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How dead investors beat the market

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From Bill Bonner, Editor, Bill Bonner’s Diary:

BALTIMORE – The stock market got a healthy bounce to start the week. Where it goes from here is anyone’s guess.

But you don’t have to guess. Because you don’t make money in the stock market from short-term moves. You’ll guess wrong as often as right, and you’ll end up getting nowhere.

It’s the big, long-term moves that make a difference. And the trouble is, sometimes, those moves last longer than we do.

Timing for Dummies

Our “Timing for Dummies” model calls for buying stocks when you can get the Dow for less than five ounces of gold (it’s currently about 20)… and selling stocks when the price goes over 15 ounces of gold.

Otherwise, you just wait. In gold.

Over the last hundred years, you would have multiplied your real wealth – measured in gold – more than 58 times (three round trips from five to 15).

As we saw last week, stocks are greatly overrated. You could have bought the whole Dow in 1928 for 10 ounces of gold. Then, you could have used those same 10 ounces to buy the Dow stocks again in 2013. The total real capital gain over 85 years: zero.

In other words, don’t expect any capital gains from stocks at all. What you can expect are dividends. But dividends are subject to income taxation.

In Baltimore, for example, federal, city, and state taxes together come to about 50%. So, if your stock pays a 2% dividend, you end up with a big, fat 1% net annual return.

And roughly half the time, your Dow stocks will be worth less than the cash (10 ounces of gold, on average) you paid for them.

In other words, your dividends will disappear in capital losses approximately one year out of every two.

Over the last 20 years, readers, colleagues, analysts, and family members have criticized us for “missing out” on the biggest stock boom in history.

But guess what. During that period, gold has done better than the S&P 500, even when you account for dividend reinvestment – without the risk.

Standout Winners

People think they need to invest. They see ads with couples smiling approvingly at their statements. They think they will be chumps and losers if they’re not on top of their portfolios.

But a study carried out a few years ago showed that the best investors were, in fact, those who were least on top of the situation.

Looking at the performance of its clients’ accounts, asset manager Fidelity discovered what looked like a group of standout winners. These investors consistently beat the averages.

What was their secret? What can we tell our other customers, Fidelity wondered?

Well, the secret was that the best investors were dead. Their accounts just sat there, still open but inactive, accumulating and reinvesting gains.

Everybody wants better performance, but it’s a rare investor who will jump in the grave to get it. And it’s unnecessary.

What this shows us is that active investing doesn’t really pay off at all. Not for most people. Unless you are very lucky, or well-advised, you’ll end up losing money.

Choosing stocks… trading in and out… making investment decisions – rare is the investor who makes it work. And why should it work out for them?

Investing is part of the win-win world of life. You get, more or less, not what you want or what you expect… but what you deserve. And what you deserve to get depends on what you give… what you put into it.

A full-time, serious analyst – like our own Chris Mayer, for example – might earn a slightly higher-than-average return. But whence will come his profits? That is, if he makes more than average, someone else must make less. So who’s the loser?

Easy, peasy… it is the random, mom-and-pop, momo-following, CNBC-watching, ETF-buying, live amateur!

Over the Long Run

That amateur watches the news. He hears that stocks “always go up over the long run.” And he looks back and sees proof – a huge run-up in the stock market over the last 36 years.

What he doesn’t know is that most of that gain is counterfeit. It was caused not by organic growth in sales and profits (the things that make businesses worth owning), but by inflation in the capital markets. The Fed pumped in $4 trillion; it went into stocks and bonds.

That flim-flam is at the heart of today’s economy and markets. Take away the $4 trillion of fake money… and the fake interest rates of the last 10 years… and the whole shebang would look completely different.

If you look at actual company earnings, for example – based on IRS filings – you find that U.S. corporations are earning not a penny more today than they did in 2006… and considerably less than they did in the last four years of the Obama administration.

Earnings per share have gone up, however, because corporations have used cheap credit to buy back their shares, thus reducing the number of stocks outstanding.

This makes the individual shares more valuable (there are fewer of them divvying up the profits). But it has the pernicious consequence of leaving corporate America with about 50% more debt – over $9 trillion of it.

That is, it leaves U.S. companies weaker than before, not stronger. They are now more vulnerable to the interest rate cycle… which seems to have turned against them.

And now, they will suffer more from President T’s cavalier tax cut and spending increases, which doubled the U.S. borrowing requirement and pushed up interest rates further and faster than before.

The combination of higher debt and higher rates will hit corporate earnings hard. Even before the yield on the 10-year T-bond reaches 4%, we predict investors will wish they had sold stocks and bonds… and bought gold.

More to come…

Regards,

Bill

P.S. 

Before you go, we’d like to remind you about an event tonight. At 8 p.m. Eastern time, we’ll be appearing on a free webinar along with Casey Research founder Doug Casey and Palm Beach Research Group founder Mark Ford.

You see, we’ve been working on a project with Doug and Mark for some time… And we’re finally ready to reveal it to our readers. We can’t give away too much right now, but you can hear everything for yourself by saving a spot right here. We’ll speak with you later.


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Stocks

Charts show steady investor optimism, more upside for stocks

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The stock market rally that began 2019 has not yet run its course, even with Tuesday’s Washington-induced surge, CNBC’s Jim Cramer said after consulting with technician Carley Garner.

“The signs suggest that this market can have more upside before the rally exhausts itself,” Cramer recapped on “Mad Money.” “Eventually the market will become too optimistic and stocks will peak, but we’re not there yet.”

Garner, the co-founder of DeCarley Trading and author of Higher Probability Commodity Trading, has an impressive track record. In mid-December, one week before the Christmas Eve collapse and subsequent rebound, she told Cramer that pessimism was peaking and stocks were due for a bounce.

But now that the S&P 500 has gained over 15 percent since those midwinter lows, it’s worth wondering the reverse: what if optimism is approaching its peak?

Lucky for Wall Street, Garner says it’s not. She called attention to CNN’s Fear and Greed index, which uses a variety of inputs to measure what CNN sees as investors’ chief emotional drivers.

Right now, the index sits at 67 out of 100, signaling more greed than fear, but still “a far cry from the extreme levels where you need to start worrying,” Cramer explained. When the major averages peaked going into the fourth quarter of 2018, the index hit 90, and according to Garner, “we usually don’t peak until we hit 90 or above,” he said.

Add to that the fact that only half of professional traders and investors polled for the most recent Consensus Bullish index said they felt bullish; the recent downtrend in the Cboe Volatility Index, which tracks how much investors think stocks will swing in the near future; and that, historically, this is a good time of year for stocks; and Garner sees more momentum ahead.

The S&P 500’s technical charts seem to uphold Garner’s theory. Its weekly chart shows fairly neutral readings for two key indicators: a momentum tracker called the Relative Strength Index and the slow stochastic oscillator, which measures buying and selling pressure.

“Even if the S&P 500 keeps climbing to, say, … 2,800 — up 2 percent from here — Garner doesn’t anticipate either the RSI or the slow stochastic [to] hit extreme overbought levels,” Cramer said, adding that the technician could even see the S&P climbing to 3,000 if it breaks above the 2,800 level.

If Garner is wrong and the S&P heads lower, she said it could trade down to its floor of support at 2,600, and if it breaks below that, fall to 2,400. But that scenario is highly unlikely and, if it happens, would be a buying opportunity, she noted.

The S&P’s monthly chart told a similar story, Cramer said. The index is currently trading at 2,746, between its “hard ceiling” at 3,000 and its “hard floor” of 2,428, he said, which means it’s “basically in equilibrium.”

“To Garner, that means going higher is the path of least resistance for the S&P,” the “Mad Money” host said. “Once the S&P climbs to 2,800, or perhaps … to the mid-2,900s, that’s where Garner expects things will turn south and the pendulum will start swinging in the opposite direction.”

“Remember, … Carley Garner has been dead-right, and the charts, as interpreted by Carley, suggest that this market still has some more upside here,” Cramer continued. “But if we get a few more days like this wild one, she thinks we’ll need to start worrying about irrational exuberance. For now, though, she thinks we are headed higher, and I agree.”



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What Jeff Bezos’ private life means for investors

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Daniel Ek, chief executive officer and co-founder of Spotify AB.

Akio Kon | Bloomberg | Getty Images

Daniel Ek, chief executive officer and co-founder of Spotify AB.

Cramer said Wall Street has misread Spotify‘s latest earnings report and guidance, and that misunderstood stocks like these give investors an opportunity to make some money.

he called out stock analysts like Everscore ISI’s Anthony DiClemente who have downgraded the equity over concerns about subscriber growth.

“I think this is lunacy,” said Cramer, who has been bullish on the music streaming platform since it went public last April. “It’s like the market just doesn’t know how to read this company or its quarterly guidance. In my view, Spotify is very much on the right track.”

The stock was rocked after a seemingly mixed quarterly earnings released Wednesday, Cramer said. After Spotify reported lower-than-expected sales, tight cash flow and conservative guidance across the board including subscriber growth, shares sold below $129 at one point in Thursday’s session.

But Cramer noted that the company beat expectations on operating profit and gross margin, which was 120 basis points higher than was asked for.

“I think the sellers were missing a lot of context here and the context is something I like to talk about a lot and it’s called UPOD. They under promise … and then they over deliver,” he argued. “At this point, CEO Daniel Ek and his team have established a track record of giving cautious guidance—under promise—and then beating it—over delivering.”

Spotify’s guidance includes planned investment costs and the company could “become the premier platform for podcasts,” a hot market for hard-to-reach millennials, Cramer said.

Click here to read Cramer’s full take.



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Charts show investors ‘can afford to be cautiously optimistic’

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Investors can afford to be “cautiously optimistic” at this point in the stock market’s cycle, CNBC’s Jim Cramer said Tuesday after consulting with chartist Rob Moreno.

Moreno, the technician behind RightViewTrading.com and Cramer’s colleague at RealMoney.com, sees a convoluted path ahead for stocks. After calling the December bottom, Moreno noticed that the Nasdaq Composite’s late-2018 decline was about a 24 percent drop from peak to trough.

That’s important because, in a bull market, stocks tend to see “periods of consolidation — pauses in a long-term bull run,” Cramer explained. “To [Moreno], the decline here looks very similar to what we saw from the Nasdaq in 2011, 2015 [and] 2016,” three consolidation periods of recent past.

If he’s right, that could be bad news for the bulls, who may have to wait at least seven months for stocks to break out of their consolidation pattern, during which they tend to trade in a tight range, Cramer warned. But Moreno still sees some opportunity for investors.

“If you believe his thesis about the market — that we’re in a consolidation period, one that will last until September — then you can afford to be … cautiously optimistic right now,” Cramer said on “Mad Money.”

Part of Moreno’s confidence came from his analysis of the S&P 500’s daily chart, which also included the support and resistance levels from its weekly and monthly charts.

Even after a 16 percent rally from its December lows, Moreno saw more room to run for the S&P based on its Relative Strength Index, or RSI, a technical tool that measures price momentum. The RSI, he explained, hasn’t yet signaled that the S&P is overbought, and the Chaikin Money Flow, which tracks buying and selling pressure, shows big money pouring in.

“Moreno thinks that these new buyers are the kind of investors who won’t be panicked out of their positions by short-term volatility,” Cramer said, adding that the technician sees about 3.5 percent more upside for the S&P before it hits its ceiling of resistance at 2,818.

But if the S&P manages to trade above its ceiling of resistance and return to its October highs, Moreno expects a “synchronized reversal” in the stock market that could crush the major averages, the “Mad Money” host warned.

“At least until September, Moreno says you should be a seller if the averages approach their October highs — that’s around 2,930 for the S&P 500,” Cramer said. “Eventually he expects a breakout from these levels, but it won’t happen any time soon.”

So, what’s the right move for investors? According to Moreno, not all is lost. He still expects to see strong gains — a roughly 7.5 percent move — before the current rally peters out. But he doesn’t want buyers to get too trigger-happy, especially considering the months of sideways trading he’s predicting for 2019.

“Until [September], he expects the market to trade in a fairly wide range, with the S&P bouncing between 2,350 and 2,930. For now, we’re headed higher, but he says you should use these key levels as entry and exit points until the consolidation pattern finally comes to an end later this year and the averages resume their long march higher,” Cramer said. “Even if he’s right and this rally will lose its steam after another 7.5 percent gain, that’s still pretty good, but I am very wary and it makes me want to do some selling after this run.”



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