There is no Education like Stress

Monthly Market Commentary: June 1, 2017

An angry Australian calls bureaucrats “pen-pushing paper-shuffling bloody idiots” in a letter to a minister. I have great sympathy for the infuriated Australian. Complex laws and regulations cause enormous stress on us and especially on small business owners who unlike large corporations do not have access to sophisticated legal and commercial advice. I was, therefore, surprised to read in a column by Lucy Kellaway how “stressful” the job is of the CEO of a large company. In fact, I found the article by Kellaway to be rather bizarre in view of the fact that CEOs earn so much more than workers, but are in my opinion under much less stress than their employees, and numerous other dangerous occupations.

I recently attended the annual Mauldin conference. What surprised me most is how bearish the attendees were. I can only explain this bearishness after an 8-year bull market as a result of most individual investors having lost so much money in the 2000 to 2003 and 2007 to 2009 bear markets. Consequently, they failed to capitalize on the subsequent huge bull market, which followed the March 2009 low.

In early May, Wolf Richter (www.wolfstreet.com) commented that, “Over the past 10 weeks – so since March 1, 2017 – five stocks in the S&P 500 index have gained a total of $260 billion in market value, the infamous FAANG stocks: Facebook, Apple, Amazon, Netflix, and Google (now Alphabet).
By any measure, $260 billion is a massive surge in valuation for just five stocks, or 1% of the S&P 500, in just 10 weeks. And the rest of the S&P 500? On March 1, the index closed at 2,394. Today it closed at 2,397. In those 10 weeks, it went absolutely nowhere. Which means this: the remaining 495 stocks in the index lost as much in total market capitalization as the FAANG stocks gained.”
I should add that this dichotomy has continued to this very day with the FAANG stocks having been joined by stocks such as Tesla and NVIDIA.

I need to emphasize that this kind of narrow leadership is symptomatic of an extremely mature bull market (after all the bull market is more than 8 years’ old by now), but as was the case of the NASDAQ bubble in 1999/2000, the investment mania in FAANG type of stocks (and Bitcoins) could last somewhat longer. We should not forget that between October 1999 and March 30, 2000, the NASDAQ 100 rose by more than 120%!

There is one issue investors should carefully consider. After the NASDAQ began to collapse post March 2000 a major shift in the stock market’s leadership occurred. NASDAQ stocks which had been the leaders during the bubble did not make new highs for years (most of them never) and it took the NASDAQ 100 until the end of 2016 to exceed the 2000 peak. However, the transition from the old leadership to the new leadership was not smooth and painless. Take as an example Newmont Mining (NEM). Along with the stock market, Newmont Mining rose until early 2000. Then, along with the NASDAQ slump the stock was also dragged down into October 2000 when it had declined from peak to through by 53%.

What I want to say is that once the FAANG stocks and their peers will break down it is likely that they will – at least initially - drag down the entire market and also the emerging new leadership.

Stress is caused by adversity and extreme stress by extreme adversity. Extreme adversity can be caused by a total loss of money (including divorce), the loss of a beloved one, the loss of one’s job, and a severe illness or accident. The extreme stress arising from loss of money can usually be avoided by disciplined diversification of one’s assets (stocks, bonds/cash, real estate, and precious metals). A geographical diversification is equally important.

I am enclosing an article by Jeff Thomas (jeff.thomas1066@remove-this.gmail.com) who writes about SWP Cayman Islands, which provides a full line of Offshore Gold Storage Programs, Gold in your IRA, and Gold Storage in our secure Gold Vault. 

With kind regards
Yours sincerely 

Marc Faber 

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