse. Please see periodic remarks on the Fund Notes and Commentary page for discussion relating specifically to the Hussman Funds and the investment positions of the Funds. 

—

Prospectuses for the Hussman Strategic Growth Fund, the Hussman Strategic Total Return Fund, the Hussman Strategic International Fund, and the Hussman Strategic Dividend Value Fund, as well as Fund reports and other information, are available by clicking “The Funds” menu button from any page of this website.

Estimates of prospective return and risk for equities, bonds, and other financial markets are forward-looking statements based the analysis and reasonable beliefs of Hussman Strategic Advisors. They are not a guarantee of future performance, and are not indicative of the prospective returns of any of the Hussman Funds. Actual returns may differ substantially from the estimates provided. Estimates of prospective long-term returns for the S&P 500 reflect our standard valuation methodology, focusing on the relationship between current market prices and earnings, dividends and other fundamentals, adjusted for variability over the economic cycle (see for example Investment, Speculation, Valuation, and Tinker Bell, The Likely Range of Market Returns in the Coming Decade and Valuing the S&P 500 Using Forward Operating Earnings ).

Global Fiscal And Monetary Madness, Economic Chaos And The First Worldwide Inflationary Depression

Posted by Michael Pento via King World News

on Tuesday, 3 November 2015 14:44

King-World-News-Legend-Who-Oversees-170-Billion-Issues-Dire-Warning-About-Global-Financial-Markets-864x400 cWith continued volatility in global markets, today one of the top economists in the world sent King World News an incredibly powerful piece warning about global fiscal and monetary madness, economic chaos and the first worldwide inflationary depression.  

The fantastic piece from Michael Pento HERE

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