Eight Reasons to Dump Your Equities Right Now

Both the U.S. and global economies are suffocating under the crushing weight of debt. The retarding effects of debt are further exacerbated by the growing regulatory burdens placed on businesses in the U.S. and Europe by voraciously expanding governments. Sluggish growth will continue until radical policy changes arrive or are forced on the system by another crisis (which hopefully won’t be squandered like the last one).

I remain deeply skeptical of the post-Brexit rally because it flies in the face of fundamentals. I still expect the S&P 500 to drop sharply by the end of the year and in 2017 and think it is dangerous to be heavily exposed to stocks in the current environment. Like much (but not all) of the market’s post-crisis rise, the current rally is fueled by blind faith in central bankers’ ability to prop up over-indebted and over-regulated economies around the world.

Market psychology was summed up very well by David Riley, head of credit at BlueBay Asset Management, who told The Wall Street Journal, “Fundamentally, the lesson to be drawn from this year is that when you’ve had shocks – whether it’s China or the oil price falls – you’ve got policy relief” from central banks.  I would respectfully suggest that this is the wrong lesson since central banks are making things worse, not better, and leading markets further out on limbs that are likely to snap off.

Right now the S&P 500 is trading at all-time highs (I have to admit that I choke when I write that).

And – contrary to Wall Street’s endless cheery rhetoric – I would severely limit or hedge equity exposure right now, if I were you.

Here’s why…

It Makes Absolutely No Sense to Chase Stock Prices At These Levels

Here is a list of just some of the reasons I would limit or hedge equity exposure as the S&P 500 trades at all-time highs:

  • U.S. corporate earnings have declined for four consecutive quarters.
  • Average job growth over the last three months is a paltry 150,000 in a country with more than 300 million people.
  • The most recent Atlanta Fed GDPNow forecast for 2Q16 was lowered from 2.7% to 2.4%.
  • GDP growth over the last four quarters averaged under 2%.
  • The 2/10 yield curve has been flattening for two years while global interest rates are at record lows (and in many cases negative).
  • Oil prices are plunging again into a new bear market.
  • American politics are in turmoil.
  • The world is being hit with one horrific terrorist attack after another, literally turning some of its major cities into war zones.

Furthermore, there is not a scintilla of evidence anywhere that political and business leaders or investors are concerned about America’s $19 trillion deficit and $60 trillion in unfunded future liabilities or the $600 trillion in global derivatives that everyone pretends don’t exist (and my response to that is Deutsche Bank). I didn’t hear a single word uttered about this issue at the Republican Convention or at the Democrats’ shindig in Philadelphia. If this is not gross political and moral malpractice on the part of our leaders, I don’t know what is.


If you want to run out and chase stock prices at these levels, be my guest. My advice is to do the opposite and reduce or hedge your equity exposure. History and common sense strongly suggest that the current rally is unsustainable and stock prices are vulnerable to a serious reversal. Faith in central banks is not a strategy; it is a cult. Cults eat their own.

Edward Yardeni is one of Wall Street’s most respected economists. His recent work demonstrates that the stock market is trading at or near peak valuations. As Figure 3 above shows, the S&P 500 Price-to-Sales Ratio is now 1.81x, nearly as high as it was during the late 1990s when markets were dominated by irrational exuberance over the Internet Bubble. Price-to-Sales is a useful tool because it is harder for companies to fudge revenues than earnings (as we know all too well, it is child’s play to manipulate earnings with non-GAAP earnings adjustments).

In addition, the chart below shows that the S&P 500 Forward P/E is a 16.6x, the highest level since 2004/5., while the S&P 500 Forward Price/Sales is also at its highest level in more than a decade.


The destruction wrought by Ben Bernanke’s plan to push investors to take risk by destroying the returns on capital is becoming more obvious every day. Wilshire Associates reports that the long-term investment returns for public pension funds have dropped to their lowest recorded levels at 7.47%. That return would be respectable if it were risk-adjusted or sustainable, but it is neither and leaves these funds increasingly underfunded and on the road to insolvency. Hedge funds – including many run by well-known managers – are struggling to eke out a positive return for the third consecutive year while some are nursing double digit losses. Active managers are demonstrating with every passing day the lure of low fee index investing because they can’t figure out how to add value to investors’ portfolios in a world dominated by free money and market-dependent central banks.

When it pays to be stupid and passive rather than active and smart, something is seriously wrong. This is the result of a world run by people who have no clue what they are doing.

Sincerely,

Michael

29 Responses to “Eight Reasons to Dump Your Equities Right Now”

  1. Michael, you have made some great calls, particularly on VRX and gold/gold miners. However on February 8th you mentioned there would be a super crash by June 20th and on that date said “Sell the equities you have and move into cash.” if one had followed your advice at that t8je they would have missed a huge reversal in the market. What makes you think now is the time that equities will swoon?

  2. Hi Tony,

    If you are looking for investment income and believe that precious metals are likely to rise over time with inflation, then SLVO and GLDI might be worth a look. They are yielding about 12% by writing out of the money cover calls on the underlying asset (GLD (3% out of money call) and SLV (6% out of money call)). Yes, your upside (and downside) is capped a bit this way, but the yield is hard beat. I also like Michael’s suggestion: ANGL, but I hold this one with a tight stop. I would be interested to see if any one else has found some alternative or safer strategies to generate some yield.

  3. I agree 100%. However there is no accounting for irrational exuberance. The market may continue to climb. I missed out on the run up from 2009 completely. I relied on the market pundits, especially Bill Bonner, who predicted a market crash. He also said interest rates would rise, so I lost a ton of money from that erroneous prediction.
    It looks like the market may continue to rise, despite all the signs pointing to imminent destruction. What would be wrong with staying long with tight stop-losses?

  4. What MIke is saying is that the Fed has been keeping the party going. At some point it is going to not be able to do that any more. And that seems reasonably soon, since the Fed is running out of Ammo. So lighten up on equities, so you won’t have to dump them later, and tighten up on the stops for what you keep, have defensive stocks and short or buy puts on stuff that will crash with a down turn. I have one short that should crash with a down turn, but so far I’ve got a 10% loss (Fed Party time), but I’m going to keep holding it as insurance. Remember stocks (as a group or individually) can go high than you can reasonably imagine, and they can go lower too.

  5. While S & P valuations are stretched on conventional measures, the never ending waves of cheap money and money printing from central banks will keep interest rates low – or in some cases negative for some time to come. Inevitably much of that cheap money will flow to create asset bubbles. from a Uk perspective, holding US and other strong global companies makes good sense in a post brexit world, as these are likely to continue to generate profits/aka dividends in all but the worst global crisis – and such companies are likely to continue to keep their high valuations.
    with such cheap money, companies will borrow, or use their surplus cash, to buy back shares and thus maintain EPS even if profits arent growing; so long as they continue to pay dividends and maintain their capital value, do i really care how that is achieved
    While capital values of gov debts may keep rising, I cant see any sense in putting money into them; some strong corporate bonds may make sense, with a reasonable yield.
    personally I dont think it likely that there will be a crash as continually forecast; the world has always had problems, but sub $50 oil is likely to lubricate even slow growing economies – and there will always be good companies with high ROCE. I see the markets as continuing to be volatile at least until after the US election, but unless the major indices make significant breaks of the current ranges, I suspect that funds/people will continue to buy on dips
    it is a crazy world, where central bankers are struggling to keep all the balls spinning, but it is in nobody’s interest to stop the party; but who knows?
    I do know that pundits have been predicting the market to crash for as long as I can remember – and it still keeps on grinding up

  6. Michael you mentioned $60 trillion unfunded deb, but http://www.usdebtclock.org show $103 trillion unfunded liabilities–an even stronger argument to be negarive about the future. Site also shows each citizen’s portion of the national debt of $19.4 trillion is $59, 893 while every taxpayer’s portion of the unfunded liability is $861,031. What could possibly go wrong?

  7. everybody wonders why we still go up….100% central banks. Their policies drive people to this equity bubble and have surprised me how long they can keep it up. S & P aggregate in Sept 2014 was $106…now its $87….while making new highs? HUH? Totally irrational. It very well could go higher but we haven’t traded on fundamentals in years. I may miss out but no way I have a buy and hold strategy here.

  8. A quibble. Federal deficits increase buisness profits on almost a dollar for dollar basis. In econoimics the “Kalecki identity” quantifies this relationship. That’s why profits were so strong in 2010-11 when the economy was slow. Lower deficits in recent years have been the cause of the recent drop in earnings. For the first time in several years, deficits (including state and local) are increasing Thus, these flows are actually a favorable support for the stock market. Ironically, Jim Grant, of all people, pointed this out in his letter several years ago.

  9. There is a simple solution. Each person could pay in one million dollars and the debt would be gone!! Almost no one has that kind of money, so the government could just print some more bills, give everyone $1,000,000 then have them pay it back to the Feds and Wallah, the debt is gone. Kinda like check floating, which I believe is what THEY have been doing all along!!!!

  10. On a more serious note, I have been buying metals for some time now and believe it will be a good hedge if the Feds don’t pass a law that it is illegal to own!! Physical possession is a must so get a safe! If you let someone else store it and the world crashes, they will too and your gold & silver will disappear!!!

  11. Even though Michael didn’t hit the correct date on when the markets would fall, which is nearly impossible. That’s the same as trying to pick a winner of a major golf tournament. Everyone just needs to be prepared when it does drop to the floor. I will say either sometime this fall. China is in some trouble again or after the next President sits in the office. Whoever may win in November. When it does drop it will be between 4,000 or a 10,000 point drop in the market. Yes, 10,000 is a lot, but it may even be worse. Just be prepared and get to cash quickly! Remember, if you are feeling uncomfortable about the markets get out before you fall through the floor. Great articles! Read them daily.

  12. If you want to put your money somewhere relatively safe but still have decent returns, look to companies that produce and/or sell essentials for life (i.e. water, power, food). They usually do well even in down economies. In the past couple of weeks, those stock prices are down and may drop a little lower over the next few days. If they do have any losses, they bounce back fairly quickly. You pay for that safety though. You may get only 5-15% return per year but, really, that’s not a high price to pay for safety and peace of mind. One thing is for dang sure though . . . I wouldn’t have my money in a company like TSLA. They may have been a good ride recently but the wheels are about to fall off.

  13. Ernest Grolimund

    Thanks. Good comments. Edward Jones company plotted Dow vs time for Bull and Bear Cycles and says it is still the best predictor of the Dow, long term. This would predict an 18,000 +/- high for a short time, then another bull market. Crash risk is high now but will drop in a year or so. But it is all a bet. Long term investing makes sense but only with tight stops. That minimizes risk. Bonds are bad. Money market is bad. Metals sound like a better part of a balanced portfolio than bonds or money market. I tried to invest in solar and SUNE dishonesty cost me on that small bet. Interested in Utility funds, too. But fear remains in all investing. Short stops sounds like the best advice here, even on funds.

  14. This charade can last 1) as long as they want it to last and 2) as long as the claims on the paper wealth are not exchanged for real assets or goods (that’s the problem with pension funds). I think pension funds will become a real problem within 5 to 10 years when a wave of retiree will require that a paper promise is exchanged for hard cash. For the moment, pension funds are still paying 100% when their coverage is around 70% and SS still pays pensions when the trust account is basically empty. In the meantime, if nothing happens that will boost real growth, the gap between promise and available cash will be closed and deflation of asset prices will really hit.

  15. IF one wants good steady and sage returns, je/she should buy shares of thé 6 big canadian banks. They pay up to 4.5% dividends. Furthermore american owners of these shares will make an additional return when thé american dollar looses value against the canadian one.

  16. Alex Avner Herzfeld

    The problem with these very well researched and very plausible predictions is a remark of John Maynard Keynes (which I personally deem to be its wisest saying): “Markets can stay longer irrational than you may remain solvent”.

  17. I HAVE BEEN WATCHING THIS DEBT PARASITE GROW SINCE I GOT INTERESTED IN LABOR RELATIONS IN 1959 IT HAS GROWN STEADILY BECAUSE NO ONE HAS REQUIRED THAT THE USERS OF THE SYSTEM BE REQUIRED TO PAY THE BILL UP FRONT VERY FEW OF THESE FOLKS ARE EVEN REMOTELY INTERESTED IN PAYING THE BILL WITH THEIR OWN FUNDS EITHER NOW OR LATER SO THE DANCE CONTINUES TO MUSIC PROVIDED BY BORROWED MONEY SO LETS FACE REALITY AND TELL ALL THESE WHO WOULD BE LED BY THE HAND TO PLACE THEIR TRUST IN THE INEVITABLE BUY A BASKET OF JUNIOR GOLD MINERS AFTER DUE DILIGENCE AND WISE SELECTION AND BUY INTO TWO OR THREE FUNDS THAT GO PARABOLIC WHEN FINANCIALS FINALLY CRASH AND THEN SHORT THE DUMMIES LIKE TESLA AND THE BIG BANKS THAT ARE TOO BIG TO BAIL OUT NOW FOR SURE AFTER ALL THIS GET GALLONS OF YOUR FAVORITE WHISKEY AND BARRELS OF DRINKING WATER AND REMOVE YOUR SELF TO A SAFE PLACE TO WATCH I DO NOT THINK YOU WILL BE DISAPPOINTED FOR ABANDONING BUY AND HOLD AS YOUR ACTIONS WILL BE VINDICATED VERY VERY SOON WE WILL HAVE THE OPPORTUNITY TO CATCH A FALLING STRONG ROOM FULL OF KNIVES SHIVS SABERS MACHETES AND ASSORTED OTHER CUTLERY IF YOU FEEL LUCKY, GET OUT THERE AS FOR MY HOUSE WE WILL BE ON THE SIDE WAITING TO SELL OUR PRECIOUS METALS AND MINERS AT A HUGE PROFIT AND BUY INTO THE RUINS OF THE WORLD MARKET FOR THE FUTURE GAINS THAT WE WILL NEED TO SURVIVE ON A SPARTAN LEVEL LIFESTYLE

  18. Reply to Dennis Boyle:

    Not making money isn’t the same as losing it. That may seem like a distinction without a difference, but it isn’t. Is the guy who has the chance to get a million dollars if he plays Russian roulette and doesn’t blow his head off a “loser” because he chose to not play?

    Is the other guy who did play … and the gun didn’t go off … a winner? Maybe, but it doesn’t make him smart.

    It’s always a question of the reward for the risk involved. And you have to make those decisions in real time. You aren’t allowed to look at the headlines of a paper from the future when you make investment decisions. Mr. Lewitt’s call is the right call, REGARDLESS of what has happened or what happens from here Why? One word. Discipline. Those who have it survive. Those who don’t … don’t.

    As to setting tight stops, good luck with that. If the market continues to function normally, you’d be okay, maybe whipsawed out, but okay.

    But what if there’s an event over this coming weekend let’s say, and the market opens down big. Were those stop market orders you put in or stop limits? If it’s a stop market, you’re gonna get taken out a lot lower than you hoped, and if it’s a stop limit, you might as well not have placed any stops at all.

    Stops offer precious little protection in a true emergency, but people don’t seem to get that.

    And what if there’s an event and the market closes and can’t reopen … for weeks or months? You are SOL. Bottom line: The continuous more or less smooth functioning of the financial markets is not a given.

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