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 |  Subject: MoneyWeek's Wealth Assault #2 - A second, Even Bigger Stock Sell-Off Inside 2 Months  Tue Aug 04, 2009 11:10 am | |
| by Toby Bray, Publisher, MoneyWeek
Extract from an article that covers 4 wealth assaults and 4 financial protection moves that will be posted here.
Here's the wealth assault #2: A second, Even Bigger Stock Sell-Off Inside 2 Months"The bulls are in control," says Vito Racinelli in Barron's.  | Don’t buy into this rally |
“The panic is over!” declares Forbes...
“Buyers are shopping for stock bargains... we believe the panic is over and a V-shaped economic recovery is under way.
“It is in its earliest stages, which means plenty of economic indicators have yet to turn positive, but the signs of a strong bounce off the panic-induced lows are all around us.”
Optimism that the worst is over and growth could soon rebound has driven the FTSE 100 up 28% this year. Investors – private and institutional – have bought into economic recovery and cheap valuations. The earnings picture, it seems, is not an issue. At MoneyWeek, we believe earnings are very much an issue. In other words: Don’t buy into this rally either, reader.You need to take important actions to protect your stock portfolio as soon as possible. I’ll get to those shortly. First you need to know about the screaming warning signal that’s flashing as you read this...The ‘Fed Model’ says SELL Just six months ago this signal flagged up a major opportunity to get into shares. Now that same indicator says stocks are overvalued. It’s time to get bearish on the stock market.This indicator is called the ‘Fed Model’. It shows the relative value between stocks and bonds and has slipped from bullish on stocks to neutral. It gave its most bullish reading in modern history in January, ahead of the recent rally, but has slipped back with frightening pace. We know this by calculating the FTSE 100’s earnings yield (earnings per share divided by the share price) and comparing it with the yield (what you get as a dividend) on 10-year government bonds. The idea is that you should buy stocks when the yield is significantly above the yield on risk-free bonds. Right now, it’s NOT. And this is an indicator with a very good track record...
- The Fed Model sent a clear SELL signal on European equities in June and July 2007, well before the market finally cracked.
- Of course, the Fed Model’s most famous calls were in the 1987 and 2001 market crashes. Both times this model called the top of the market, according to data from ING Research.
The prevailing opinion here at MoneyWeek is that markets have reached some kind of inflection point. (Try three free issues by clicking here.) Right across the board, markets - be they equities, commodities or currencies - seem at an obvious place to make a turn. Make no mistake: a correction is coming. In fact it may happen any day now... What to do before rally turns to crash Absolute Strategy Research is already warning its clients of the potential risk: “We suspect that the biggest risk for equity investors is likely to come from rising bond yields rather than rising PE multiples.” And Credit Suisse is not far behind, saying “the rise in bond yields has undermined the valuation of equities.” “Stocks have raced ahead of the fundamentals and there seems little scope for further gains this year.”
-- Robert Quinn of S&P
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The Fed Model could prove, again, to be the canary in the coal mine. That means it’s time to consider selling some of those winners or at least putting your best performing shares on a very tight leash. One way to do that is by placing stop-loss orders on winning shares. That way, if they do fall back, as we believe they will, you can lock in profits into your portfolios. Now’s the time to do this.In 2009 so far, UK general retailers have outperformed the overall market by a third, while housebuilders have beaten the index by 25%. Even Britain's bank shares have done better than the FTSE All-Share by 3%. If you own stocks in those sectors, you’ll want to consider selling immediately. In just a moment, I’ll introduce you to the ONLY small group of stocks worth buying and owning in the months ahead. But right now, I should introduce myself. My name is Toby Bray. I’m publisher of MoneyWeek magazine. We’ve seen a lot since the magazine’s inception 9 years ago. MoneyWeek prophetically told its readers to buy oil when it was $23 a barrel. We tipped specific gold and silver stocks 3 years before the City even mentioned them. And MoneyWeek pushed investing in China and India long before leading fund managers. We’ve been calling for a crunch in global credit markets since 2004. But even MoneyWeek’s analysts have been taken aback by the scale and speed at which things unraveled at the end of last year. I’m writing today because worse is to come...“Forewarned is better.” -- Contrarian veteran James Grant James Grant is right. It is better to anticipate risks than to ignore them. Seems like a pretty straightforward rule. But caution is almost never popular. Investors brag about the money they made, NOT about the money they avoided losing. Frankly, the mood right now among the investment mainstream is frightening. On June 6, Brian S. Wesbury and Robert Stein - senior American economists at First Trust Advisors – stated in Forbes:
“The stock market should rise back to its pre-panic levels. It took seven months for the Dow to fall from 11,000 to 6,500, and it is very possible that it could go back to 11,000 in another seven months.”
"I could not have survived all this turmoil without your timely advice, information and assessment of what has been going on. I have saved myself loads of money on my pension fund following your tip-offs"
-- Tony Le Grange, Southampton
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That kind of move would be unprecedented in history.What planet are they on!And yet it’s the same party line in pretty much every investment bank and broker on the planet. But we at MoneyWeek think caution is valuable – especially the kind of informed caution that saves your skin when everyone else is losing theirs... Informed caution is our specialty... and those who have faithfully read our pages over the years could testify that forewarned is, indeed, better... much, much better. | |
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