From the Desk of Craig Griffin, President and Founder of ITM Trading
MARKET UPDATE 5/30/2014
Does an investor only need to know what direction the stock market is heading? Well, one always wants to align themselves with the primary trend but one also has to understand why a market is headed in a particular direction or that person is liable to get caught in the high wire act, and as Jim Rickards says in his new book, “When the [stock] market crashes this time there will be no net!”
If you suffered through the crash of 1929 you would understand what Rickards is talking about. The high level reached by the Dow in September 1929, which was 381 points, was not crossed again until 1954, some 25 years later.
I have written in past updates that single biggest reason that the stock market has been rising is due to stock- buy backs. Today Bert Dohmen,of Dohmen Capital Research Institute, was on CNBC’s Closing Bell. You can see the interview here:
Dohmen pointed out that the stock buy backs are very deceptive for investors because it increases the earnings per share by reducing the number of shares outstanding. CNBC commentator Bill Griffeth interjected by saying:
“Tell me what company is not doing that right now?” This is the danger! “So many companies that are increasing their dividends, they’re not spending on new factories, they’re not hiring more people, they’re increasing buy-backs. I mean they are doing all the things Apple is doing and it’s working, stocks going up!”
In other words, these companies aren’t investing in their infrastructures; they are using the easy money policy of the Federal Reserve to borrow money at zero percent (or close to it) and buying their stock back. What does this tell us? There is a big disconnect between what is really going on in the U.S. economy and high price of the Dow Jones which makes us more vulnerable today than we were just prior to the Great Recession which spanned from December 2007 – June 2009. GDP growth was very strong and real estate was throttling upward at a historical pace just prior to the Great Recession.
According to Economic Cycle Research Institute (ECRI), the U.S. is now in a new recession that began around the last quarter of 2012 or the first quarter of 2013. They originally felt that the recession would begin around the summer of 2012 but have revised their call by a few months. Not bad considering the National Bureau Economic Research (NBER) sometimes doesn’t make the official call as to when a recession began or ended until months and even years after the recession ended. For instance, the NBER didn’t make the official call as to when the 1990 recession began until 24 months after the recession ended!
Their long periods of doubt which is delivered to the people through our newspapers and financial press only serves to keep the small investor buying stocks while the big corporations distribute or sell their stocks to the public! Distribution is always ever present at a market top, particularly a market that has been bulled higher by easy money with no real fundamentals for a solid economy!
Dohmen then asked on air:
“Do you know that the stock buy-backs (companies buying back their own stocks) is the only big buyer we have seen for the last five years?! Every major group of buyers, institutions, pension plans and so on have been net sellers of stocks in the last five years. Only corporations buying back their own stock has been the big buyer at almost a trillion dollars a year! So that is what made stocks go up!”
Do you see the danger here? Stocks aren’t going up because the economy is sound! Stocks have been rising mostly because corporations have been buying back their own stocks and this has been driving the market higher. It is times like these when these huge corporations begin to distribute their stock to the public while they exit the market. Now this can’t be done unless the stock market is rising and even appears hot so the public feels it is safe to get into the water. This is the reason for stock purchases and a sure sign that the end is near!
We recently invited our subscribers to listen to an interview that I conducted with James Rickards a few weeks ago. Rickards is one of the brightest guys on the planet and in this interview Jim talks about financial terrorism,and surmises that future wars will be financial. The nature of these wars is to cripple a country’s economy, their stock and bond markets and of course their currency! It is no secret that the U.S. is a major target for these new terrorist plots. Jim believes it is important to protect yourself from coming events!
Jim was approached by the CIA to study the financial terror inflicted on the United States which happened just prior to the attacks of 9/11. This is a must hear interview and you can listen by following this link or call us at 1.888.OWN.GOLD for a free CD!
And remember, “It would be foolish to acquire gold for the short term but it would also be unwise not to own some gold for the long term!”