Warren Buffet – Dennis Tubbergen

Update: Stocks and Silver

There were two big market movers last week. Stocks and silver both advanced between 3% and 4% on the week.

As far as stocks are concerned, the downtrend line that has been in place since January of 2022 has now been broken to the upside, as noted on the weekly chart of an exchange-traded fund that tracks the Standard and Poor’s 500.

Note the trend line on the chart that has been drawn from the beginning of calendar year 2022. The highs made in early February took out the highs made in December. However, last week’s market highs did not take out the highs made in early February. At this point, the primary trend in the S&P 500 is down but on a more intermediate term, stocks are in a trading range.

From a fundamental perspective, stocks remain overvalued by many measures. Robert Burgess makes this observation about the performance of the S&P 500 (Source: https://www.advisorperspectives.com/articles/2023/03/31/this-stock-market-splash-has-a-disturbing-undertow):

The benchmark S&P 500 Index is wrapping up its second straight quarterly gain, rising 5.50% through Thursday and adding to the 7.08% surge in the final three months of 2022. This will be cheered as good news, confirming the stock market’s recovery from last year’s bear market and resiliency in the face of stubbornly high inflation, rising interest rates, and bank failures. Don’t fall for it.

Underneath those topline numbers lurks a disturbing development — a very small percentage of stocks actually account for the rise. If not for a handful of highfliers such as Nvidia Corp., Meta Platforms Inc., Tesla Inc., Warner Bros Discovery Inc., and Advanced Micro Devices Inc., which all chalked up gains of between 50% and 87%, the S&P 500 would be struggling. In fact, when all stocks are weighted equally, the index is actually little changed, rising less than 0.5% for the quarter. Broader measures of the stock market, such as the New York Stock Exchange Composite Index, are essentially flat.

On Wall Street, this is known as bad breadth and a sign that despite the outward appearance of health, all is not well with the stock market. Longtime Wall Street watcher Ed Yardeni, who is credited with coining terms such as “bond vigilante” and “Fed model” highlighted the diverging performance between the S&P 500 and its equally weighted alternative in a note to clients this week. He pointed out that the ratio between the two tends to peak before recessions — making the recent January high a cause for worry. Other measures of breadth also signal weakness: the number of equities on the New York Stock Exchange trading above their 200-day moving average is lower than the average for the past decade; the same is true for the number of stocks hitting new 52-week highs less those touching 52-week lows.

Breadth is an important indicator of the health of a rally in stocks. If the advance has most stocks participating, the rise in stocks is considered to be more sustainable. If the advance is propelled by a small number of stocks, it is not as likely to be sustainable long term. Think about it using a military analogy. If the charge is led by the generals and the troops aren’t following, the mission is unlikely to be successful.

That describes the current stock market advance.

The “Buffet Indicator” is a stock valuation metric popularized by legendary investor Warren Buffet in an interview about 20 years ago. The stock market valuation measure takes total stock market capitalization and divides it by gross domestic product. In other words, it takes the devaluing US Dollar out of the measure and compares the total value of stocks measured in dollars and divides by gross domestic product measured in dollars. Since both statistics are measured in dollars, it is a comparison rather than a stand-alone dollar measure.

This chart (Source: https://www.advisorperspectives.com/dshort/updates/2023/03/06/buffett-valuation-indicator-february-2023-update) shows the current value of the Buffet Indicator compared to where the indicator has stood historically.

Notice that the Buffet Indicator currently stands at 140%. While that is down significantly from the 211% of late 2021 when I called the market top, it is just below where the decline began at the time of the tech stock bubble bursting and well above where the decline began at the time of the financial crisis.

Since I believe that the odds are fairly high that we may be on the verge of repeating the financial crisis, the downside for stocks from here could be greater than in 2007 – 2008.

As far as silver is concerned, it’s no secret to longer-term readers that I have been a silver bull.

My silver optimism is purely based on fundamentals.

I expect that inflation will continue and differ with some of my RLA Radio guests as to what the future policies of the Federal Reserve will be.

There are some bright people whose opinions I respect and value who believe the Fed will stay the course and continue tightening to get inflation under control.

I have long held that the Fed would pivot at some future point, and to a certain extent, the central bank already has.

The recent bank bailouts were backstopped by the Fed via currency creation.

Past RLA Radio guest Peter Schiff had this to say on the topic recently. (Source: https://schiffgold.com/interviews/peter-schiff-bank-bailouts-will-devalue-the-dollar/):

In just two weeks, the Federal Reserve added nearly $400 billion to its balance sheet. That’s money created out of thin air. That’s inflation. And so, when you do that, you destroy the value of all the money that’s already in circulation. So, Americans are going to pay, not because they are taxpayers, but because they are US dollar owners and US dollar earners. Everybody’s paycheck is going to be reduced in value because of the bank bailouts. These bailouts are endangering everybody’s bank deposits, even the banks that are solvent. Now it’s inflation that is the risk. And so it doesn’t matter if your bank fails. You’re still going to lose. In the event that your bank failed, you lose your money. But now, because the government won’t let the banks fail, everybody who has a bank account is going to lose purchasing power.”

I am also bullish on silver due to increasing industrial demand. Although technically speaking, it may not be the best time to invest in silver, over the longer term, I expect the metal to move much higher.

If you or someone you know could benefit from our educational materials, please have them visit our website at www.RetirementLifestyleAdvocates.com. Our webinars, podcasts, and newsletters can be found there.

Stock, Retail and Housing Update

Despite the recent rally in stocks, when analyzing longer-term price charts, it is my view that stocks remain in a downtrend at this point in time.

As I have often stated in this publication, it is rare that any market moves straight up or straight down. Instead, a downtrend is typically characterized by a series of lower highs and lower lows. Note the price action on the weekly price chart of an exchange-traded fund that tracks the price action of the Standard and Poor’s 500.

Notice the downtrend line that I have drawn on the price chart. It is a textbook downtrend trendline. As is easily seen by the price chart, there is a downward price trend channel on the chart.

Until this downtrend price channel is broken to the upside convincingly, I expect more downside in stocks.

From a fundamental perspective, stocks remain overvalued. One of the most commonly used valuation metrics for stocks is a tool that is now known colloquially as “The Buffet Indicator” ever since the Oracle from Omaha stated in an interview it was his favorite indicator to use to determine if stocks are overvalued or undervalued.

The chart reproduced here, from Advisor Perspectives (Source: https://www.advisorperspectives.com/dshort/updates/2022/10/27/market-cap-to-gdp-buffett-valuation-indicator) shows the current valuation levels of stocks using this indicator.

Notice that stock valuation levels are slightly lower than they were prior to the tech stock bubble imploding about two decades ago and much higher than at the time of the financial crisis. As you probably recall, stocks fell more than 50% in both of those prior time frames.

That tells us that despite the miserable year in stocks that we have just experienced, there is likely more downside ahead.

Meanwhile, the economic news indicates a generally sluggish economy that is being adversely impacted by continued inflation. Black Friday, the most anticipated retail sales day of the year saw most retailers struggling through what should have been their best day of the year. The exception to this were stores that were deeply discounted merchandise. This from “Breitbart” (Source: https://www.breitbart.com/economy/2022/11/25/black-friday-disappoints-thin-crowds-and-desolate-stores/)

The busiest shopping day of the year is not as busy as retailers hoped.

Across the U.S., shopping malls are seeing only thin crowds, according to reports in business media. Inflation and depressed consumer sentiment appear to have dampened the holiday shopping spirit.

Reuters reported:

At Times Square in New York City, which was cloudy with occasional light rain, employees were seen waiting inside stores for crowds that so far had not arrived.

Outside the American Dream mall in East Rutherford, New Jersey, there were no lines outside stores. A ToysRUS employee was seen walking around the mall handing out flyers with a list of the Black Friday doorbusters.

Bloomberg reported:

Around 10:30am at Crossgates Mall in Albany, New York, the ultra-low-cost brands and the higher-end buzzy retailers had the most foot traffic, while the middle-market stores were desolate.

Gap Inc.-owned Old Navy, which was offering 60% off most items, had a line so long that some shoppers turned around as soon as they entered the store. Athleisure favorite Lululemon Inc., which had only a few racks of discounted merchandise, and American Eagle Outfitters Inc.-owned Aerie, a popular intimates brand among Gen Z shoppers, also drew big crowds.

Meanwhile, stores like Banana Republic, Macy’s, and Urban Outfitters had no lines at all, and only a handful of shoppers.

Overall, the National Retail Federation has forecast that retail sales will be up six to eight percent this year compared with last year. That is a big slowdown from last year’s 13.5 percent increase and the 9.3 percent rise in 2020. After adjusting for inflation, sales may actually be down. The Consumer Price Index is up 7.7 percent compared with a year ago.

November saw a significant decline in consumer sentiment, according to the University of Michigan’s survey. The index of consumer sentiment fell five percent below the October reading, reversing about one-third of the gain since the historic low in June. The gauge of current conditions dropped by 10.4 percent.

That is bad news for a consumer spending-dependent US economy.

While retail is slow, as I have forecasted, the housing market is continuing its slow-motion crash. Homebuyer confidence is now at a record low going back to 1985 as the chart below from “Zero Hedge” shows (Source: https://www.zerohedge.com/economics/housing-market-obliterated-pending-home-sales-post-record-drop-deal-cancelations-price)

The Current State of Stocks

About one week ago, I completed the June Special Report which is titled “Mid-Year Market Update: What to Consider Now for Your Money”.

This week’s holiday issue of “Portfolio Watch” is a preview of that Special Report.

As I have often stated, the potential problem with a time-sensitive special report written 3-4 weeks before delivery, is that so many things can change by the time the delivery happens.

The June Special Report examines the state of many markets and offers a forecast as to where they go from here.

Interestingly, the stock forecast offered seems to be playing out already. Here is a bit from that report which can be ordered next week for those with an interest in reading the entire report.

Last year, when we forecast a high probability of a stock market correction, we pointed to a commonly used piece of fundamental data, something known as “The Buffet Indicator”.

The Buffet Indicator is actually a measure of the total value of stocks as compared to economic output. Put another way, this indicator is a measure of market capitalization (the total, combined value of stocks) divided by Gross Domestic Product (total economic output).

Last year, we published this chart, noting that the indicator showed that stocks were extremely overvalued.

There are three important points of reference on the chart. The first is the calendar year 2000 when the Market Cap to GDP indicator stood at 159.2%. That means that in approximate terms, the total value of stocks was about 1.6 times the economic output of the United States.

From those levels, stocks fell more than 50%.

The second important reference point is in 2007 when stocks peaked just prior to the financial crisis. At that point, stocks were valued at 110% of US economic output. From that point, stocks once again fell more than 50%!

Then, late last year, the Buffet Indicator rose to 216%, a level never seen previously. The total value of stocks was more than twice the total economic output of the United States. At those levels, it was easy to predict a stock decline was inevitable. As a side note, for stocks to return to the historic average of the Buffet Indicator, they would need to fall 70% from those lofty levels.

As of this writing, we have now seen about a 20% correction.

Technically speaking, as long-term readers of our newsletters and special reports know, we called the top in the market in December. While forecasting where stocks go is dangerous business in an artificial economy abundant with newly created currency, it seemed like a December 2021 top was likely for a couple of reasons.

The chart above is a chart of an exchange-traded fund that tracks the movement of the Russell 3000, a broad stock market index

There is another technical indicator that we use to potentially detect major turning points in the market. While the indicator itself isn’t unique, the way that we use it is unique.

The indicator is something called a MACD, often pronounced, “mac – dee”. It is a technical indicator developed by Gerald Appel in the 1970s. MACD is an acronym that stands for moving average convergence-divergence.

The MACD is often used with a daily or a weekly chart to determine trend changes. The chart above is a weekly chart and the MACD indicator has been drawn across the bottom of the chart.

The MACD indicator has two lines moving up and down across the bottom of the chart. These lines, one orange and one blue occasionally cross each other. It is these crossovers that many traders use to trade and determine potential trend changes.

The orange line on the bottom of the chart is drawn by taking the 12-period moving average of price and subtracting the 26-period moving average of price. If you look closely at the labeling on the right-had side of the MACD indicator, you’ll see a zero line. When the orange line crosses the zero line, it is at that point that the 12-period moving average of price and the 26-period moving average of price are the same.

Here’s what one can discern using a moving average of price: the 12-period moving average of price is the market’s consensus of value over the 12 periods. On the chart above, which is a weekly chart, the 12-period moving average of price is the market’s consensus of value over the past 12 weeks. The 26-period moving average is the market’s consensus of value over the past 26 weeks.

When the orange line on the chart above is over the zero line, it tells you that the 12-period moving average is higher than the 26-period moving average. That means that if the moving average of price over the past 12-periods is greater than the moving average of price over the past 26-periods, the market may be bullish.

The blue line on the chart is a 9-period average of the difference between the 12-period moving average and the 26-period moving average.

When the orange line on the MACD chart crosses over the blue line to the upside, it means that the trend may be turning positive or bullish. When the orange line crosses over the blue line to the downside, it means the trend may be turning negative or bearish.

This indicator, like any other indicator, is far from perfect. In a market that is not solidly trending, the MACD line and average line crossover can lead to false signals.

Notice also within the MACD indicator above, there are some vertical lines drawn. These vertical lines are known as a histogram. They plot the difference between the MACD line (the 12-period moving average line minus the 26-period moving average line) and the average line.

On a longer-term chart, like a monthly chart, the ‘ticks’ up or down of these lines can signal a strengthening or a weakening market.

Looking at the chart above, I’ve drawn a downtrend line on the chart. Notice how far the current price (as of one week ago) is from the down trend line drawn on the right-hand side of the chart. If this Exchange Traded Fund (IWV) doesn’t close over about $253 (from a present price as of this writing of $225), the trend will remain down.

That means that stocks could rally by up to 12% or so from here and not change the primary trend from down to up. Last week, stocks made up half that gap. I look for the trend line to hold and the downtrend to remain intact.

That means stocks can rally from here by another 5% or more without a trend change occurring.

My Interpretation of the Dow to Gold Ratio – Why Stocks Have More Downside and Why Gold Has More Upside

Stocks rebounded again last week as metals retreated slightly.

The Dow to Gold ratio now stands at 17.78. For those of you unfamiliar with the Dow to Gold ratio indicator, it is calculated by taking the price of the Dow Jones Industrial Average and dividing by the price of gold per ounce.

The Dow began the week at 26,797.46 while gold was at 1507.50. That makes the Dow to gold ratio 17.78 (26,797.46/1507.50)

My long-term forecast continues to be that this ratio will reach 1 which means more downside for stocks and more upside for gold.

Given the current level of 17.78, that last sentence may be an understatement.

The reality is that in order to hit that target of 1, stocks will have to significantly fall, and gold will need to rally strongly.

In my view, economic circumstances that exist around the world presently suggest that is a likely outcome.

As crazy as that prediction might sound to you, her me out.

To begin with, much of the rally in stocks over the past couple of years has been due to stock buybacks of their own stock by companies.

This from CNN on August 22 (https://www.cnn.com/2019/08/22/investing/stock-buybacks-drop-tax-cuts/index.html):

Corporate America’s epic buyback mania may finally be succumbing to gravity.

The 2017 corporate tax cut left US businesses flush with cash. S&P 500 companies responded by rewarding shareholders with record amounts of buybacks in 2018, with each quarter setting an all-time high.

However, that record-shattering pace appears to be slowing. S&P 500 companies executed $165.7 billion of buybacks during the second quarter of 2019, according to preliminary estimates by S&P Dow Jones Indices. Although that’s still a stunning amount of repurchases, it marks a 13% decline from the same period a year ago.

The slowdown in buybacks, which have become a lightning rod for criticism among some in Washington and even on Wall Street, underlines the impact the tax law had last year as companies steered a sizable chunk of their windfall to investors.

As stock buybacks slow, one of the activities that has been supporting the stock market becomes less supportive making stocks more susceptible to a decline.

Secondly, margin debt is higher month-over-month. Margin debt is debt that an investor incurs to purchase securities, usually stocks. As long as margin debt keeps rising, it helps create more demand for stocks.

While margin debt is near an all-time high on a nominal basis, on a real basis, adjusted for inflation, margin debt is still below all-time highs. Perhaps there is a little more room to add to margin debt, but I wouldn’t count on it.

Thirdly, one of Warren Buffet’s favorite indicators to gauge stock valuation, market capitalization to Gross Domestic Product is inflated.

The chart printed here illustrates market capitalization to GDP. Note that the ratio remains slightly below the levels prior to the tech stock crash but is much higher than just prior to the financial crisis about one decade ago.

Finally, “Fortune” magazine had this to say recently about stocks (Source: https://fortune.com/2019/07/31/yes-stocks-are-overvalued-but-by-how-much-heres-what-history-tells-us/) (emphasis added):

Robert Shiller’s cyclically-adjusted price-to-earnings (CAPE) ratio has only breached 30 three times in history.

The first time was in 1929, just a few short months before the stock market was trounced in one of the worst crashes in history during the Great Depression. Almost 70 years later, it happened again in 1997 and stayed above that level for nearly 5 years as the dot-com bubble deflated. The most recent flirtation with a CAPE of 30 began in the summer of 2017, where it has remained in a tight range ever since.

This chart, printed with the article, illustrates.

As far as gold is concerned, central bank policies are improving the fundamentals for gold.

Money creation via quantitative easing programs worldwide are bullish for tangible assets, gold in particular.

Peter Schiff, past guest on RLA Radio, had this to say this past week about his call for gold reaching $5,000 per ounce this past week (Source: https://kingworldnews.com/peter-schiff-on-his-5000-gold-call-and-todays-pullback-in-gold-silver/):

Most investors think my $5,000 gold call is crazy. But what’s crazier negative interest rates or $5,000 gold? In the insane world of negative interest rates, $5,000 gold is the one thing that makes sense. In fact, $5,000 for an ounce of gold will likely prove to be a bargain!

This week’s guest on Retirement Lifestyle Advocate’s Radio, Mr. Michael Pento of Pento Portfolio Strategies had this to say about gold.

He explained that when interest rates are up, keeping money in cash in a deposit account makes sense.

Given a choice between depositing money in a deposit account yielding 6% interest or buying gold that yields 0, mot investors will choose the deposit account and capture the investment yield.

On the other hand, if both cash accounts and gold are yielding zero, most investors would opt for the tangible asset, gold rather than keeping assets in a fiat currency.

Today, however, for many investors the choice is even more obvious. Given a choice between gold and a negative-yielding cash account, the gold becomes a ‘no-brainer’.

As central banks continue to pursue crazy monetary policies like negative interest rates, that will likely be bullish for gold.

The entire radio program and the interview with Michael Pento are now posted at www.RetirementLifestyleAdvocates.com.