The year draws to a close. It will be one for the history books.

By the end of last week, 50 stock market records had been broken. And now the Dow pushes toward 17,000.

The overwhelming majority of investment advisors are bullish. Even longtime bears – such as Hugh Hendry, Jeremy Grantham and John Hussman – have decided to join the fun.

Here’s the Reuters report:

“I can no longer say I am bearish,” said Hendry today according to InvestmentWeek. “When markets become parabolic, the people who exist within them are trend followers, because the guys who are qualitative have got taken out.”

Speaking at the Harrington Cooper conference, Hendry argued that an ongoing currency war between the US and China will continue to force the Federal Reserve to keep monetary policy loose and easy.

“I may be providing a public utility here, as the last bear to capitulate,” he said. “You are well within your rights to say ‘sell.’ The S&P 500 is up 30% over the past year: I wish I had thought this last year.”

Hendry sounded pretty crestfallen. Here’s more from InvestmentWeek:

“I have been prepared to underperform for the fun of being proved right when markets crash. But that could be in three-and-a-half-years’ time.”

“I cannot look at myself in the mirror; everything I have believed in I have had to reject. This environment only makes sense through the prism of trends.” 

As Hendry said, he is not the first bear to “warn” that stocks are likely to go much higher from here. Here’s a roundup of some recent quotes we’ve heard from the long-time bears: 

John Hussman: “…we should neither expect, rely or be shocked by a further blowoff…”

Jeremy Grantham, GMO: “My personal guess is that the US market, especially the non-blue chips, will work its way higher, perhaps by 20% to 30% in the next year or, more likely, two years…”

Richard Russell: “I continue to think that this bull market will end in an upside explosion.”

Bob Janjuah, Nomura: “I still see end Q4 2013, through to end Q1 2014, as the window in which we see a significant risk-on top before giving way, over the last three quarters of 2014 and through 2015, to what could be a 25% to 50% sell-off in global stock markets.”

Uncharted Waters

Is there no one else? No one else? What are we? Chopped liver?

Yes, dear reader, everyone is thinking the same thing. Which means no one is thinking at all.

True, take a look at almost any stock market chart and you will see something that looks like it wants to go up further.

But who knows?

We are sailing in uncharted waters. No maps. No GPS. No road signs. No familiar landmarks. Central banks are all engaged in experimental monetary policy – on an epic scale. Now the financial markets – and perhaps the economy too – are hooked on it.

Two weeks ago, the Fed announced that it would begin scaling back its bond buying. Instead of buying $85 billion of Treasury and government-backed mortgage bonds a month, the Fed will now only buy $75 billion a month.

It was like an alcoholic who tells his wife he is cutting back on his drinking: “From now on, instead of a quart of Jameson a day, I will only drink a fifth of Wild Turkey.”

There was something insincere, too, about the Fed’s additional note – that it would keep interest rates near zero as long as it damned well pleased.

Stay on the Sidelines

Whatever comes of this, our guess is that the drinking spree is not over. In the meantime, anything can happen.

So what do you do?

Stay on the sidelines, we urge.

“But wait,” protests a family member, perhaps speaking for the majority of dear readers.

“Staying on the sidelines has been hugely costly. I don’t know if I want to stay on the sidelines while this stock market continues to go up.”


More and more people are asking the question. And more and more are sure of the answer: No. Which makes us wonder if there really are any buyers left… or whether the buying is a result only of the Fed’s QE.

But as far as we know, as long as the Fed keeps pumping, prices for stocks, Andy Warhol doodles and Manhattan apartments will keep going up.

But that doesn’t mean any of them are good investments.

Stocks, for example, are an option on a bigger Fed-induced bubble. But they’re not cheap.

A simple look at the 12-month “as reported” P/E for the S&P 500 will tell you that. (More on this below from Chris…)

Could this continue? Yes, of course. Or, it could blow sky-high.

Yes – 2013 was one for the history books; 2014 almost surely will be, too.



Market Insight:

How to Shop in the ‘Bargain Basement’
From the desk of Chris Hunter, Editor-in-Chief, Bonner & Partners

A look at the price-to-earnings (P/E) ratio for the S&P on a 12-month “as reported” earnings basis reveals that the index is trading at 20.3 times earnings.

The historic average is a multiple of 15.5.

That means the S&P 500 now trades at a 31% premium to its historic average.

P/E ratios measure how much investors are willing to pay for each dollar of underlying earnings. A P/E of 20 means investors are willing to pay $20 for $1 of 12 months of earnings. A P/E of 5 means investors are willing to pay just $5 for each dollar of earnings.

Most investors get excited about stocks… and stock markets… that trade at high P/Es. These make for exciting dinner party conversations… and give investors the kind of adrenaline rush usually reserved for bungee jumping and high-speed motor racing.

At Bonner & Partners we take a different route. We like stocks – and stock markets – that are unloved… out of favor… and on offer at low earnings multiples.

Carloads of research shows that this is the best way to make money in the markets over the long term.

The reason is simple. High-flying growth stocks are vulnerable to falling at the slightest hint of disappointment. Not so for bargain basement stocks, which investors expect to disappoint. But even the slightest hint of improved prospects for bargain basement stocks will trigger fresh interest and higher prices.

As legendary low P/E investor John Neff put it: “If you buy stocks when they are out of favor and unloved, and sell them into strength when other investors recognize their merits, you’ll often go home with handsome gains.”

Our advice: Seek better bargains than are currently available in the S&P 500 and hold for the long term.