RICHARD RUSSELL: THE #1 REASON TO BE UNDERWEIGHT EQUITIES
Richard Russell’s latest letter is something that most investors can probably empathize with to some degree. While it’s clear that the equity markets are in the midst of a bull market, it’s less clear whether now is still a good time to be buying. Russell, while acknowledging that this is certainly a bull market, prefers not to be overweight equities for one single reason – the values just aren’t that good:
“So is it really a bull market? I think it is. Then shouldn’t we be up to our necks in stocks? I choose not to be, mainly because I don’t like the values. Dividend yields are low in my estimate, and I’m in no hurry to rush into the arms of an anxious and waiting Wall Street.
I know that the potential for great and safe profits in the stock market are created when one buys stocks when they’re on the “bargain counter.” When the Dow’s’ dividends are below 3%, then historically the Dow is far away from the bargain counter.
Sure the Dow and stocks can rally from here. But like the batter who is facing a gifted and clever pitcher, I prefer not to swing on this pitch. So be it, I guess I’m just a stubborn old fool who has too much respect for RISK and values.
Today QE2 ends, and supposedly the Fed steps back. The Treasuries are now on their own, and the Fed has stopped buying. The smart boys are sticking to this scenario. With the Fed no longer buying Treasuries, the Treasuries start falling while interest rates rise. This tends to throw the economy into the dumps. The Fed will watch for a while as the edge is taken off inflation. But as the economy worsens, the Fed will be forced to stimulate again. Once stimulation is back, the precious metals will boom. That’s the line and scenario that I hear.
The Russell reaction — It bothers me that it’s all so pat and so widely accepted. So far, the Treasuries are acting according to script and so is gold. The stock market is acting as if something better is riding on the winds of the future. Could something be amiss with the accepted scenario? Could Bennie Bernanke have it right? And why is Treasury Secretary Geithner ready to say “bye” to the administration? What can he see ahead that he doesn’t like? Geithner’s been Obama’s leading economic confidant. Certainly, an unusual time to exit.”
Clearly, this is an argument that is backed by years of data and market practitioners who seem to have made their reputations by remaining prudent through these times when the markets are excessively expensive….Russell is no exception.
Source: Dow Theory Letters
Cullen Roche
Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.
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23 Comments
Yeah, I want to follow a senile 90 year old whose last bit of wisdom was to get long stocks in 2008 right before the collapse. In a big spread in Barron’s, he was convinced the market would go up, and managed to just about nail the top, riding it to 50% losses.
And … there isn’t any reason to justify overvaluation. The world just does not look like 1999.
All the baseball metaphors aside, I don’t see how it is particularly prudent to sit out a bull market.
Depends on your age. As an investor, if you’re young, it should always be “risk on”. Being prudent is not a one size fits all strategy.
Nils- stay invested. You will learn prudence and many other things along the way.
You seem to miss that I can always get out when prices start moving against you. I’m not married to my positions. This is of course not true for the large fund managers. I can’t afford to sit around waiting for the next crash or the elusive Black Swan that everyone seems to expect lurking around the corner. You can make a nice living saying that valuations are too high because they will revert eventually, provided you get paid for talking, not trading.
Nils -
I agree with you. Sitting out does not seem prudent. If you are actively involved in your trades, which everyone ought to be, you can watch the charts and news as well as a money/fund manager or talking head can. Perhaps this is just a hick-up in the game plan with a looming crash in the rushes. In the meantime, if you can watch the markets and cash in, why not? I try to listen to the talking heads, but watch the charts. It seems all the news is always to be baked into the charts.
My two cents.
Could someone please enlighten me as to why specifically this is a bull market?
Brian,
I think if you accept the usual notion that bull market is 20% then the rally from March 09 certainly qualifies as a bull market. Note it had only sunk about 8% from its May 2 high.
However, my view is it is a bull within the context of a much larger bear market that began in March 2000. This current bull market could be the action that draws in the last suckers before they let the air out of the balloon.
My belief is (based on the tone of your question) is that we are facing a bear market of biblical proportions. This bear for 2 years has just been content to hibernate and eat honey; the next move will be baring its fangs. I won’t believe it’s over till valuations are at drooling levels and nobody on Wall Street wants to own any stocks. Then a new bull market will emerge.
I’ve actually read where we are in a secular bear market.
I tend to avoid those phrases all together. And I avoid looking at Earnings and Unemployment as predictors for the same reason. They are lagging indicators.
I did make some money with Imperial Sugar a couple of years ago from a hint that their earnings were going to be pretty good, but this was a turn around event.
I think many believe we are in a “turn around event” period for the economy and that is the reason for the recent run up. But it is based to some degree on Japan causing the past malaise. How much of that is true I dunno. Inventories are fairly high at car dealers right now. If anyone has any data on other inventories, like Ross Perot said, “I’m all ears”.
He must be thinking with a “buy and hold” longer term mentality. Those days are gone.
But there was a quick note on Bloomberg this morning about Americans closer to being out of debt than previously thought. And the bad news in Europe is stifled for a while. Sure there is still risk and Greece will probably be back like a bad penny and Japan’s debt may also rear its ugly head. God help us if Spain and others start to catch a cold. But I’m looking (hoping)and wishing for all of you a good July. (three weeks anyway)
NOTE: Email on prior post was incorrect.
There is a better way to look at the cash returned by a company that William Priest came up with called “shareholder yield.” It takes not only dividends, but also stock buybacks and debt pay down into account. So Richard Russell might want to take a look at those numbers rather than the outdated “dividend yield.”
http://www.forbes.com/2009/11/20/priest-shareholder-yield-intelligent-investing-cash-flow.html
What has the yield on Berkshire Hathaway stock been since its inception? Zero!
Enjoy your day,
David
David B. Durand, MD
Tom H thanks for your comments, this puts it into better perspective as I guess I was becoming miopic to some extent. I look at May 2nd as the end of the bull market and my question is a challenge to find out if anyone thinks differently. Just curious to know how many are in the DOW 14000 camp and how many are in the DOW 10000 camp over the next 6 months…. Or possibly both?
Has Richard Russell ever been bullish??
Geoff, He is a bull on gold from what I have read.
I’ll give Richard Russell this much. At least he’s consistent!
David Durant MD,
Thanks for your comment; I have heard of William Priest, but never read anything about him or his theory.
My initial reaction (as a former accountant)- is that what you are describing is the Statement of Cash Flows and this is available on every public company quarterly and annually. I’ll have to google him and see what I can find out.
At any rate, whether what you describe is similar/identical to the Cash flow statement, now is a particularly dangerous time to be 100% long in the market due to many factors.
Brian,
My belief is we will see one more fairly strong leg up maybe a few weeks or months (it’s probably already started) and then this fall or spring 2012 the heavy selling starts – likely worse than 08-09. (BTW, I’m an RIA and an experienced investor)
Why? because it’s been all artificial and valuations never got even close to a bear market bottom – not even in the same neighborhood.
At bear bottoms, P/E ratios get into the middle single digits and dividend yields get to 8-15% range. right now were at about 2%. The math is really scary.
Of course, most people will disagree with me on this. But I’ve been around long enough to know what a real bear market looks like; we haven’t seen one in 30-35 years. The one were in when it’s finished they’ll be talking about 100 years from now.
I warned people in 2000 and in 2007-08 and they were laughing. I’m telling you this, not to be a braggart, but to warn you what’s coming. So please don’t try to get too cute with your investment strategies.
If you think I’m full of baloney, read this interview:
http://breakawaytrading.wordpress.com/2010/06/29/prechter-interview/
Best wishes to all; be careful!!!
If anyone pulls up the Nasdaq, S&P 500, or DJI and looks at their long term chart, they will note that we are completeing the top of the final shoulder on a head and shoulders partern that took a very long time to form. (Indicated DJI fall probably to about 2000.) That is a very good reason to get out of the main line stock markets. If one follows the annual patterns of stocks they will also note that July is always a horribly down month. It rallys until the fourth and then plunges through early August. I may be limiting my holdings for other reasons, but I have followed the ramblings of Russell for a long time and as long as he sticks to the markets, he is in his natural element. He may be a little thick about God and morals, but he is as smart as they come about the market.
>> they will note that we are completeing the top of the final shoulder on a head and shoulders partern
the Dow would have to fall to 7000 for the pattern to exist. You are just displaying a bearish bias if you think that it will become an H&S. There is nothing that suggests that right now.
Looks like the S&P is going to 1500 in 2012 but I would certainly sell if the weekly close is below 1200. A 1250 to 1410 range for the next six months. It is always a good idea to watch 10 year TB yields. TMV moving over 52 might get me to lighten up some.
P.S. Russell was very bullish on the technologies during that run up, but became negative on home morgages just before the housing callapse. He has become bullish on Gold. I thought he was a little slow on that, but the run from $250 per ounce to over $1500 per ounce has given a lot of room for correction. Silver’s run from $4.50 per ounce to over $40.00 per ounce was not bad either. There are good reasons for him to be bullish on gold. If you aren’t you may have my condolences. He, like Tom H., has talked about bull markets inside a much larger bear market, and that seems to be his understanding of the current state of affairs. I have talked about pulling back right now because of the warning signs that the charts and markets are flashing, and because of the normal annual stock pattern. That does not mean I have set on the side lines for a long time. I have made over 100% since February, but now is a good time for caution. Even the precious metals are effected by the main market’s movement. It is time to take profits and watch with someone else taking the loses. I do expect the indexes to be lower in early August to what they are now. I don’t think there has been a year in the last ten years that that has not been true. I believe it will take time for the fall from the final shoulder of the head and shoulders pattern that is being completed. but we are near the top of that last shoulder. It is a large pattern that takes a long time to complete. Someone asked about a DJI of 10,000 or 15,000. I hate to say it, but the pattern suggests 2,000, not 10,000. Get ready for the roller coaster ride. One mentioned Berkshire Hathaway. You know the one that built that great stock, has for the most part, already exited the market. I wonder why?
Just about now, I am getting to feel that I should buy into this rising market. However, with some rational thinking, it seems that I again, am getting caught-up with the mass enthusiasm. In such times, the warning is there. So I guess it’s time to rationally get some “inverse” market protection.