From Porter Stansberry in The S&A Digest:
As I see it, my job as the head of an independent investment-research company is to always tell you what I would want to know were our roles reversed.
Frequently, though, that presents a big business conflict for me. Often, telling you what I know you ought to hear will upset you or make you angry. Today is one of those times.
I'm certain today's Friday Digest will set a record for number of refunds inspired... You see, nobody likes a bear. And I'm convinced that the market is set to crash in the short term. At the very least, I hope you'll give my reasons a careful read.
Please make sure you understand my argument... Even if you disagree with me and resent me for writing it. Just take the time to think about what I'm saying.
There is no teaching. There is only learning. And what you learn from today's Friday Digest could easily save you a fortune.
"Nobody pays you to be bearish." This is the ultimate truth of the advisory business. Nobody likes a bear. Nobody will hire a bear. Nobody will stay in business with a bear for long – especially not during a raging bull market where stocks seem to hit new highs every day.
Thus... it is with a considerable amount of personal and business risk that I announce... I'm now firmly bearish.
In early June, I warned that stocks would suffer when the Federal Reserve stopped printing money. But my timing was off, because the Fed reconsidered and has continued to print.
Now, with the economy heating up, it seems very likely that the printing will have to stop. March is now the consensus time frame. As a result, stocks are going to fall next year.
It is time to raise cash, tighten stop losses, and wait for much more attractive valuations. My bet is that a lot of selling happens during the first week of January – as that will push capital-gains taxes into the next tax year.
If I'm right about where the market is heading, January should be a terrible month for stocks.
Let me be clear. I'm not equivocating: I believe we are on the verge of a massive rout in stock prices. I see U.S. stocks falling at least 50% in terms of valuation between now and the end of next year. Stocks are going to get crushed.
How do I know?
First, all three of the primary, contrarian market indicators we follow in my Investment Advisory are showing strongly bullish conditions. Things that drive stock prices higher (i.e. credit, capital flows, and sentiment) are all near record highs.
Credit has never been cheaper (record-low risk spreads). Cash into equity mutual funds has never been stronger (money flows). And sentiment has never been more bullish: 19 stocks with a market capitalization of $10 billion-plus are trading for more than 10 times sales. That's the most I've seen since the top of the market in 2000.
You might (rightfully) wonder why I see these hyper-bullish conditions as a negative. You have to remember... our indicators are contrarian.
We know when sentiment is at a bullish peak, it has nowhere to go but down. When credit can't get any cheaper, it's bound to become more expensive sooner or later. And when individuals have already spent their cash reserves on stocks, it's unlikely they'll be able to keep buying at the same pace.
In short, as investing legend Warren Buffett once said, to invest successfully, you must be fearful when others are greedy, and greedy when others are fearful.
You have to know when conditions have become overheated. You have to know when to stand aside.
Without a doubt, this is one of those moments.
It's not only our proprietary indicators that have me worried. U.S. stocks have become very expensive – far more expensive than most people realize. The median price-to-earnings (P/E) ratio on the S&P 500 is now at a record-high level, eclipsing its peak from 2000.
This is important because it speaks to the generally high level of equity prices.
Back in 2000, only a handful of large-cap names traded at huge P/E ratios. That's what pushed the average P/E to nearly 50. But the median P/E never got that high... and is a better reflection of the true, broad price of U.S. stocks.
Other historically reliable gauges of value – like the Shiller P/E – are also at record-high levels – above 25. Likewise, the total stock market capitalization compared with U.S. GDP is also at an all-time high. Now, you might quibble with these measures of value.
Shiller, for example, uses a 10-year-average earnings figure, a number that is unusually low because of the big accounting losses seen in 2009. I'd argue that in nearly every 10-year period, we'll see a similar stretch of earnings losses. Whatever issues there are with the index's make-up, it has been a statistically accurate indicator of future returns.
The same goes for the market-cap-to-GDP figure and the median P/E figure. All of these valuation measures and all of my proprietary indicators tell me the same thing: money put into stocks now, at these high levels, is unlikely to produce a positive return.
The problem with this market isn't just the number of very expensive stocks. There's a bona fide dearth of value. Anyone who expects a significant margin of safety when buying a stock isn't going to find much to look at in today's market.
Investment-research firm Value Line reports the lowest median three- to five-year appreciation potential among all the stocks it covers. According to Value Line, there's less value in the market today than there was in 2000 or 2007.
So what happens when record numbers of expensive stocks and a record lack of value collides with record enthusiasm for stocks and a Fed hell-bent on moving cash into the stock market?
It's not going to be pretty.
Last week, the percentage of investment advisors reporting themselves "bearish" on the market fell to just 14.3% of the Value Line survey – the lowest level seen in the last 25 years.
Looking at the historical record, the only other time when stocks were this expensive and there were so few professional bears was January 1973 – before the market fell 50%.
The only years when sentiment was this overwhelmingly bullish and stocks were almost this expensive were: 1972, 1987, and 2007. Those were very bad times to buy stocks.
Two last points…
One, margin debt at the New York Stock Exchange is now at the highest level in history – at 2.5% of U.S. GDP. The amount borrowed against stocks to buy stocks is now equal to more than 25% of the entire commercial and industrial loans in the U.S. This is an accident waiting to happen.
Two, the pros know exactly what's coming and when it's going to start falling apart: New equity issuance is running at the fastest pace since the 2000 bubble peak. Insiders don't sell when stocks are cheap.
In my view, the margin debt figure guarantees we'll see a crash, not merely a correction. And don't forget, nearly every large investor today is being driven to buy because of the same macro factor – the Fed.
Many investors continue to buy equity securities merely because they know other investors will be driven out of fixed-income due to the Fed's bond-buying program. I'd estimate the Fed is driving at least 75% of individual investors today.
What will happen when the Fed stops? Markets don't handle massive changes in sentiment well because everyone cannot sell at the same time. The combination of record levels of margin debt and so many investors simply following the Fed is going to cause a historic rush for the exits.
Believe me: people will panic. And it won't be a flash crash, either. Make sure you're not waiting until that moment to sell, because there might not be a reasonable bid for your stock.
You may wonder what I'm doing with my own assets…
I'm personally raising cash before the end of the year. Outside of one security that I plan to hold forever, I plan to end the year completely out of the stock market. That leaves me with gold bullion, foreign real estate, farmland, a trophy property in Miami, private equity (my publishing company), and lots of cash.
If my forecast comes true, I will be one of the lucky few investors waiting at the bottom, just like I was back in 2008/2009. I hope you'll join me.
By the way, I plan on updating everyone on this thesis – hopefully before the crash starts to unfold – at our live event in Miami this coming February... And I'll divulge a brand-new way to protect yourself from the imminent collapse.
From February 28 to March 2, we're hosting our inaugural Stansberry Society event. Stansberry Society is a new business I started this year so our subscribers could get together a few times a year to mingle and share ideas... Plus, we'll invite our top analysts and several world-class guests to present.
It will be like the "TED" talks... The presentations will be high-quality, the ideas we share will be groundbreaking... But the information and the speakers are focused on ideas that you can use to improve your life (unlike TED).
We've just confirmed our keynote speaker for Miami... And I couldn't be more thrilled. I can't believe this person actually agreed to speak. I can't tell you the name, but I guarantee you've heard of this person. This person is one of the most controversial people in the entire world. In my opinion, this is the perfect speaker for our first Stansberry Society gathering.
In addition to Miami, we also have events planned for Dallas, Los Angeles, and Nashville... And if you sign up for Stansberry Society, you'll get VIP access to all four events. We're planning gala dinners and activities around each event that are only available to our VIP members.
If you'd like to learn more about Stansberry Society, or you've been considering signing up, I'd urge you to act quickly...
Crux note: We understand full membership in Stansberry Society – normally priced at $10,000 – is not for everyone... but that doesn't mean you can't benefit from Porter's best advice...
If you aren't already reading every issue of Porter's flagship letter, Stansberry's Investment Advisory, we encourage you to start. At just $49.50 for one full year (or just $69 for two full years) with a four-month, 100% money-back guarantee, we've made it affordable for every budget. Click here to get started.
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More from Porter:
Porter Stansberry: What to do with your best stocks in a market crash