Sunday, September 21, 2014

Stock Buybacks & Dividend Payments Create A Trap Door Under U.S. Stock Prices


The following is the definition of "share repurchase" from Investopedia:

"A program by which a company buys back its own shares from the marketplace, reducing the number of outstanding shares. Share repurchase is usually an indication that the company's management thinks the shares are undervalued. The company can buy shares directly from the market or offer its shareholder the option to tender their shares directly to the company at a fixed price."

I have been discussing the incredible rate U.S. companies have been repurchasing shares throughout 2014. For a deeper look at why companies are using this strategy I would highly recommend reading:

Share Buy-Backs: The Repurchases Revolution - The Economist

Profits Without Prosperity - Harvard Business Review

The quick and easy summary goes like this: Companies (hopefully) have profits at the end of every month and quarter they must decide what to do with. Repurchasing stock reduces the total "float" or shares available for trading in the market. With a reduction in the available supply of shares it boosts the share price.

The why is a bit more complicated. Boosting share prices in the short term has an obvious benefit to the people who decide when and how many shares to repurchase; a large part of their compensation is determined by how the company's stock price performs.

Another reason may be that the company believes share prices are undervalued (this should quickly be dismissed because companies always invest heavily at market tops and invest little or nothing at market bottoms).

A third reason; companies cannot find a way to put the money to productive use. If the economy is only purchasing X amount of the products made at your factory, why would you build another factory that is just going to warehouse unsold product? A few quotes and charts will be coming from StreetTalkLive as we continue on.

“Companies are buying their own shares at the briskest clip since the financial crisis, helping fuel a stock rally amid a broad trading slowdown. Corporations bought back $338.3 billion of stock in the first half of the year, the most for any six-month period since 2007, according to research firm Birinyi Associates. Through August, 740 firms have authorized repurchase programs, the most since 2008."


"The growth in buybacks comes as overall stock-market volume has slumped, helping magnify the impact of repurchases. In mid-August, about 25% of non-electronic trades executed at Goldman Sachs Group Inc., excluding the small, automated, rapid-fire trades that have come to dominate the market, involved companies buying back shares. That is more than twice the long-run trend, according to a person familiar with the matter.

Companies with the largest buyback programs by dollar value have outperformed the broader market by 20% since 2008, according to an analysis by Barclays.”



If a company decides not to invest profits in future business growth or use it for share repurchases, it can give the money back to share holders through dividend payments. This is another simple way to boost share prices because it provides an attractive income stream to investors interested in purchasing the stock.

"Companies are not just borrowing to complete share buybacks but also to issue out dividends. According to the most recent S&P 500 company filings, the level of cash dividends per share has now reached $9.76 which is the highest level on record. It is also the greatest deviation from the long-term trend of dividends per share since the financial crisis."




Is it a long term problem that companies are spending all their profits (and in some cases going further into debt) to repurchase shares and issue dividends instead of using the capital to invest in future business growth?

Of course it is.

As a quick side note, Berkshire Hathaway, the company managed Warren Buffett, has never issued a dividend and never will. For a detailed understanding why, I would highly recommend reading this piece from one of his annual letters posted by Business Insider: Warren Buffett On Dividends.

This discussion explains part of the reason why the S&P 500 is sitting at all time record highs while the real economy has not recovered. When profits come in they are not being used to grow the company (which would lead to jobs and income growth), the funds are circulated within the organization to artificially turbocharge share prices.

The following chart illustrates this divergence. The middle class no longer experiences the benefits of corporate growth and profitability.


Corporations will not have the ability to artificially levitate their stocks higher forever. Either the real global economy must catch up to what share prices have priced in, or share prices must return to levels the real economy can support. We will be discussing the slow down in the global economy both outside and within the U.S. economy in depth over the coming weeks.

Saturday, September 20, 2014

A Review Of Natural Market Cycles & The Coming Reversion

The current bull market run in U.S. stocks has now crossed over 2000 days, making it 5.5 years old. It is the fourth longest in history (trailing only the 1949, 1974, and 1990 runs). The average bull market in U.S. stocks is 3.16 years and the median bull market is 2.16 years (a bull is considered over after a 20% decline or more).

It would surprise many to know that the current run of consecutive months with job gains in the U.S. is the longest in history. The next three occurred in 1989, 2000 and 2007.


I find this second statistic and the chart above fascinating. You'll notice that the top 4 runs of consecutive job gains all occurred within the last 25 year period. I believe three major factors account for these recent record runs (these are broad strokes; it would take numerous books worth of writing to discuss this subject in its entirety).

The first is that the government changed the definition of employed and unemployed in the early 1980's. If you are a Realtor that makes no money and works with a customer for 2 hours one month, you are considered employed. The same goes for a part time worker at 20 hours a week who is seeking (and probably needs) full time work.

The second factor is the stimulating effect of declining yields for on assets over the past 32 years. The cost to take on debt has declined steadily alongside commercial real estate cap yields (falling cap rates equal higher prices, see Commercial Real Estate: How Prices Are Determined). The ability to borrow more has turbocharged the entire economy while the real estate industry has created an army of jobs over the past few decades (if rates were to begin rising this stimulant would become a depressant and many of these jobs would disappear).


The third factor that has turbocharged the recent job runs has been the involvement of the Federal Reserve and federal government in the economy.

In the early 1980's the American government began to run massive deficits in order to stimulate the economy. In the 1990's these deficits were combined with loose monetary policy in order to stimulate growth. In the 2000's the two continued to be used together only on steroids. Today the world does not even remember a time when the U.S. government or Federal Reserve were not solely responsible for the growth within the U.S. economy.

The "new" economy has become such a perverse creature of its former self that it looks like a meth addict continuously seeking its next hit. Greenspan said that we entered a period of "Irrational Exuberance" after the stock market crossed 100% of nominal GDP back in 1996. The only problem is that due to these combined stimulant/drug injections into the economy we have been above that point almost every moment since. The real wash out has not arrived yet. 



We know what happens when booms are artificially juiced to run longer than they naturally would; the busts become equally larger on the downside.

Analysts now believe that stock market gains and job growth are a permanent part of the economy because company earnings will experience straight line growth into the future, forever. The following is a real quote by Jeffrey Saut, someone that people take seriously in the financial world:

“Since 1989 the S&P 500’s earnings have grown by 6.15% annually. Extrapolating that into 2020 implies earnings of $183.36. Using the historical median P/E ratio of 15.5x yields a price target of 2842 in 2020.

Here is the chart that illustrates Saut's permanent earnings growth. No more recessions. Market cycles no longer exist.


Do you see on the chart above how previous earnings booms were followed by an equal or greater bust? This is the natural cyclical flow of an economy. Expansions lead to contractions which wash away the excess and create the foundation for the next period of expansion.


Manufacturing Costs For The Top 25 Export Economies As Currency Wars Rage On

John Mauldin posted the interesting chart below this week showing the cost to produce goods in the top 25 export economies. A few of my thoughts:

Over the past two years companies in the United States have been discussing how they are bringing their manufacturing back to domestic producers because the cost is equal or below the bids they are receiving in China. The chart below illustrates how China has rapidly caught up with the United States in the cost to produce goods (great news for America, not great news for China). 

There are only nine countries now less expensive than the United States. Mexico and India are less expensive than China which had provided a boost to their overall economies in recent years (and should continue to help moving forward). Indonesia is the most attractive producer in Asia. 

The price of labor in Europe makes their manufacturing costs less competitive. That is already correcting itself as wages are in free fall due in large part to massive youth unemployment (the invisible hand working). 


Japan, a country heavily dependent on exports, carries a higher cost burden than many of the Asian exporters. This is part of the reason why Japan (along with Europe) is so focused on reducing export costs through currency devaluation. A reduction in the value of your currency is like a magical reduction to the cost of your exports with no wage reductions needed. 

The chess pieces will continue to move as the currency wars rage throughout the remainder of this decade (and possibly beyond). I believe that when the smoke clears the Japanese yen will experience the greatest losses while gold and silver will experience the greatest gains.

For more see: Japan Is A Powder Keg Searching For A Match

Bill Fleckenstein Brought Out To The Firing Range On CNBC

The market continuously moves through a steady psychological cycle of human emotion. During the depression stage of a market decline no one wants to admit they own the asset, and they can only discuss the potential risks of the market moving lower. This is the absolute best time to begin accumulating a position within that asset class (examples in today's markets would be precious metals, agricultural grains, uranium stocks and the Russian ruble).



As prices rise and investors gain confidence psychology slowly shifts until it reaches the complete opposite end of the spectrum. During this period, usually between thrill and euphoria, the fear that prices could potentially move lower is completely washed away.

We are at this psychological point for U.S. stocks. At this stage the mainstream media likes to lump together a group of talking heads like a firing range to verbally assault anyone left on the planet who could potentially even think about not having their clients "all-in" U.S. stocks at current nose bleed price levels.

This week CNBC brought on Bill Fleckenstein who created a short fund at the peak of the stock market back in 2007 (a short fund profits when prices fall). He closed his short fund in February 2009 (the market bottom) because he felt central banks would print an enormous amount of money and stocks would experience a relief rally.

This would probably be the closest example available of an analyst who has a complete understanding of monetary policy and its impact on the financial markets, however, the CNBC host tells Fleckenstein he misunderstands monetary policy, at which he can only laugh.

The remaining portion of the segment consists of the three U.S. stock bulls assaulting Fleckenstein relentlessly for not currently being 100% long U.S. stocks. Fleckenstein is currently in the early stages of opening a new short fund to capitalize on the U.S. stock market's next collapse, just as he did back in 2007.

Thursday, September 18, 2014

Seth Klarman On The Complacency Before Chaos

The following is a piece from billionaire Seth Klarman's recent letter to his investors. It provides an incredibly well-written summary of where we are in the financial markets today.

Klarman manages the Baupost Group, one of the largest hedge funds in the world:

We don’t know now (nor do we ever know) what the overall market will do. As we’ve discussed in recent letters, there are reasons for investors to be frightened but also numerous individual opportunities worth seizing. Today’s limited opportunity set means that we are still holding sizable cash balances, about 35% of the portfolio at June 30. This dry powder will become more valuable if the markets become more turbulent.

Equity markets continue to hit successive record highs, volatility remains strikingly low in equity and most other markets, and inflation is ticking higher. Investors have clearly grown weary of worrying about risky scenarios that never seem to materialize or, when they do, don’t seem to matter to anyone else. U.S. GDP, for example, was recently restated to minus 2.9% for the first quarter of 2014. Normally, this magnitude drop signals recession. Equities, nevertheless, marched relentlessly higher.
...
In today’s ebullient markets, we see many investors ratcheting up their own risk levels--buying substandard credits and piling up leverage are two favorite methods--in an attempt to generate near-term performance.
...
The financial markets could be getting closer to an inflection point, where the economic weakness that the bond market seems to be reflecting derails the more optimistic equity market. Or perhaps things can go on forever exactly as they are: a “Goldilocks” stock market resulting from a tepid economy, dampened volatility, and relentlessly low interest rates. Amidst the market rally, complacent investors continue to ignore a growing array of global trouble spots. Contrary to claims from the Obama Administration, the world is not a tranquil place at present. As such, risks facing investors seem to be rising but are not yet priced into the markets.
...
Late in a market cycle--when bargains are increasingly hard to find, valuations are lofty, and most investors have been scoring handsome gains for a number of years--we can say from experience that history tends to rhymeMoney becomes more freely available to pursue even the most marginal of opportunities. Dollars pour into venture capital, and the largest buy-side firms take strategic stakes in hot, late-stage private investments just prior to an expected big money IPO. Specialized funds are raised, regularly and easily, to invest in things like Greek private investments, Spanish real estate, or European non-performing loan pools. Willing investors abound for these. It doesn’t matter that market prices have mostly rebounded, prospective returns are thereby limited, and the capital in those funds is likely to be put to work whether or not prices warrant and even if conditions on the ground deteriorate. With investment bankers and hedge fund executives canvassing Europe today to bet on recovery, you have the increasingly common circumstance of proliferating “opportunity funds,” absent only the investment opportunity. Some clients of hedge funds today are, in a sense, disintermediating themselves, funding new entities to bid higher for the same sort of assets their other, more disciplined managers are already bidding more judiciously for. The discipline problem in this case is not that of the legacy managers; it may just be that of the clients.

The pressure to reach for return virtually ensures that many investors will take greater and greater risk for less and less potential reward at market peaks. If you can’t find bonds that yield 8%, better grab those offering 6%. Or 4%. If you need 8% to meet your bogey (assumed pension fund returns, for example, or promised returns to investors), then you will be prone to own increasingly risky assets or leverage up the safer ones. These pressures, as much as any indicator, are today signaling danger. Investors today are bidding ever higher amidst frenzied competition to buy pools of non-performing loans, and then leveraging them up to get double-digit returns. Mortgage securities backed by questionable loans issued to dicey borrowers now trade close to par and yield a downright stingy 3-5% where they once yielded a generous 15-20%. A recent brokerage report excitedly touted the new HoldCo PIK Toggle notes of a Croatian consumer goods retailer. Nearly every word of that description is a flashing red light to seasoned investors.

To put it a bit differently, writer and investor John Mauldin is right when he says that there is “a bubble in complacency.” Fear has effectively been banished. The members of the Fed know it. Stock traders who chase the market to new highs almost daily know it. Implied volatilities (and realized volatilities) are historically low (the VIX Index recently hit a seven-year low), and falling. The Bank for International Settlements recently cautioned that financial markets are euphoric and in the grip of an aggressive search for yield. The S&P has gone over 1,000 days without a 10% decline, according to Birinyi Associates. Dutch and French 10-year government bond yields are at 500 and 250 year lows, respectively; Spain, 225 years. Spanish debt yields were recently inside of U.S. levels.
Increasingly, hopes and dreams are being capitalized as if the future is certain and nothing can go wrong, as if up cycles such as the present one don’t inevitably sow the seeds of the next decline. The European Central Bank recently cut its deposit rate to an unprecedented minus 0.1%, and Mario Draghi assured that he isn’t finished. Can this be done without consequence? Investors have become numb to risk because such policies continue, seemingly forever, and new measures (such as European and now even Chinese QE) are regularly threatened and claimed to be costless and reliably effective. We are far from convinced of this; indeed, the higher the level of valuations and the greater the level of complacency, the more there is to be concerned about. Even as reported inflation remains quite subdued, signs of incipient cost increases are increasingly evident. We are seeing them, for example, in apartment rents, construction costs, and salaries of newly minted engineering graduates and oilfield workers.

Like global equity markets, credit markets have been surprisingly resilient, and our worry meter is high here, too. Ecuador recently issued $2 billion of ten-year bonds, as the market shrugged off its 2008 default. Kenya also completed a $2 billion offering, the largest ever debt sale by an African country, according to The Wall Street Journal. That offering attracted $8 billion worth of bids. In the U.S., issuance of low-grade credit is at record levels, as is covenant-lite issuance. Yields are at or near historic lows, which is especially nutty for junk credits, including the hideously risky CCC-rated issues. June CLO issuance set a record. Given changes in regulation, Wall Street has far less capital available to support the trading of this burgeoning junk issuance and the corresponding surge in debt ETFs. A sudden change in rates or sentiment could lead to serious market instability. When is harder to predict than if. While we are not predicting imminent collapse (market timing is not our thing), we are saying that a selloff, greater volatility, and investor losses would hardly be surprising from today’s levels.

In markets, it’s always hard to tell, in the words of the old commercial starring Ella Fitzgerald, Is it real or is it Memorex? Is the market nearly triple its spring 2009 level because things are better, or do things feel better because the market has nearly tripled? Indeed, we can do a simple thought experiment that might be revealing: How would everything feel if the S&P 500 were suddenly cut by one-third or one-half? Would such a drop drive astonishing bargains, or would the U.S. economy soon falter, with festering problems such as unemployment, the federal, state and local deficits, the long-term fiscal situation, and the creditworthiness of most sovereigns suddenly seeming ominous?

It’s not hard to reach the conclusion that so many investors feel good not because things are good but because investors have been seduced into feeling good—otherwise known as “the wealth effect.” We really are far along in re-creating the markets of 2007, which felt great but were deeply unstable when shocks started to pile up. Even Janet Yellen sees “pockets of increasing risk-taking” in the markets, yet she has made clear that she won’t raise rates to fight incipient bubbles. For all of our sakes, we really wish she would.

h/t Zero Hedge

Wednesday, September 17, 2014

Mark Cuban On Startups & The Desire To Win

Mark Cuban discusses the value in funding startups outside of Silicon Valley, the desire to win in the business world, Cyber Dust and Shark Tank.

It's no secret that Cuban, who appears on this site often, is one of my favorite business personalities in the world, and I listen to and read his thoughts/advice at every opportunity.


Tuesday, September 16, 2014

Marc Faber On Diversification

Some positive words this week from Marc Faber on diversification: "I hope that when the collapse happens, I'm only going to lose 50% of my money." (only partially kidding of course)

A slightly different tone than what we currently hear from the rest of the financial world which has already booked 20% plus annual returns for at least the next five years by staying 100% invested in U.S. stocks. 



Faber is now berated on CNBC for admitting he diversifies a portion of his portfolio in precious metals. With the anniversary of the Lehman Brothers bankruptcy this week, here is how the major asset classes have performed over the last six years:

Silver +71%
Gold +61%
S&P +58%






We'll check back in a few more years to see how things have progressed from here. My guess is there will be less mocking of Faber on CNBC for admitting he owns a portion of his portfolio in precious metals. 

h/t Zero Hedge

Monday, September 15, 2014

Saturday, September 13, 2014

Peter Schiff: Doubling Down On Failed Fiscal & Monetary Policies

By: Peter Schiff of Euro Pacific Capital
Friday's release of disappointing August payroll numbers should have been a jarring wake-up call warning Wall Street that the economy has been treading on thin ice. Instead the alarm clock was stuffed under the pillow and Wall Street kept sleeping. The miss was so epic in fact (the 142,000 jobs created was almost 40% below the consensus estimate) that the top analysts on Wall Street did their best to tell us that it was all just a bad dream. Mark Zandi of Moody's reacted on Squawk Box by saying "I don't believe this data." The reliably optimistic Diane Swonk of Mesirow Financial told Reuters the report "sure looks like a fluke, not a trend".
But the opinions of those that really matter, the central bankers in charge of the global economy, are likely taking the report much more seriously. Given that this is just the latest in a series of moribund data releases, such as news today that U.S. mortgage applications have fallen to the lowest levels in 14 years, caution is justified. Unfortunately very little good comes from central bank activism. Recent statements from Fed officials across the United States and recent actions from ECB president Mario Draghi reveal their growing resolve to fight too low inflation, which they believe is the biggest threat to recovery. There are many things that are contributing to the global woes. But low prices are not high on the list.
Since the markets crashed in 2008, central banks around the world have worked feverishly to push up the prices of financial assets and to keep consumer prices rising steadily. They have done so in the official belief that these outcomes are vital ingredients in the recipe for economic growth. The theory is that steady inflation creates demand by inspiring consumers to spend in advance of predictable price increases. (The flip side is that falling prices "deflation," strangles demand by inspiring consumers to defer spending). The benefits of inflation are supposed to be compounded by rising stock and real estate prices, creating a wealth effect for the owners of those assets which subsequently trickles down to the rest of the economy. In other words, seed the economy with money and inflation and watch it grow.
Thus far the banks have been successful in creating the bubbles and keeping inflation positive, but growth has been a no show. The theory says the growth is right around the corner, but like Godot it stubbornly fails to show up. This has been a tough circle for many economists to square.
Two explanations have emerged to explain the failure. Either the model is not functioning (and higher inflation and asset bubbles don't lead to growth) or the stimulus efforts thus far, in the form of zero percent interest rates and quantitative easing, have been too timid. So either the bankers must devise a new plan, or double down on the existing plan. You should know where this is going. The banks are about to go "all in" on inflation.
Despite their much ballyhooed "independence", central bankers have proven that they operate hand in glove with government. They are also subject to all the same political pressures and bureaucratic paralysis. There is an unwritten law in government that when a program doesn't produce a desired outcome, the conclusion is almost never that the program was flawed, but that it was insufficient. Hence governments continually throw good money after bad. The free market discipline of cutting losses simply does not exist in government.
This is where we are with stimulus. Six years of zero percent interest rates and trillions and trillions of new public debt have failed to restore economic health, but our conclusion is that we just haven't given it enough time or effort. My theory is a bit different. Maybe zero percent interest rates and asset bubbles hinder rather than help a real recovery. Maybe they resurrect the zombie of a failed model and prevent something viable and lasting from gaining traction? This is a possibility that no one in power is prepared to consider.
But what if they succeed in getting the inflation, but we never get the growth? What if we are headed toward stagflation, a condition that in the late 1970s gripped the U.S. more tightly than Boogie Fever? It may come as a surprise to the new generation of economists, but high inflation and high unemployment can coexist. In fact, the two were combined in the 70s and 80s to produce "the Misery Index." But according to today's economic thinking, the Index should not be possible. Inflation is supposed to cause growth. If unemployment is high they say there is no demand to push up prices. But it's the monetary expansion that pushes prices up, not the healthy job market.
The tragedy is that if the policy fails to produce real growth, as I am convinced it will, the price will be paid by those elements of society least able to bear it, the poor and the old. Inflation and stagnation mean lost purchasing power. The rich can mitigate the pain with a rising stock portfolio and more modest vacation destinations. But they won't miss a meal. Those subsisting on meager income will be hit the hardest.
Many economists are now trying to make the case that the United States had hit on the right stimulus formula over the past few years and is now reaping the benefit of our bold monetary experimentation. They continue the argument by saying Europe and Japan were too timid to implement adequate stimulus and are now desperately playing catch up. But this theory is false on a variety of fronts. First off, the U.S. is not recovering but decelerating. Annualized GDP in the first half of 2014 has come in at just a shade over one percent, which is lower than all of 2013, which itself was lower than 2012. The unemployment rate is down, but labor participation is at a 36-year low, and wages are stagnant. We have added more than $5 trillion in new public debt, but very little to show for it. We are not the model that other countries should be following but a cautionary tale that should be avoided.
It is also spectacularly wrong to assume that the problems in Europe and Japan can be solved by a little more inflation. Higher prices will just be a heavier burden for European and Japanese consumers, not an elixir that revitalizes their economies. The problems in Europe, Japan and the U.S. all have to do with an oppressive environment for savings, investment, and productivity that is created by artificially low interest rates, intractable budget deficits, restrictive business regulation, antagonistic labor laws, and high taxes. Since none of the governments of these countries have the political will to tackle these problems head on, they simply hope that more monetary magic will do the trick.
So as the Fed, the ECB, the Bank of Japan, and all the other banks that follow suit, push all their chips into the pot and hope that a little more inflation will save us from the abyss, we can wish them luck. It's going to take a miracle.

Thursday, September 11, 2014

Facebook's Valuation Crosses $200 Billion: What Is It Really Worth?

I feel confident that if you handed me a stack of market data combined with the operating statements of a commercial building over the past few years I can provide you a detailed explanation for the building's value.

When it comes to putting a value on Facebook, I have no idea. If you'd like the perspective of someone that has little understanding of the technology sector, here are my thoughts:

The market is gaga over the prospect of social media advertising. I've never been on Facebook, so maybe I do not understand, but are all these people around the world clicking on the advertisements and purchasing products? I have gotten to the point where I completely tune out the advertisements that are on a page.

It seems to me that "page views" have become the new "eyeballs" (the term investors used to measure value during the late 1990's technology bubble). Will companies continue to push more money into online advertising if the economy slows and their revenues fall? It's possible that when companies have to decide where to put cash in a rational manner they may stop to ask how much of the social media advertising is generating real sales for their products. Right?

Anyway, Facebook crossed the $200 billion valuation mark this week. I have no intention of purchasing the stock, and I'll probably look like an idiot when it hits a $400 billion valuation in 6 months.





A Visual Walkthrough Of U.S. Stock Prices Relative To Markets Around The World

Earlier in the week we looked at the relative overvaluation of the U.S. stock market vs. the rest of the world using a wide variety of value metrics. See: How Expensive Are U.S. Stocks Relative To Markets Around The World?

Today we're going to strip out the value metrics and just look at one side of the equation; price. We'll be using charts put together by the excellent financial site; A Wealth Of Common Sense.

A large part of the reason why the U.S. market is relatively overpriced vs. the rest of the world.....is simply because the price has risen far more than other markets (remember price is half the equation). As we know, the average investor is naturally drawn to markets that have recently performed better than others like mosquitoes are drawn to a bug zapper.

The following chart shows the S&P 500 (the U.S. stock market), which has climbed well past its 2007 high and has been rising relentlessly for the better part of three years. It is where everyone in America wants to invest (see How The Home Bias Phenomenon Impacts Investors) and many speculators outside the U.S. want to invest right now.


The next charts show why there is relative value to be found outside the United States; these markets have not risen as relentlessly the past few years and have not crossed back above their 2007 highs.

Emerging Market Stocks:


European Stocks:



Asian Stocks: 



Latin American Stocks:


The direction you believe these markets will move in the future depends on how you think the global economy and financial markets will behave in the years ahead. If you believe the global economy is just beginning to build up speed and will continue to expand in the years ahead, then there is an argument to be made to add positions to markets outside the United States which need to "catch up" in price performance.

If you believe the global economy will slow in the years ahead, you may want to consider exiting a portion of your global stock market portfolio and adding more cash or dry powder for a potential market decline. Under this scenario, in a worldwide sell-off, U.S. stocks would "catch down" to global stock markets and commodities (I am in this camp).

Under either scenario, based on relative value, an investor should not be holding the largest percentage of their stock holdings in U.S. stocks. If you are a momentum chaser, then the U.S. stock market is ideal because it has reached the euphoric blow off stage. If you are a value investor, then you should be exiting the U.S. market as quickly as possible.

The last bonus chart combines commodities and emerging market stocks. As you can see, they have tracked together over the past two decades mainly because emerging market countries are commodity producers and exporters. As commodity prices rise it positively impacts the revenue those countries receive. Click for larger image:

There has been a divergence over the past few months with emerging market stocks performing well while commodities have stagnated or declined.

You can look at this this divergence the same way we did for U.S. stocks vs. the world above. If you believe the global economy will grow at a faster pace in the years ahead, then commodities should "catch up" to the relative out performance of emerging market stocks.

If you believe the global economy will slow, then commodities are ahead of the curve on emerging market stocks which will soon "catch down."

I am somewhere in between. The largest position I continue to add to my portfolio is cash, while I layer in a smaller percentage of extremely sold off and hated commodities (mainly silver, agriculture grains, gold stocks and uranium stocks). My hope is that emerging markets "catch down" so I can use some of the dry powder in cash to enter those markets. The U.S. market is so far away from being even remotely close to undervaluation that there is no need to even pay attention to those stocks unless some enormous market crash brings them back down to earth (that is coming, so don't completely forget about them).

If you live in the United States, do your absolute best to think of the markets as a global financial environment. Do not let your mind wander back into the natural state of home bias.