How high is high? (by W. Snyder)
“Buy low, sell high” is what investors would like to do, but many “Sell low, buy high”, which is what they should not do. This Newsletter recently recommended selling as opposed to buying. The last week has seen even higher highs in the US markets. The DJIA was up to 20,750 with P/E ratios over 21 while dividends were only 2.30. Nasdaq was around 5,845 with P/E ratios over 25 and dividends down at 1.15 while the S&P index was 2,367 with P/E ratios of 24.8 and dividends of 2.00.
It does not require the intelligence of a genius to see that equity prices are extremely high as well as being expensive for what they offer for the price, namely, very low dividends and lots of downside potential. Investors would do well to sell highly-priced stocks now while the prices are still so high. The current bull rally is the third-longest in stock market history, and it is unlikely that it will go on much longer or forever. In fact, one can ask what the basis is for the record highs. The Trump administration promises lower corporation taxes and deregulation. So it seems as if the high equity quotations are the fruit of the market`s having already priced in the advantages foreseen thanks to the new President.
This writer`s crystal ball regarding the future is rather murky, but the nefarious effects of NIRP and ZIRP have been massive misallocations of capital and a bond market in turmoil. The Fed augurs higher interest rates already in March, which will cost bond holders trillions more in losses on paper. As for company profits, if dividends have been so low recently, that reflects or should reflect profits, which reflect the global slowdown that can be seen from diminished trade figures for 2016. Add to that that the US has racked up another record year of trade deficits, and the national debt inexorably nears the magic figure of 20 trillion US dollars.
The most recent Newsletter underlined the dangers threatening the US dollar on Forex markets, which should not be underestimated. When one looks at the numbers and the behaviour of the markets, it should be clear that defensive investors will go on the defense. It will be too late when the correction starts to take effect. The stock markets react in micro-seconds to price changes as do Internet platforms.
In 1929 investors had to wait for more than two hours to see their losses on the ticker tape. Nowadays one can watch the figures on a computer screen in real time. The problem is that sell orders may arrive too late since the time taken to connect to the market may mean that the price is already much lower. Try an auction on e-Bay, where the final price bid is higher than your last bid one second before close!
Walter Snyder
info@swissfinancialconsulting.ch