Ah yes, the buy and holders are patting themselves on the back. “See the market always comes back!”
Congratulations. Really! But remember it is what cash flow you end up with in retirement that matters. So did you learn any lessons?
Did you learn once again to simply hold? Or did you learn that maybe, just maybe, you should think about the risk of losing a large sum of savings. And how that would affect you. It’s not over, ya know.
And do you know why the market bounced back, or do you really believe markets are only an up escalator and dips are temporary. And during pandemics? Let’s take a look and see if where we really are and why.
The mega caps are taking over the markets. The rest of the market bounced back but are struggling again. In other words, 90% of the SP500 is in a pullback and staring the pandemic in the face.
That was a historic rally exceeding any other. Do you wonder why?
30-40 million lost their jobs. Corporations were heavily in debt before the virus because they borrowed to buy back their own stocks on the open market. 10-15% of the companies were considered zombies only able to make payments by borrowing ever-more money… before the virus.
I could see a third heading toward bankruptcy without significant bailout funds – not just more loans. Of course in this crazy market, Robinhood traders are gunning up the price of bankrupt companies…someone is getting played.
This entire bull market has been financially engineered with the help of speculators and now Robinhood traders – 40,000 new accounts in 4 hours the other day diving into Tesla. No euphoria there.
Here is some of the engineering. It includes corporate buybacks which are another price insensitive flow of cash into the markets.
The most interesting statistic I keep seeing is that net retail and institutional investors kept selling into the rally. It was an investorless rally – again. But money was flowing in from somewhere. What we do know is that the $3 trillion of money was created out of thin air in a couple of months. And I might add that they have pulled back about the same time the market stopped advancing. (Hint, hint)
I have never worried about small pullbacks. I worry about market crashes and bear markets that wipe out a large chunk of people’s nest eggs. I told members to get out in late January before the crash. The signs were there. And at those valuation levels the losses could be big. They were. Then the money printing started to save the financial markets. Or at least certain financial operatives.
Understand the financial markets are not the economy and the economy is not the financial market. They are completely detached today. Kind of like hitting the accelerator of your car with it in neutral – it will red line quick.
So if you are a renewed TSP millionaire, it is time to ask if you want to stay one. You saw how fast the market can plunge. If everyone is waiting for the plunge to sell, then many will be too late. Fear Of Missing Out (FOMO) of more gains is not a good retirement account strategy.
Crazy stuff is happening out there. That spike in TSLA coincided with the 40,000 new Robinhood holders of Tesla. Some who were broke by the end of the day, maybe even deeply in debt.
It’s a very narrow market now with only 5 companies accounting for about 28% of the SP500 total market value. Watch those five. BTW, Tesla is not in the SP500 because the SP500 requires 4 quarters of profits first – think about it. Speculators have now valued Tesla higher than all the other car companies combined (minus Toyota).
Tesla accounts for 3 times the weighting of the TSP S fund’s (non-sp500) second most weighted company which is Blackstone. Interesting note: Blackstone helps manage TSP and is now buying corporate bonds for our central bank.
Also watch the night traders since they are the only ones driving this rally – in the Futures market. You see it when the opening price is 2% higher than the previous day’s closing price and the indexes go down all day giving some of it back.
Note that recently (see slide above) where the Nasdaq-100 rallied 2% to hit a new all-time high but closed 1% down in the same day. It does not happen often. Maybe the market is telling us the euphoria is hitting exhaustion. Or did we hit peak Robinhood yet.
Why I am certain this will not last…
Valuations Matter in the Long Run
Everything above is tactical, short-term considerations. The long-term consideration remains the extreme valuations in the market. When we talk valuations we are talking about future cash flows to investors and what you are paying for those flows today.
Bond prices are easy because you know the payments and we know if interest rates are 1%, then that is your future income stream.
But the same goes with stocks. If we roughly know future cash flows to investors and we know the price of stocks today, we know that returns will be low at these prices. Very low. And the virus turned them negative long-term. And only the financial engineering is holding prices up for now.
Knowing long-term returns (10 years) is negative, the only decision speculators are trying to make is will the prices be engineered higher in the short term. That is it.
I want TSP millionaires to stay TSP millionaires. That is why I write post like this and started my service. I want you to be aware of what is really going on. But I also want young TSP investors to learn and not give back what they have today so they can invest more in the future when the markets reset.
Stock momentum is weakening and our Risk Indicator is weakening, but guess when this started to happen? When the central bank stopped expanding its balance sheet. Coincident? No.
So what this means is you have to 1) predict central bank actions and 2) assume they are all powerful and can keep control of the markets. I do not believe part 2 is sustainable.
Which means the central bank is forcing retail investors into a dangerous situation. Not just Robinhood newbies, but retirement accounts and pension funds who do not understand the situation.
Invest safe and keep what you have… please,
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