Learning From 2016 Stock Crash

Joes,
What makes the stock market interesting is that both the investors as well as the stocks can be irrational at times. All of us learned from our experience and mistakes. One big lesson I learned is to move away from following the herd and be willing to have a change of mindset if what I am doing could not produce the desired results.

Investors with limited resources must always avoid being caught holding stocks at high prices (high end of bull market) or holding through the top of the bull market down to the bottom of the bear market. This is a heavy price to pay (in the form of opportunity cost lost).
Having a big “war chest” that one could tap upon during a big bear market has certainly been a wish and desire of many investors.

The STI has dropped from a closing high of 3,539 as on 15-4-2015 to a low of 2,649 as on Friday, 26-2-2016, a loss of 890 points (or 25.15%). According to Investopedia, a “BEAR MARKET” is defined as “a market condition in which the prices of securities are falling, and widespread pessimism causes the negative sentiment to be self-sustaining. As investors anticipate losses in a bear market and selling continues, pessimism only grows. Although figures can vary, for many, a downturn of 20% or more in multiple broad market indexes, such as the Dow Jones Industrial Average (DJIA) or Standard & Poor's 500 Index (S&P 500), over at least a two-month period, is considered an entry into a bear market.” Based on this definition, the Singapore market may now be said to be in a Bear Market.

In a Bear Market, the prices of virtually all stocks regardless of blue chips, defensive or high dividend-yielding stocks, would all decline significantly to their lowest support level with some even going below their intrinsic value in a very severe sell down. Hence, investors would be well rewarded if they can learn to love the Bear Market and to take advantage of this rare golden opportunity to acquire many good sound stocks at a huge discount especially during a very severe market decline.

New millionaires are known to surface after every bear market. “Can I be one of them?” This is a question many investors may like to ask themselves.

History has shown that stock market cycles and stock investors (herd) behaviour never changed throughout the decades. The vast majority of investors are governed by the instinctive survival trait of fear (of danger or losing out to others) and greed (for quick easy gains or to gain more than others). Stocks become cheap when the herd rushes for the “exits” on fear, and expensive when the herd rushes in on greed for quick easy profits that others are seen to be reaping. Common sense tells us that it is wise to act contrary to the herd behaviour in order to “come out as easy winners”. In practice, this is easier said than done as we are going against our instinctive nature – Flight whenever grave danger on sight.

The small number of successful investors that are able to act contrary to the herd are usually those who understand market behaviour and have a positive mind-set. They have the courage and confidence to buy when news and market sentiments are very bad with most people dumping their stocks. They are well aware that the stocks they bought can easily become cheaper; and they are more than ready to buy more at cheaper prices.

The data below shows the decline in value of some typical stocks during the previous and current Bear Market: (figures within brackets denote the % loss in value from the market top)

2007 Bull Market Top: (11-10-2007) STI – 3,875
Closing Prices
UOB – $22.70
DBS - $22.50
OCBC - $9.03
Venture - $15.80
SGX – $15.90

12 Months After Market Top: (10-10-2008) STI – 1,948 [-49.73%)
Closing Prices
UOB – $14.80 (-34.8%)
DBS - $14.00 (-37.78%)
OCBC - $5.98 (-33.78%)
Venture - $5.00 (-68.35%)
SGX - $5.37 (-66.23%)

Bear Market Bottom: (09-03-2009) STI – 1,457 [-62.4%]
Closing Prices
UOB – $8.20 (-63.88%)
DBS - $6.45 (-71.33%)
OCBC - $3.83 (-57.59%)
Venture - $5.42 (-65.7%)
SGX - $4.02 (-74.72%)

2015 Bull Market Top: (15-04-2015) STI – 3,539
Closing Prices
UOB – $23.13
DBS - $20.95
OCBC - $10.86
Venture - $8.65
SGX - $8.59

10 Months After Market Top: (15-02-2016) STI – 2,607 [-26.34%]
Closing Prices
UOB – $17.85 (-22.83%)
DBS - $13.41 (-35.99%)
OCBC - $7.64 (-29.65%)
Venture - $7.78 (-10.06%)
SGX - $7.02 (-18.28%)

The % decline in value of the 3 banking stocks during the first 10 months of the current Bear Market appears poise towards matching the 12-month decline in their value in the previous Bear Market. Since the last Bull Market did not end with a new record high STI and the fundamentals of many stocks especially banking stocks are now much stronger, it is reasonable to expect a less severe decline in the current Bear Market unless a serious economic or financial crisis occurs. As each Bear Market is different in duration and severity, it should be interesting to see the further unfolding of the current one over the next few months.

QUESTION: For those waiting to buy stock at the lowest price, do they know where the market bottom is?
ANSWER: Absolutely positively yes. The reality is – Everyone knows where the market bottom is – AFTER HE OR SHE HAS MISSED IT. Hence, it is never a good option WAITING to buy a stock at an uncertain low price.

Much can be learned from the current global financial market behaviour that has confounded and confused many investors and experts.

Following the QEs, near zero interest rates and the massive company share buybacks, the US stock market has been moving towards new record high while the other markets, especially those of Asia and Europe, are struggling or in bearish market mode. The S & P 500 “VIX” (or Fear) Index is also at the record low end as on 5 August 2016 (similar level exactly one year ago) reflecting the general public optimism and confidence of the market. The belief that central banks will do everything to protect the market rally could also have contributed to such optimism..

Judging from the comments of many financial experts, it would seem that many US investors continue to buy equities at increasingly high valuations because they still offer better yields, compared to other asset classes. Driven by easy liquidity, the stocks are powered higher even as the earnings continue to miss, and regular downward earnings revisions seem to have no effect on the investors, who are clearly in a risk-on mode.

One does not need to be an expert to understand that market moves in cycle; and the stock market has moved from the low end [LOW RISKS/HIGH POTENTIAL REWARDS) of the cycle in 2009 towards the present high end [HIGH RISKS/LOW POTENTIAL REWARDS]. The Singapore market climbed to its highest point in April 2015 followed by the US market a month later. Since then, both markets went on a slide early this year, with the former sliding more than 20% into a “bear market” before recovering. The US market has just moved on to a new record high without the support of a robust economy and strong corporate earning prospects. Could it continue to climb higher? ANSWER: Most Certainly Can – if it has not reached its peak and turns into a bear market. Astute investors and traders can still find many opportunities to profit in such a time.

Below is an extract of some interesting comments [offering valuable food for thought] as made by one US Investment Advisor, Freedom Capital Advisors, on the current state of the US market:

“Many market professionals are at a loss to explain the current environment that we find ourselves in today. The correlations of the past are no longer working and the trends we used to follow don't seem to work. Bonds prices are up, stock prices are up, and metal prices are up. What gives? This isn't normal. How does one explain this seemingly upward movement of all assets in the same time frame?

TINA, or there-is-no-alternative, is the current explanation given by many TV pundits and some so-called market professionals. The reasoning is simple: investors have to buy something because they can't keep their money in cash any longer at low to negative yields. If you think about the argument it makes a lot of sense, at least on the surface.

Every investor, whether professional or individual, has been forced to deal with the economic realities of a ever-decreasing yield in their traditional areas of investment. Some very high profile investment titans such as Tepper, Icahn, and others have even attempted to hedge, or even go short. Many have tried to stay out and remain cautious, as worries about moving out on the risk spectrum has been too uncomfortable. But sadly with time, many millions of individuals and institutions alike have been worn down. They can't afford to stay in cash and feel the need to invest in something, anything as long as it doesn't yield zero (or worse).
"There is no alternative" is uttered and the more it gets repeated the more complacent everyone gets. The whispers are out there "stocks/bonds/utilities/telcoms/etc... will go up because of TINA" and the markets are being lulled into complacency because it "seems" to be true. The fear indicator VIX is on its all time lows sub 12.

Make no mistake TINA has arrived, and she will continue to look good (until she doesn't). But be very aware that when TINA leaves, and she will, she will leave suddenly on those very investors that trusted her so much. So prepare in advance and keep alert to her departure.
There is an old saying that markets can stay irrational a lot longer than you can stay solvent, and it has paid over the years to keep this in proper context in all strange investing environments. Today's environment is no different. It would be arrogant though to suggest that people get out of every asset class and go to 100% cash tomorrow. Neither I nor any financial professional knows when TINA's going to go away, and furthermore, some assets might do surprisingly well when TINA's gone.

The key to navigating through this very confusing market is to 1) realize that TINA has arrived and 2) be skeptical of every investment idea. A healthy dose of fear should be applied to all ideas and each investment situation should be thought through carefully. Injecting fear into every thought will sharpen your focus and help mitigate the hypnosis that TINA brings with her.”

Warren Buffet is considered by some to be one of the most successful investors in the world and many would like to emulate him by following his ways.

The extract of an article below from John Hussmann - “The Most Broadly Overvalued Moment In Market History” is really a good eye opener especially to small investors who blindly follow Warren Buffet but have no deep pockets and patience.

“Last week, Warren Buffett himself made the jaw-dropping suggestion that the market was “cheap relative to interest rates.” Now, if you understand a century of market history, and Buffett’s own investment decisions over time, the most obvious conclusion is that Warren has been abducted and replaced by either an imposter or a highly sophisticated yet folksy robot.

My friend Jesse Felder has a simpler explanation, which is that Buffett strongly prefers not to disrupt the markets to the downside. In a piece titled Why Warren Buffett is So Reluctant to Call Stocks a ‘Bubble’ Jesse mentions the 2001 Fortune article and writes, “What you need to know about Mr. Buffett, though, is that he was eager to share this warning signal with investors only well after stocks had peaked. In fact, the Nasdaq Composite had already crashed by more than 70% before the words above were published. It’s true that he did make an earlier warning in Fortune but both articles were the products of the enterprising (or kindhearted - I’ll let you choose) reporter Carol Loomis who learned of Buffett’s private worries about the stock market and convinced him to make them public.”

Two years ago, as the broad market was about 10% below current levels, Alice Schroeder, who authored a book on Buffett titled The Snowball, also observed, “in private he has been more negative, at least with me, about the economy, money-printing, employment, than he is in public.”

Buffett has always expressed an admiration for the U.S. economy, and for long-term investment in the equity market. Knowing that every share of stock outstanding has to be held by someone at every point in time, he undoubtedly recognizes that there is no way for investors, in aggregate, to avoid market risk. My impression is that he has decided that he’s not going to be the guy who busts their bubble. To the extent that Buffett is now in the commendable process of divesting his holdings for the benefit of charity, one might even view his reluctance to rock this boat to be protective of that legacy - provided that investors aren’t encouraged by his words to take investment positions they can’t tolerate holding over the completion of this market cycle and for a very, very, long time thereafter.

For our part, we’ve always given more weight to a century of observable evidence than to anyone’s verbal arguments, even those who we hold in high esteem. Still, as long as investors are comfortable with expected S&P 500 10-12 year total returns of less than 1% annually, with likely interim losses on the order of 50-60%, investors are free to label this situation as “fairly valued” or with any other phrase they wish.”

Full details of this interesting article is available in the link below –

www.hussmanfunds.com/wmc/wmc170306.htm

The US stock market has been nudging up one record high after another, defying many prominent experts and analysts’ predictions of a significant correction. The Volativity S&P 500 (VIX) Index is also at the low end of its 5-year-low in spite of many poor data, reports and bad news. Are the American investors right to believe that their economy and financial market are going to have much better days ahead and that they do not have to be concerned over their bull market coming to an end anytime soon? Since any significant correction in the US market, in the past, tended to have an adverse impact on the Singapore market, should Singapore investors, therefore, be duly concerned over such a correction occurring this time particularly since our STI never followed the DOW or S&P 500 in testing its last record high this time round?

The article in the link below provides some interesting and useful data and facts on the current state of the US market and investors seeking to understand local market behaviour and its possible direction, may also find the information helpful.

seekingalpha.com/article/4078779-stock-m...1999-surpassing-2007

Below are some extracts from the article –

“While investors continue to cheer rising stock prices, even as world economic and social issues are causing massive problems, several warning signs continue to be ignored that an imminent major correction in the stock market is overdue. Currently, we are in the 99th month of the current bull market, which is the 2nd longest bull market in history, and second only to the historic tech bubble bull market between 1990-2000. Ultimately, that bubble finally burst with stocks being sent into a 50% decline. It is not a matter of "if" the bubble bursts, but "when" the bubble bursts. History has shown that lofty evaluations are just not sustainable, and it doesn't matter who the President is at the time.

[Chart On 7 Longest Bull Markets In History - See full article]

The chart above, which is roughly 4 months old, does not reflect the additional gains the market has seen between March 2017 and present. Additionally important, is the fact that there has been no substantial correction in stock prices since February 2016, and was short lived less than a month, so it can't really be considered a correction, but more of a pullback. The last two corrections in stock prices that are substantial enough to be considered "corrections" occurred in 2002 and 2008. Since March 2009, and the market has been full steam ahead with the assistance of FED interventions.

The chart also shows the impending results of overvalued markets where every bull market saw significant corrections that lasted for many months before beginning to reverse and start to build sustainable price gains again. We also see that the most overvalued eras saw the largest percentage corrections with the exception of the 1932-1937 bull market.

History has proven many times, that when stock and housing prices enter into over-valued zones, there will be substantial corrections that last several months, and usually result in at least a 50% correction or more. History has also proven, that timing when those events will occur, is simply a task too tough to tame. Even the largest firms have failed to be able to time when the bubble bursts. However, when the warning signs begin to reach historic levels, as they have reached now, smart investors will usually begin to heed those warnings and begin making adjustments to their portfolios to reduce their risk.”

“Markets have been rising to such lofty levels due to the Trump election and euphoria. They have risen on future prospect and promises made by this President, even though all the warning signs say it is time to reduce risk now. In fact, President Trump has been in office for over 4 months, and his "First 100 Days Plan" has already been a complete fairy tale. Not one piece of legislation he promised the American people has come to fruition. The most recent jobs reports show that jobs are being lost faster than they are being created, and those that are being created are majority "minimum wage" jobs that will not sustain economic growth.

Conclusion

Americans are maxing out their credit again, and defaults are at a 4 year high and the problem is getting worse day by day. Housing prices have surged to astronomical levels once again, primarily due to the FED Reserve intervention in previous years. As the FED is now under the "must raise interest rates" scenario, expect housing defaults to rise again very quickly. Stocks have reached extremely lofty levels under the euphoria of a President that has delivered none of what he promised so far, and a Congress full of Democrats that are going to fight him every inch of the way for 4 years. Corporate equities to GDP ratios are off the charts and show stocks over-valued by almost 90%. Massive retail closures are being ignored as non-events as large numbers of people enter the unemployment line again. Terrorist activity around the world is becoming an almost daily event, which puts strain on global economies, and it is ignored by the markets. It's just a matter of time before it cannot be ignored anymore.

For all these reasons, and some that I have not even covered in this article, I recommend investors take heed of the warning signs that history has proven not to ignore. Do not get caught up in the Trump euphoria "stock pump". Start making the right decisions to protect your financial interests by limiting your risk in equities that are at all time lofty levels, and not supported by economic growth and true job creation, yet supported by FED reserve free money economics and prospects of a future that isn't going to materialize. There are too many political, social, and economic issues troubling the world, and the stock market is just one major event away from collapse. We are in the biggest stock market bubble since 1999 and 2007, and the data proves it.”

The US stock market has been having one of its best and longest bull market run-up. The Singapore market had a relatively small crash in 2016 but did not result in a traditional bear market. Following the lead from the US market, the Singapore market recovered from its 2016 crash and also has a bullish run-up confined mainly to banking and selective technology stocks but the STI never managed to surpass its old record high of 3,875 achieved in 2007. Unlike the bull markets of past decades, the current Bull Run has been fuelled mainly by the loose monetary policy and massive liquidity in the financial system; and its behaviour has been greatly different from that of the past decades thus fooling many analysts and investors into making many incorrect decisions. Some of the questions on the mind of many investors now are that –
1. How long would the current US bull market continue before a sizeable correction or bear market appears? A bear awaits the bull regardless of the lifespan of the bull.
2. How would the Singapore market respond to a sizeable correction or bear market in the US this time since the STI never surpassed its all time record high of 3,875?
3. How would the current trade war, essentially between US and China, affect the world economy and stock markets in the short and medium terms?

As questions such as that mentioned above are not easy to seek an accurate answer, it is always interesting to know what some of the big smart investors of the world are doing in such a time as this. According to a recent report authored by Michael Snyder, WARREN BUFFET’S BERKSHIRE HATHAWAY is currently sitting on 100 billion dollars in cash. One reason for it doing this was its discomfort over the level of the “BUFFET INDICATOR”. Whether Berkshire Hathaway is doing the correct thing, it certainly may be wise for other investors to sit up and take note. Below are some interesting extracts from this report -

“Warren Buffett’s favorite indicator is telling us that stocks are more overvalued right now than they have ever been before in American history. That doesn’t mean that a stock market crash is imminent. In fact, this indicator has been in the “danger zone” for quite some time. But what it does tell us is that stock valuations are more bloated than we have ever seen and that a stock market crash would make perfect sense.”

So precisely what is the “Buffett Indicator”? Well, it is actually very simple to calculate. You just take the total market value of all stocks and divide it by the gross domestic product. When that ratio is more than 100 percent, stocks are generally considered to be overvalued, and when that ratio is under 100 percent stocks are generally considered to be undervalued. The following comes from MSN…

That being said, the Buffett Indicator, while it’s not a flawless indicator, does tend to peak during hot stock markets and bottom during weak markets. And as a general rule, if the indicator falls below 80%-90% or so, it has historically signaled that stocks are cheap. On the other hand, levels significantly higher than 100% can indicate stocks are expensive.

For context, the Buffett indicator peaked at about 145% right before the dot-com bubble burst and reached nearly 110% before the financial crisis.

SO WHERE ARE WE TODAY?

Right now we are at almost 149 percent, which is the highest level ever recorded…
Where does the Buffett Indicator stand now? It may surprise you to learn that, at nearly 149%, the total market cap to GDP ratio has never been higher. It’s even higher than the 145% peak we saw during the dot-com bubble.”

“The Buffett Indicator is very simple, but it is also very accurate. If you want to do well in the stock market, you want to buy low and sell high, and right now we are in absurdly high territory. Stock valuations always return to their long-term averages eventually, and many believe that the coming stock market crash is going to arrive sooner rather than later.”

The full content of this report can be found in the link below –
www.zerohedge.com/news/2018-08-02/buffet...re-primed-crash-ever