Falling oil prices lead to mass layoffs...
Falling oil prices lead to mass layoffs... Oil is just another bubble... A look at investor behavior... Stocks are expensive...
Falling oil prices have affected more than just the price you pay at the pump...
This morning, the Wall Street Journal reported that oil and gas companies have announced plans to lay off 100,000 workers globally since oil prices plunged last year. Houston consulting firm Graves & Co. says 91,000 have already been laid off.
One oil worker told the Journal, "Everything was going good. I bought a Chevy Silverado with cash." He was working in Odessa, Texas until he was laid off in January. Now he's thinking of joining the Army. Lots of newbies came into the oil industry during the shale boom. They're clearing out now. One young lady got a geology degree and only made $40,000 a year with it. She recently packed up and moved from Texas back home to North Carolina.
That's what happens in bubbles. They suck everybody in, then mess up their lives. The emotional hangover from big bubbles tends to outlast the financial damage.
Oil is only the most recent bubble to pop. In the past 15 years, we've seen a major tech-focused equity bubble (peaking in 2000), two bull runs in mining stocks (peaking in 2008 and again in 2011), and the biggest housing bubble in history (peaking in 2006).
That's a lot of bubbles in a fairly short period of time. It's no small wonder bubbles remain on investors' minds...
Today, the Financial Times reported (behind a paywall) that fears of a global property bubble are building. It quoted analysts, citing historically low yield levels and "increasingly aggressive pricing" of real estate around the world. It also noted several of London's biggest buildings changing hands multiple times the past year and that "people are moving up the risk curve into riskier locations and taking on higher levels of debt," which tends to work out poorly... even if it looks smart for a long time. Last week at the Grant's Interest Rate Observer conference in New York, I sat and listened as a prominent investor spoke at length about a bubble in bonds. He called it "The Bigger Short," a reference to Michael Lewis' book about the 2008-2009 financial crisis, when some investors made huge fortunes selling short mortgage bonds.
I've (unsuccessfully) called for a top in bonds more than once during the last several years. I exited the top-calling business a couple years ago and have never felt better about it.
Yesterday, my research partner, Mike Barrett, forwarded me an article that said fears of stock and bond bubbles have reached their highest level in 15 years (since the tech bubble). That's according to a survey of institutional investors who, for all their big fees and Ivy League degrees, stink at the stock market as much as everyone else.
The 15-year time frame reminded me that folks who were afraid of a bubble in the late '90s started getting scared as early as 1996. But that was the start of an unbelievable run of huge stock market gains, with the market up 20% every year until the bubble popped in early 2000.
Like I said, I'm out of the top-calling business. It's too hard and risky. And nobody does it consistently.
I will say that the top likely isn't in until the bears are truly exhausted. Today's headlines touting fears of a bubble indicate that there are probably too many bearish investors around for it to be a real top. My colleague Steve Sjuggerud said in Monday's DailyWealth that U.S. stocks have more upside because U.S. investors haven't returned to the stock market in big numbers.
Steve says stocks don't peak until a large percentage of the population is invested in the market. "We have the lowest percentage of families in stocks in decades," Steve noted, citing the Federal Reserve's Survey of Consumer Finances. The survey shows about 21% of U.S. families invested in stocks in 2000, compared with 17% in 2007 and less than 14% today.
According to mutual-fund-flows data published by researchers at the nonprofit Investment Company Institute, investors took money out of the stock market every year from 2007 to 2012. They didn't return to stocks until early 2013. They missed out on a huge updraft of prices.
But you never know how the market will behave. The big crashes we saw in 2000 and in 2008-2009 seem to come around once a decade or so. Maybe we have a few years before we see another... maybe not.
Investor behavior tends to be awful. We get scared and head for the exits when everyone else is scared... and we join in the buying frenzy only after everyone else has joined in. We're pack animals, like wolves. We find safety in numbers.
Investing is hard because it's OK to hang with the herd most of the time. The market isn't crashing most of the time... so you forget how ugly things can get.
But, like my colleague Brian Hunt said yesterday, the market's job is to hurt as many people as it can. Right now, according to the various numbers we're studying, the market hasn't enticed enough victims. Too many people still aren't buying yet.
That said, stock prices are generally growing expensive. It's hard for a value investor like me to find anything to buy. I've recommended selling many more stocks in Extreme Value than I've recommended buying lately.
It's typical for a value investor to recommend buying more stocks when the market is down than when it's up. I recommended 18 long ideas in 2008 and 2009... and just seven in 2012 and 2013. I recommended seven new long positions last year, only because I tried (unsuccessfully) to buy at the bottom of the huge natural resources bear market that started in 2011 and still rages on today.
As you can see, calling tops and bottoms is dangerous. That's why I stick to buying high-quality businesses. They're safer. My Extreme Value subscribers have done well buying safe blue-chip companies – what I call "World Dominators." We're up 200% on payroll-processing firm Automatic Data Processing, 107% on consumer-products giant Apple, 174% on tobacco company Altria, and 456% and 172% on booze giants Constellation Brands and AB InBev, respectively.
If I've learned anything in nearly 20 years at this, it's that reducing risk and buying great businesses is the surest way to wealth in the stock market.
So far this year, I haven't recommended buying any new stocks. Mike and I are currently looking for good short-sale candidates and building a watch list of the greatest businesses we can find so that we can buy them whenever they become cheap enough.
Most folks probably think I'm crazy for closing out of more positions than I'm recommending as the market marches upward. I'm OK with that. It's important to be disciplined as a newsletter editor, just as it's important to be disciplined as an investor. Even great businesses can be terrible investments if you pay the wrong price. Anyone who bought shares of beverage giant Coca-Cola in 1998 had to wait more than a decade to break even (after dividends).
Figuring out the price to pay isn't the hardest part, though. The hardest part is selling when everyone else is buying and buying when everyone else is selling. You can be wrong for a few years at a time (like folks who started getting bearish in 1996 or 2004) even if you're behaving correctly. But if you learn to spot a great business and buy when it's cheap (and sell when it's expensive), you'll vastly grow your wealth over the long term. Plus, you'll do it by taking less risk than most investors.
New 52-week highs (as of 4/14/15): AllianceBernstein (AB), American Financial Group (AFG), Aflac (AFL), Deutsche X-trackers Harvest China A-Shares Fund (ASHR), Axis Capital (AXS), Brookfield Asset Management (BAM), WisdomTree Japan Small-Cap Dividend Fund (DFJ), and Energy Transfer Equity (ETE). A subscriber asks about reinvesting dividends in the mailbag. Do you have a question for one of our analysts to answer? We can't answer individual investment advice... but please send your questions and comments to feedback@stansberryresearch.com. "Is there a difference between reinvesting dividends, and using the same dividends to buy additional shares each quarter on your own? Is there a different tax treatment? Do you get a better price on the stock if you reinvest?" – Kurt Schraut
Ferris comment: Nope. It's the same as if you had done it yourself. It's purely a matter of convenience... and discipline. As long as you buy high-quality companies that you can hold for a long, long time, setting up an automatic dividend reinvestment plan helps to keep you in the stock during downdrafts when you might otherwise be inclined to sell.
Regards,
Dan Ferris
April 15, 2015
