HEDGING
Transcript:
David Scranton: Question is, did February deliver the knockout punch or does this bull market have a few more rounds left in it? That is the question that everyone is asking as the market continues to stagger following last month’s ten percent correction. So, will Wall Street get its legs back or will it be down for the count in the very near future and more importantly, how does that uncertainty impact you and your money? It’s time once again to tune out the hype and focus on the facts. Facts that matter to you, the income generation.
So just when it looked like the stock market was going to fully rebound for that historic week-long plunge in February, it didn’t. Yes, it regains some losses but since then it’s been one many sell off after another with everything from inflation, to the Federal Reserve to President Trump seeming to spook investors. You know, there are several different ways to interpret all this to prepare for what might come next and that’s exactly what we’ll be doing on Today show. Helping me today will be renowned options expert John Najarian and Dr. Mark Farber author of the popular Gloom Boom and Doom report, but first, let’s take a closer look at what’s up with Wall Street and what might happen next.
February was one of Wall Street’s wildest month since two thousand and eight first the Dow plunged more than thirty-two hundred points, twelve percent in just two weeks starting, yes, on the Groundhog Day. Then stocks bounced back to life recovery about three quarters of those losses at their highest point but then volatility remained high for the next several weeks then the final days of the month bigger drama. The Dow dropped another six hundred eighty points leaving it down about sixteen hundred points from the record high in late January, in the end all the major indices finished February lower with the S&P 500 the Dow Jones Industrial Average having the worst monthly performances since January 2016. The Nasdaq posted its weakest month since October 2016 and frankly, I was a little bit surprised by how the month ended and you know it takes a lot to surprise me these days when it comes to the financial markets but coming off its second-best January in history and following a record year, I would have thought that momentum alone was strong enough to ensure a stable recovery. My initial belief was that we’d have another six to twelve months of an upward market I would call the market to blow off before steep long-lasting correction to a cold. But after February I am no longer so sure about that prediction. If you watch the show for a while you know I firmly believe that a major correction is coming.
According to the lessons of market history, it’s long overdue. But timing it has been challenging because the unprecedented levels of artificial stimulus we have injected into the economy since the fiscal crisis. The overuse of quantitative easing has altered some economic fundamentals and so far, managed to delay the course of history but I’m convinced that it won’t be able to change the course of history, yes, that major drop will come but the pressing question for everyday investors right now Is, has it already started. To try to answer that question let’s look at the two basic approaches that analysts use to determine whether a stock should be bought or sold. The first is technical analysis and the second is fundamental analysis. You see with technical analysis you’re looking mainly at charts and graphs to determine market performance economic trends at all the relevant data. The theory is that all of market sentiment is baked into the cake of a chart and with a clear understanding of where the market sentiment stands and by being able to interpret these charts you’re better able to forecast where it’s going in the future. Although you need extensive training in technical analysis to really interpret these market graphs and become an expert, anyone can recognize certain patterns if there are obvious enough. For example, it isn’t too difficult to spot a pattern of chaos like what we’ve seen today and, in the months and weeks, just before the 2007-2009 crash.
Let’s talk now for a moment about the second type which is fundamental analysis. Fundamental analysis is what’s considered as traditional analysis. They look beyond the charts and graphs and focus on the data that might be influencing the market sentiment specifically they look at three types of financial statements that every company must share: their balance sheets, their income statement, and their cash flow statement. By using data, the statements, they examine a company closely and compare it to its competitors within its industry. They can also do a year over year comparison of the financials of a particular company to see how it’s trending for example fundamentalists look at things such as each company’s price to earnings ratios and compare those ratios to P. E. Ratios of other competitors within the industry. You can also look at average P. E. Ratios of the stock market overall to determine if they’re on the higher or a lower end of the historical at range. So, let’s focus for a moment on this one important piece of data used by fundamental analysts and see what it might tell us about the state of the markets right now.
There actually has been very little argument lately among experts and for some time now that stock prices are overvalued in relation to corporate earnings. You’ve heard me discussed many times the need for markets to make fundamental sense at some point again in the future and that comment has a lot to do with P. E. Ratios being fundamentally out of whack. Consider for a moment that the stock market grew by about twenty percent in two thousand and seventeen walk corporate earnings and G.D.P. growth for the year according to the Bureau of Economic analysts was just 2.3%. Given that disparity, the trailing P. E. Ratio for the S&P 500 right now is about twenty-two times earnings and as I’ve explained before these are only two potential ways that the markets can make fundamental sense again when P. E. Ratios are high. The first is that corporate profits can quickly catch up with overinflated stock prices. Now, this hardly ever happens. The second is that prices can trim back down to align with profits and that’s exactly what’s happening when markets experience a major sustained pullback. In other words, fundamental analysts would read high P. E. Ratios as a potential warning sign that the markets are irrational and they’re fundamentally in need of a major correction. To make sense again from a historical perspective that conclusion has proven to be consistently accurate. I’ll talk a lot more about that in just a bit and about another index for measuring P. E. Ratios that sounding even a louder alarm about the stock market right now than all the other fundamental and analysis methods put together. But again, the more important question for you is this, has the next major sustained pullback already started or, at the very least, could the market’s persistent unrest since early February be a sign that it’s about to?
Well, no matter how you approach the data no one can know the answer for certain, of course, but as of now I believe there’s enough evidence pointing to that possibility that investors should take note and probably take some type of action. Even if you’re an aggressive investor and you feel comfortable gambling that the market’s going to find its legs again and go on fighting for another six to twelve months, I would say at the very least you should consider hedging your stock market positions. We’ll talk a lot more about hedging later in the show. Right now, let’s welcome back our good friend Jon Najarian and he is a man we always feel fortunate to have when talking about the financial markets. Jon Najarian started his career as an options trader at the C.B.O.E. 1981 following a stint as a pro football player with the Chicago Bears. Jon his brother Pete are the co-founders of optionMonster.com a provider of market intelligence commentary and strategies he’s a regular on C.B.C. fast money and is always in demand as a speaker and market analyst. Jon welcome back to the show it’s good to have you.
Jon Najarian: Great to be with you David. Thanks for having me back
David Scranton: So, tell me, what’s your take on what’s happened with the stock market, starting on Groundhog Day of this year?
Jon Najarian: Well yeah it seems that the market really had gotten ahead of itself in January David I know you’ve said that and other astute market watchers have said that trees don’t grow out of the sky. You don’t just put on one hundred points on the Dow Jones Industrials every single day for a month straight which is what we did, and you haven’t had any corrections of any significance in years. So, we were due for some volatility. Boy did we get it in spades and then we had a bunch of reasons like for instance the departure of Gary Cohen and other things that have happened recently tariffs and the like that have sort of given investors pause all say.
David Scranton: So, I know you talk about January but even if you look back throughout all of 2017, being 20% plus year thirty percent of what the index are quoting. You know the question is how much of these drops how much is volatility that occurred in February really came from the new days or is it just as you said the market getting out over its schemes over the last maybe even more than a year and these particular Newsworthy items are really just an excuse for the market drop by the Monday morning quarterbacks.
Jon Najarian: Well think it was that the market was very robust and very strong and a lot of that I give credit to President Trump and some of the rollback in regulations obviously continued low-interest rates but that, David, is what changed on Groundhog’s Day as you’re saying, because all the sudden we saw a big jump in interest rates. When you’re talking about rates that back in November were two twenty-five for the ten-year rate and all the sudden it touches two ninety very quickly in February that was a wakeup call for the market. All the sudden I can make almost three percent on a ten year instead of two and a quarter. That’s a little bit more of a draw of capital away from the stock market. It doesn’t mean everybody should leave but that was a wakeup call I think for investors.
David Scranton: But, what do you think was different then? We saw seventy-five or eighty basis points jump in a month or six weeks right after the election, but it was hardly a heck up on the stock market or the bond market. Suddenly, this time a sixty basis points jump. It really affected both stock and bond markets so why do you feel it was different this time from maybe fourteen months before.
Jon Najarian: I think fourteen months before we still had the Fed that was basically at zero interest rates, and since then they’ve moved now five times. I mean they’ve taken the Fed funds rate up to you know over one percent and I think David, that tells me that when we pull back we can’t pull back as far because when the interest rates were zero you could pull all the way back towards zero and we’d seen not the ten years, but we’d seen the short-term rates do exactly that. Now when we pull back we’re pulling back towards that one or one and a quarter that’s as far as we can go so I think that’s why the market just can’t fight the Fed as much now at one and a quarter percent rates as it could when the rates were zero.
David Scranton: So, it sounds like you’re saying that you know you thought that it was the markets seem to think that was more of a temporary thing after the election because short-term rates were below it and supporting it but now that short-term rates are supporting it the markets are saying uh-oh this is permanent, not temporary. So, we take quick commercial break we come back John I want to ask a little bit about how that affects stock market valuations and what your anticipation is of the month coming up in terms of market volatility. So, you stay with us also We’ll be right back with a lot more in terms of words of wisdom from my good friend Jon Najarian. Will be right back. And watching our show for a while you may recall the episode in which we spoke with Nobel Prize-winning economist Robert Shiller. Dr. Shiller is best known for his creation of the cyclically adjusted price to earnings ratio or the CAPE Index which has become an essential measuring tool for many market analysts the CAPE offers a more telling picture of P. E. Ratios because it adjusts for inflation and uses ten years of earnings data to determine a company’s relative earnings to its relative stock price. The point of this approach is to smooth out the data by adjusting for inflation as well as any cyclical patterns over time. as with more fundamental approaches to measuring P. E. Ratios higher readings on the CAPE index are a potential warning sign that the market just, might be fundamentally overvalued and due for a correction the higher the readings the more out of whack the markets are and the bigger the possible impending pullback in addition to its real-time use through the CAPE has been used to measure the status of P. E. Ratios to stock market history.
With that in mind every day, investors should be aware that the CAPE is currently at 33.4 on the S&P 500 this is a tie a point since before the October 1929 crash that spawned the Great Depression. The only other time it’s come close to that was just before the bursting of the dot-com bubble in the year two thousand, in other words, according to the CAPE index the market isn’t just overvalued right now it’s dangerously overvalued and standing roughly where stood right on the brink of two historic market crashes and as you know I put a lot of stock, no pun intended, in the value of history as a forecasting tool so allow me to share another important historical point about the current status of price-earnings ratios to consider alongside the CAPE index.
Historically before the end of every long-term secular bear market cycle like the one that I believe we are still in price-earnings ratios have always shrunken back down into the single digits. Earlier I noted that at present the average P. E. Ratio for the S&P 500 around twenty-two which is obviously nowhere near the single digits and to me that’s unmistakable evidence that the long-term secular bear cycle that begins the year 2000, still has several years and at least one more major market correction to go before it’s over and again I believe historical precedence will win out even though the market has appeared to be in recovery since 2013. Thanks especially to the influences in impacts of this artificial influence we call quantitative easing. In looking at both the technical and fundamental evidence I’m expecting a drop of at least forty percent and a drop that could possibly be as steep as seventy percent to forty percent would guess below what technical analysts would call our previous resistance level according to all the chart data but for P. E. ratios to get back down to single digits and to make the fundamentalists happy we’d be close to it. 70% drop from where we are today. You could read the minimum drop again as a forecast based on technical data and 70% is a forecast based upon fundamental, data. But either way, the outcome could be devastating for investors who get caught in the downdraft especially those who are retired or within ten years of retirement. So, the bottom line is simple even if you are an aggressive investor willing to gamble that this 40 to 70 correction is still six to twelve months away I would still recommend that you do something to mitigate your risk, perhaps in the form of hedging. Now if you’re retired or within ten years of retirement and you’re hedging instead of selling I would urge you consider that you’re still taking risks that you probably can’t afford to take. But again, if you have money that you won’t need for income for many years out and you want to take that chance then the choice is yours, but at bare minimum do something to protect your downside i.e., hedging. We’ll talk specifically about different ways you can hedge, coming up in just a bit. First, let’s welcome back John the Gerry and John thanks for sticking around.
Jon Najarian: Great to be back.
David Scranton: Well glad to have you as usual and I know we last week’s show we talked about this and I know you saw it so I know that you have you know you sit home every Sunday morning and you watch our show here on Newsmax. But, we talked about the fact that it’s funny because everyone talks about how interest rate increases affect the bond market, but in some ways in trade increases have as much of an impact on the stock market has the bond market because the stock market is really a discounted future earnings flow. So, what do you think this interest rate trend means for the stock market over the next few years?
Jon Najarian: Well what I’ve like to say David is that it’s the acceleration or the speed the velocity of interest rate increases. We all know that there the Fed is going to be increasing rates unless something bad happens which obviously none of us are rooting for that. But when we see that big jump you said after the election that we had that sixty or seventy basis point jump in the ten years you’re one 100% right it happened very quickly again from November of two thousand and seventeen till basically the first week in February and it’s those quick moves that startled the markets. I think overall, it’s undeniable that interest rates are going higher, but I think if they go higher at a slow and measured pace I think that’s something the market will tolerate. the market won’t tolerate it if they go up quickly.
David Scranton: Yet it’s interesting because the Federal Reserve I believe they’re smart enough that they’re not going to have quick short term in hikes in interest rates, but the long-term rates stimulated by the markets you just don’t know, and this one we had in the past month was obviously just the bond market itself reacting quickly. So I guess the question is.
Jon Najarian: Right, that’s why we watch it.
David Scranton: Of course, and John I guess the question then is, what it does to investors psychologically? A football team with an office of coordinator no defensive coordinator doesn’t make a very good football team right well the problem is a lot of investors over the last year seem to forget about defense. It’s almost like defense doesn’t matter. We’re just going to get the ball we’re to throw it down the field every score a touchdown every time don’t worry about defense. So, were they unprepared for this market pullback? Are they unprepared now? What are your thoughts about that?
Jon Najarian: Well, we all saw in the Super Bowl that Tom Brady scored as often as you could possibly score in that game through for five hundred yards and they still lost so to your point you do have to be able to do something more than just score frequently you do have to have a defense. So, to take it back to the stock market, I think a lot of people could just have thrown money at the market in 2017 and they were going to be up twenty percent or more unless they just really picked the dogs that were out there. They could do much better than that of course if they picked the right stocks, however, I think that kind of spoils people they think, “Oh! Anybody can do this. What do I need to pay David for? What do I need to pay Jon for, if I can just throw money at the stock market and make 20%?” That, changed, in February. Now there’s a lot more demand for people to get a little help whether its defensive help or whether it’s advice that it’s a clever idea to take a little off the table here and look for another spot for some of these assets.
David Scranton: Well you heard me say don’t try this at home and that’s exactly the point here, do you think the volatility is going to stay, at this higher level throughout the rest of 2018 as an as a best guess, I mean? And I know you don’t have a crystal ball but what are your thoughts on that.
Jon Najarian: No, I don’t think it’s going to stay. high I do think that if we see that acceleration that you and I talked about just a moment ago, if the velocity of change in interest rates is high, then we’ll see high and high volatility as well. If we don’t then I think we won’t be as low as we were in 2017 which was I think the lowest year on record for volatility, but I do think volatility will be more in that fourteen to sixteen range and not in the mid twenty’s that we just saw a week ago for the VIX
David Scranton: In twenty seconds or less, do you think the market has more downside throughout the year of eighteen or more upside at this point?
Jon Najarian: I think. Got more upside in 2018 I think that when Joes and Janes start cashing those bigger checks from the tax cuts I think that will be a driver as well as corporate profits David.
David Scranton: That was my opinion beginning of February when the draw first started in. Hopefully, you’re right Jon. So, stick with us for one more segment. Again, even if you personally believe that the stock market may have six to twelve months ahead of us enough legs to last that long and maybe go up another 10 or even 15%. I strongly recommend having some, kind of protection strategy defense, in place and there are several different ways that you can hedge against losses but let’s talk about some of the most common ways. First, you can watch the markets daily and keep one finger on the trigger so to speak and that, of course, requires diligence but you still only guessing as to what the daily fluctuations might indicate. A problem though is that it enables an individual to make emotional decisions that could be badly timed Plus it can be especially nerve-wracking in a period of high volatility like what we’re seeing right now. But I know that some people enjoy that kind of drama so if that’s you and you enjoy that type of drama that this might indeed be a viable way to hedge just so long as you’re not gambling with life savings or savings that you’re going to need in the short term.
But you can also hedge a little bit more scientifically. For example, you can hedge by diversifying into stocks that don’t correlate as much with the overall stock market they don’t have to be foreign stocks per se just equities that don’t correlate as closely with the overall U.S. market and therefore a less likely to take as big of a hit when the next major market correction hits. Next, you could have by doing something called trading a stop loss. To put it simply that means you put in a standing order with your broker that a stock drops below a certain price that you want to sell it for example if a stock’s currently worth twenty-five dollars a share you might want to put a stop loss that ensures it gets sold if it drops below twenty-one dollars. That takes the emotion out of it and helps you. Minimize that loss but be aware though that it’s not a perfect hedging strategy. The trouble with a stop loss order is that the market can drop fast and furious that stop-loss orders are not the highest priority when trade orders are getting filled regular market orders get filled first and sometimes stop loss orders end up not being executed simply because they’re the low man on the totem pole. Theoretically through a stop loss provide you some hedging protection on the sell side. Now in a similar way you can is to limit orders to protect yourself on the buy side when you’re entering the market as you can probably guess that’s to buy stock at a specified price or cheaper. This at least helps you adhere to the first basic rule of investing buy low but again like stop-loss orders, a limit order is not the top priority and might not get filled the next strategy I want to tee up before I talk more about it with Jon Najarian is options.
Options trading is a specialty and our guest today is a specialist in it so I want to leave plenty of time for him to share his expertise very basically though there are two different kinds of options trading First you can buy a put option the owner of a put has the right but not the obligation, in other words has the option to sell a stock at a specified price by a pre-determined date to a specified buyer. The name comes from the fact that the owner has the right to put up for sale the stock or the index for example. If you own a stock worth $25 a share the options price for example might be twenty dollars a share that means that if the value the stock drops below twenty dollars for a share you can force someone to buy it from you at twenty dollars so the put option hedges your downside or you can do something called Writing a call option. That gives another investor the right but not the obligation to buy a stock from you at a specified price within a specified time. The name comes from the fact that he must call in his order to buy the stock from you at a certain price. So obviously a call option doesn’t protect your downside as much as a put option per se but by writing a call option it increases the income you receive because you’re selling the option to that other investor so if that major drop does hit your increased income at least softens the blow of the capital losses.
Again, I can’t stress enough that none of these techniques are foolproof and you probably shouldn’t be trying them with any money you’re going to need within next ten years. If you have money that you need the next ten years you’re probably better off just simply selling, liquidating, take your winnings off the table, and not letting greed get in the way. You also really must know what you’re doing or have someone who does it in charge of executing these hedging strategies on your behalf. The bottom line is always like to say is that if you don’t have the right expertise or experience ‘Don’t Try This At Home’. Speaking of experience and expertise let’s welcome back Jon Najarian. So, Jon, you know what you think for most investors then in two thousand eight hundred you think it’s more of. You know running the ball three yards four yards and that’s it or you think more and more of it’s you know passing the ball of all fifteen twenty yards down the field trying to get the first down all in one fell swoop.
Jon Najarian: Well I think they’ll be a lot of the latter because of M & A, David. So, in other words, we’ve seen this year already several big deals announced I mean Cigna going after Express Scripts sixty-seven billion dollars deal. I’m not saying the law will be that size, but I think you’ll see those kinds of jumps out of the companies that are being acquired so to your point to me that’s more like throwing the ball downfield. I think for a lot of stocks though like Apple I think it’ll be you know three yards in a cloud of dust I think they just keep thumping away and going small moves higher for a lot of the Dow Jones Industrial stocks.
David Scranton: So let’s talk about hedging then you know I like I said I was thinking that we’re going to have more of a blow throughout this year or maybe even two thousand one hundred when the first pullback happened after Groundhog Day As I said and then I was starting to question that a little bit more so let’s say that people watch my shows so they kind of agree there’s a great chance that it’s that we’re going to have more of this uptick but they want to be cautious they want to hedge What’s the best way today for you to recommend people hedge with the volatility stop losses or options or the options to expensive.
Jon Najarian: I’m always going to say options David kind of lucky my question I know because you’re a smart host but yeah, I’m going to say options and I’m probably going to say options on S & P 500, those would be puts. So with people with exposure to the market that have stocks that are S & P 500 or S & P 500 like stocks then I’m going to buy some out of the money puts in the S & P 500 just in case. I think for the same reason you want that kind of insurance on your car or your house and just like the insurance on those, you hope that you don’t crash your car and that those puts go worthless I don’t want to root for those puts to explode I want to root for him to go out worthless so I think the market continues to grind higher but I’d like to have a little protection that would be in my head.
David Scranton: So, you know what your best guess is if you are hedging in a blanket way with S & P 500 today how far out would you go and what percentage below current market value would you put your strike price, just give us give us some feel for that?
Jon Najarian: Sure, I would and I routinely do this for customers I would or our team does technically I don’t but we buy usually two to five percent out of the money puts that are usually two to three months into the future so in other words if we’re talking here in March I’m usually picking something that’s more like a June timeframe May or June and I’m picking several strikes out of the money in the S & P 500. They’re cheaper than and the time decay is going to be very slow on something like that the nearer-term options look cheap but they’re really a lot more. Expensive if you figure how many times over the course of the year that you must buy them.
David Scranton: Yeah I guess if you get bigger if you get a bigger pullback the options now in the money, you could always turn around and sell that create again at that point too so there are ways to hedge and you could flip it into a great, way to be speculative and make money so that’s all that’s all good news and Jon we have to leave it there, for now, I appreciate you being with us again today all right you know it’s more saying that time really does fly with you having fun so Jon thank you.
Jon Najarian: Thank you, David.
David Scranton: And you stay with us also we’re right back in just a bit with our next guest Dr. Doom himself Marc Faber. Stick around. We’ve discussed the options trading is a hedge against the possibility that a major market correction is at hand but of course there’s another option and that is this. To use this time when the warning signs are mounting, as a motivation to make the shift from growth-based investing to income-based investing. If you’re retired or within ten years of retirement I believe you should be making that shift anyway. In the spring of 2017 the market had at one point its worst week in four years, all the major market indices losing between four and six percent and yes months of volatility follow this but one of the Wall Street cheerleaders do they ignore the growing warning signs and the irrational exuberance continued in the markets.
In October 2007 in my personal newsletter to my clients I called attention to the warning signs and encouraged clients to use those warning signs as motivation to lower their risk if they hadn’t yet done so already of course you already know what happened next the market peaked on October ninth and weeks of volatility followed before it went to a two year plunge that reached nearly sixty percent many investors who hadn’t reduce their risk were wiped out which some even having to postpone retirement or come out of retirement and go back to work and finally since we’ve talked so much about P. E. Ratios today I’d like to reiterate this point. If the current market really is recovered from the secular bear it would be the first secular bear market cycle in history to have accomplished that feat before price to earnings ratio so shrunken back down into the single digits. It would hold a spot in the Guinness Book of World Records as the first such secular bear cycle to have done so in the way it would also have two other spots in the book as a the shortest cycle in history and be the first to recover with fewer than at least three major corrections and market drops within it so if you’re still feeling the pressure to ignore the evidence and hang in there ask yourself what are the odds of anyone or anything setting three Guinness Book World Records? The answer, of course, is quite slim.
Now it’s time to welcome my next guest Dr. Marc Faber publishes the widely read monthly investment newsletter entitled The Gloom Boom and Doom Report and as widely known himself as Dr. Doom he’s the author of several books including the bestseller morals gold Asia’s Age of Discovery He’s a popular speaker and a regular contributor to leading financial publications around the world. Dr. Faber, welcome to the show.
Marc Faber: Thank you very much for having me.
David Scranton: So, your approach to investing has been described by many as being contrarian. Where do you think that definition is accurate and where do you think perhaps it’s not?
Marc Faber: I think. Some extent. Well, it thinks yes, it is accurate to some extent, in the sense that I’m always looking for areas in the market that are neglected, and I am avoiding popular things.
David Scranton: You know that you know you have a little bit of a reputation by some you know the doctor does moniker by some as being a bear. Were you predicting this volatility that we started to see starting on February second did you, did you see that coming? And if so, why did you think it was going to happen?
Marc Faber: Well I mean we had an extended period of extremely low volatilely. I mean the S & P went up for more than two years, from February 10, 2016, to the end of January with never more than a 3% correction.
David Scranton: What do you think coming up now, do you see this ten percent was enough to kind of shake off all the people were perhaps too aggressive or too bullish and maybe now we ended the year higher or do you think this is just the beginning of a lot more to come to a lot more serious stuff to come in 2018?
Marc Faber: Well that many factors that will influence prices but one thing I have to point out. The market celebrated two days ago the ninth anniversary of the low on March 6, 2009 when the S &P sold off it became oversold and reached six hundred sixty-six. Now we went to do so as an eight hundred seventy-two again in a blow off but this time on the bullish side so we became very oversold
David Scranton: So, it’s like a mirror image remind you at all of maybe what we saw in early two thousand or what we saw in late two thousand and seven. Are you drawing any comparisons to those times or is it just me?
Marc Faber: And no, it’s not just you I think to say I was and. Was a top in the market mostly for technology stocks and at that time as you may remember some basic industries and commodities like oil and precious metals they bottomed out so when the technology bubble burst. The stocks came up. Like mining companies they didn’t go up, but they didn’t go down. But later, they went up very strongly off after 2003 and so I believe that we are at that juncture where all asset the markets may come under pressure because it’s not just a bubble in equities, we have a bubble in bonds more so than probably in equities.
David Scranton: In fact, Dr Faber, we talked about that a lot on last week’s show the bond market interest rate hike Mark we need to leave it there for just a minute. We’re taking a commercial break. We’ll be right back with a lot more from Dr. Marc Faber. Stay with us.
David Scranton: Welcome back to the Income Generation I’m David Scranton here with Dr. Marc Faber. Thanks for sticking around. Right before the break you were talking about the bond market and interest rates and that’s a great point. Last week’s show was on that. But you know, everyone’s talking about how interest rate is going to affect the bond market. Again, is it just me or interest rate should affect the stock market adversely, just as badly as the bond market? Why is nobody talking about that?
Marc Faber: Yes, I think that’s a crucial point. Personally, as of today I would rather go along the ten years Treasury note that yields 2.85% than go along with the S & P because it depends on your outlook for the economy. My outlook for the economy is in June of this year the expansion it will be nine years old. This is, by the historical standards, among three longest expansions that the US ever had. We’ve been expanding at a modest pace but it’s being driven by a not so modest, expansion and money printing and that is not sustainable in the long run. So I think the economy will actually disappoint and then the stock market will be more vulnerable than the bond market. I think the bond market may be rebound. We most likely will not see new lows in the ten years. The lows were in 2016 at one point 3,7%. That is unlikely to happen, but I think we can be rebound and I think stocks are as you say if I’m wrong and if interest rates go up, I think stocks will be very vulnerable.
David Scranton: So, in that in the one minute we have left what has to happen in the stock market for you to become bullish again.do P.E Ratios have to get to a more reasonable level? Talk to us about that.
Marc Faber: Yes, I think I like to buy stocks and I did so, I like to buy stock, and I did so after a decline that was major like 2000 March was the peak, the low was in October 2002 and March 2003. March 2003, we had one condition fulfilled, the lengths of the bear market were essentially two years say 2007 a peak and then we went down like in March 2009 we were also down for two years and we were down like in 2000-2003 by almost 33%
David Scranton: In ten seconds or less tell us does it have to be down 20%, 30%, 40% what’s the number that gets Dr. Faber to be bullish again?
Marc Faber: What I think in the case of the U.S. minimum certain 30%.
David Scranton: 70%
Marc Faber: Thirty minimum.
David Scranton: Oh good, I’m glad you corrected mine in my middle numbers. Forty years of thirty-five are we need to leave it there for now. Dr Faber, thank you so much for being on the show and you stay with us too. We’ll be right back. We’ll wrap everything up put a bow on it and just a minute. I’d like to thank both of our guests for joining us here for another episode of the Income Generation. More importantly, I would like to think you, our new and returning viewers. you know is little doubt that the stock market may have turned a crucial corner in February a ten percent correction and ongoing volatility are certainly a change from the relative smooth sailing in all those steady gains we saw throughout most of last year and on into this January but please let’s keep in mind that what’s happening now makes fundamentally more sense than last year’s 20% market increase based upon hope and optimism. Yes, the markets have finally started to reflect reality again including the fact that stocks are significantly overvalued relative to corporate earnings as we saw a moment ago according to the Shiller CAPE index the market is dangerously overvalued.
There’s plenty of other evidence, both technical and fundamental, to suggest that the third major correction of our current secular bear market cycle might be at hand. If you trust the evidence then please, please, please, use it as motivation to reduce your market risk and to make the shift from growth to income-based investing. If you’re still skeptical and think the market may stand a feature of the six to twelve months, then once again for the last time at very least consider some sort of hedging approach or more accurately relying on a trusted qualified expert to hedge for you. Just keep two things in mind: number one, no hedging method is foolproof and, if you’re retired or within ten years of retirement, again I believe that you’re still taking unnecessary risk by hedging instead of just selling and taking your winnings off the table. Because again, history tells us that a third major correction of somewhere between 40% and 70% is destined to happen and right now a lot of evidence is suggesting that it may happen sooner rather than later.
Thanks for watching and if you’re close to retirement and you really want to know how to protect and maximize your money it’s essential that you stay informed and up to date. Right here is where you can do it on the Income Generation. I’m David Scranton. Thanks again and we’ll see you next week. If you’re near or in retirement head over to theincomegeneration.com and download your special report written specifically for the needs of the Income Generation again, those with born before 1966. I’m David Scranton and you’ve been watching the Income Generation. Well, see you all next Sunday.
