November 20, 2013
- I’m becoming increasingly concerned by emails that I’m receiving from amateur investors. These emails tout a fabulous future for theAmerican stock market. Many stock buybacks have occurred, but actual earnings growth for American companies is highly questionable.
- “I am very cautious on equities today. This market could easily have a big drop…. Very simplistically put, a lot of the earnings are a mirage.” – Reuters News, November 18, 2013.
- That’s legendary activist investor Carl Icahn, speaking at the Reuters Global Investment Outlook Summit.
- He doesn’t sound very enthusiastic, and nor do other powerful money managers who control enormous amounts of risk capital. “U.S. stocks are grossly overpriced, according to asset management firm Grantham Mayo Van Otterloo (GMO) & Company, which estimates fair value for the S&P 500 Index at 1,100 – or almost 40 percent below current levels. In a quarterly letter published on Monday, Ben Inker, co-head of global asset allocation at GMO said the expected rate of return on the stock market index is minus 1.3 percent per year, adjusted for inflation, for the next seven years.” – CNBC News, November 19, 2013.
- If gigantic funds like GMO (with over $100 billion under management) see the American stock market as “grossly overpriced”, while amateur investors are touting the market as a “fabulous bargain, with gains that are here to stay”, I would urge gold community investors to exercise extreme caution.
- Investors who are selling gold stocks now, and buying general stock market equities on American stock markets, may soon find they become part of one of the biggest “out of the fry pan and into the fire” horror shows in history.
- I expect the Fed to taper their quantitative easing (QE) program in 2014, and perhaps in December of this year. If the Fed tapers in December, many institutional money managers are likely to quickly move a lot of capital from the stock market to bonds.
- If there is no taper in 2014, the reason is likely to be that the American stock market has crashed. If the stock market crashes, it’s possible that the Fed increases QE.
- The bottom line is that whether the Fed increases QE, tapers, or does nothing, the American stock market is at great risk, because value-oriented fund managers are pulling out. Stocks that were held by the strongest hands are now held by what appear to be very weak hands.
- It’s possible to make money in an asset class with “momentum investing” (price chasing), but it’s extremely difficult, and arguably impossible, to keep that money. Most of the world’s greatest investors are value-oriented.
- Gold stock investors who want “action” should probably look at the Chinese stock market, which is far below its all-time highs.
- “China has pledged to make the most sweeping changes to the economy and the country’s social fabric in nearly three decades with a 60-point reform plan that may start showing results within weeks.” – China Daily News, November 18, 2013.
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