Our outlook:
The current political headlines about the budget impasse and Government shutdown we just maneuvered reminds us of 2011 and the famous line from The Great Gatsby when he was reminded that you can’t repeat the past, Gatsby replied incredulously, Can’t repeat the past?” “Why of course you can!” TO THINK THAT WE ARE GOING TO REPEAT THIS BUDGET FIGTH COME THE NEW YEAR DEFIES IMAGINATION. We can only wish for such chaos and nonsense, as this seems to keep the Fed out of the picture and interest rates low. Obviously the market loves cheap money. And therein lies the problem.
The Fed has pulled the rug out from under the fixed income market and driven global capital into equities. You can only buy so many houses before your life is hell. This enormous market rally is predicated on the simple fact there is little else to do with your money.
On another note, the parallels with the year 2000 and the era of irrational exuberance are equally obvious. You only have to look at the hot stocks of the market to come to that conclusion:
|
Name |
Rev ($billion) |
P.E |
Market Cap |
|
Tesla |
2.19 |
269 |
19.97 |
|
|
1.51 |
158 |
27.7 |
|
|
6.12 |
68.81 |
120.29 |
|
Yelp |
0.225 |
-614.5 |
4.49 |
The four stocks cited above, all darlings of the market have a combined market capitalization of $172.45 billion. The combined earnings of these companies are estimated to be just $2 billion in 2013, most of that coming from Facebook alone. It will take investors on average a century to recoup their investment from this basket of stocks. That’s what a 100 P.E. multiple means.
It’s not just momentum chasing, though that concerns us. Sentiment indicators have turned bearish. When everyone is convinced that equities rule the day, it’s another sign of market tops or at least a short term one. Put call ratios are near bullish extremes.
The American Association of Individual Investors also shows a bearish reading on its contrarian interpreted Survey of Investors. When most investors are bullish it’s time to head for the hills. As you can see in the chart below bullish investors outnumber bearish by more than 2 to 1.
AAII Sentiment Survey Results
We could ignore all of the sentiment indicators except for the insider’s buy/sell ratios. The Sax Angle Partners Fund has no appetite for buying the stock that the people running the companies, the insiders, are all unloading. That may sound provincial and it is true we will certainly miss out on some of the best stocks of all time. But it will also keep us from being buried by the avalanche of stock market enthusiasts these days. Insiders are selling stock at the most furious pace ever
Insider buying is at all time lows
The red line in the chart above represents insider buying/insider selling. The blue line is the S&P 500. Insider buying as a percentage of selling is at all time lows. When contrasted to the level of the market, this is not a pretty chart. Is it an accident waiting to happen? It certainly looks like one. If so I have no idea of what triggers it but watch out below. This is one of the reasons we continue to maintain very high cash balances.
All that being said, we don’t believe we can time the market accurately enough to generate decent returns. What really determines our weighting in equities is if we can find unique companies that offer compelling upside. Then we apply our diversification rules, as we will not put more than 8-12% in any one idea. Nor we will put more than 20-25% in any one sector. If we can find enough unique situations to get us fully invested we will be regardless of our “market” outlook. That just so happens to coincide with low points in the market. And of course the reverse, when the market is high, there is less likely to be insider’s willing to invest in his or her own companies.