Q: Gold to $350? Any thoughts on this? http://t.co/KVDI0GmmXB
J: Yes. This exactly the sort of outrageously bearish news you typically see at a bottom. They seem to believe that gold’s “fair value” is around $850 without explaining how they arrive at that number. I assume they are using some sort of inflation calculation. If you believe inflation is stated properly by the government then maybe you would believe that number for fair value. I don’t (just think about healthcare and rents – two unavoidable costs for most families that have been soaring over the last few years even while the government tells us there’s no inflation). Ultimately, I think that it comes back to the dollar which I believe is overvalued right now against almost everything.
Q: Hi Jesse, What do you think of the AAII small cap portfolio ? Seems to have a stellar record.
Do you think it would be a good investment after the market drops ?
J: I know nothing about it. I will say that small caps right now are the most overvalued part of the market which is one reason we have targeted our short exposure there.
Q: Based on your trade ideas, you obviously have chosen three vehicles for shorting the equity market, SRTY, SQQQ & FAZ
If you were to enter a market short trade today, what vehicle would you use and how would you enter the trade?
It looks to me that the Russell is looking the weakest so far – but is that the right short bet??
J: That’s a good question. Right now I like all three of them equally but I would lean more toward SRTY and SQQQ. Having said that I like FAZ, too, it’s just not worked as well as I have expected so far. I will also say that I like using all three right now just from a diversification stand point. I’d rather not be too concentrated in just one if it turns out I’m wrong and the market surges higher.
Q: Please advise on best way to protect big losses on FAZ SRTY and SQQQ.
I was considering placing limit orders to sell if they drop 10% below current levels ?
J: That would probably be a good way to go about it. I just don’t like using hard stops because I like to see how they trade into those levels. Depending upon how they trade I may time the getting out part of the trade a bit differently.
Q: Hi Jesse,
I have a quick question I’m hoping you can help with. Please see the following link, and refer to pages 45-47. I was wondering what your thoughts are on these metrics. This is suggesting stocks are quite undervalued, while all metrics you have discussed show the opposite. Another Jesse that I follow (Jesse Stine) produced this write up before the beginning of the year, so the data is a bit dated. Curious to know what you think. I know some of the interest rate based models are likely due to the extremely low rates, but curious if you had additional perspective on why these might be misleading…
J: I saw this when someone else sent it to me a few months ago. First of all, forward price/earnings ratios are just about the worst valuation measure you can use. There are a variety of reasons for this but the main one is that future earnings are unknowable and analysts are always, without fail, way to optimistic. Valuing companies based upon made up numbers has never been a successful way to invest. Additionally, the correlation between forward p/e’s and future returns is essentially non-existent. Even if you decide to ignore all of this, you can see that stocks are currently trading at the high end of their forward-earnings valuation range (6-16) outside of the dotcom bubble.
The other measures he shares are based on the Fed Model which has been proved to be a horrible way to value stocks. I recommend you read Cliff Asness’ terrific paper on the topic: Fight The Fed Model – http://papers.ssrn.com/sol3/papers.cfm?abstract_id=381480
Even the Fed has written about why this model is problematic and steers investors to make the wrong decision right at the wrong time – http://www.frbsf.org/economic-research/publications/economic-letter/2004/october/inflation-induced-valuation-errors-in-the-stock-market/
At the end of the day, these are merely two methods the bulls use to make is SEEM like stocks are cheap when, in fact, it’s just the opposite. Every valuable way to measure stock market valuations suggests stocks are about as expensive as they have ever been at any point over the past century.
The only useful method I’ve seen for forward p/e’s is this one which suggests stocks are extremely expensive relative to future earnings’ growth:
An uptick in Expected EPS Growth, but still a large divergence vs. Forward P/E pic.twitter.com/4iNx35CKdx
— Not Jim Cramer (@Not_Jim_Cramer) July 28, 2015
Q: Jesse, that was one of the best chart books and commentaries. Very informative. The one thing I am not certain about is the Fed not raising rates. they may be forced to like when they cut off QE. Fred [Hickey] and Bill [Fleckenstein] didn’t think they would cut if off but they did. Fred seems to think even if rates are raised it could be good for gold. What chart service do you use? I subscribe to stockcharts.com. also, what other subscriptions besides fleck and fred do you get? those are my main 2 before yours. Maybe I should get Jason’s [Goepfert] again? Let’s hope we have huge up moves in the miners.
J: I have used StockCharts.com for more than a decade. It’s great. I really like SentimenTrader. Jason does terrific work. For short-term trading I like Helene Meisler’s subscription site, too. There are a variety of others I read but none I can think to recommend right now.