Transcription of last Friday’s “Market Situation Report”

 

This email is a full transcription of Friday’s “Market Situation Report”. If you would prefer the video format, you can find it here.

 

The Market Situation Report

 

I was on several radio stations this week and my approach of buying strategies and not stocks came up a lot.  So, what I’d like to do is share with you the one strategy we talked about the most; my Long-Term Economic Cycle Strategy (I call it the LTEC strategy).

The first thing you have to know about this strategy is it compounds money at 17% to 22% a year. Not every year. But, any five-year period over the past 65 years, it’s moving at this rate.

So how does it work?

The L-TEC strategy is the foundation of why people are able to lower their volatility and their effort while increasing their returns over time.

I will show you why it’s so effective.

Look at the chart below.  You will notice five blue bars and a pink one.  The pink one is where we are today.  If you look at group 1, you will notice it says “Average P/E 7.7” below the bar.
1.16.13 Image1.jpg

 

P/E stands for “Price-to-Earnings”. What this means is people are willing to pay $7.70 for one dollar of annual lifetime income. In other words, a person pays a little less than eight dollars and they get one dollar every year forever.

That means it will take 7.7 years to get your money back. And then after that, it’s all profit. Simple, right?

So, what happens if the P/E ratio is 11.2, like it is below the second bar in the chart above?
Or how about 14.5 like it is below the third bar?
Or 17.5 like it is below the fourth bar?
Or 23.4?
Or 40!!!

What you want to understand is the higher the P/E ratio is for the stock market, the longer it will take you to get your money back and working for you.

So, when the P/E ratio was 40+ in the year 2000, it would have taken 40 years to get your money back. And this doesn’t include inflation either. And if that wasn’t bad enough, then you have life expectancy hitting around 80 years old.

So, if you are over 40 and bought the stock market in 2000, then you will just start to make money when you are on death’s doorway.

That doesn’t seem like a good strategy, does it?

I want to point out one more thing on that chart above. Notice the numbers on top of the bars? From left to right they go from 11.4% to 2.8%.

Those numbers represent the average annual return for your money when you buy at any of those levels over the next ten years.

If you buy the market at 40 (P/E ratio), then over the next ten years, your returns will be a negative two percent growth rate.

Today, the P/E ratio of the stock market in the U.S. is about 18.5.

Here is the key to understanding this all. What is most important is not the actual number, but the direction the numbers are moving.

When the numbers (P/E ratios) are moving higher over time, the market is in a bull market; like we were from 1982 to 2000.

And when the numbers (P/E ratios) are moving lower over time, the market is in a bear market; like they have been doing since 2000 till today.

110 years of market history says bear markets do not begin to end until the P/E ratio is a single digit.

We are 18.5 today and we are on our way to 9!

Today, twelve years into the bear market in stocks, the markets have gone from charging $40 for one dollar of annual lifetime income, to charging $18.5.

The number is moving down. This means we are in a long-term bear market.

In the chart below, look at where the two pink rectangles intersect. A P/E ratio of 18 or 19 will return a 5% a year annual return (after inflation).

 

1.16.13 Image2.jpg

 

This is how people like Warren Buffett and Jeremy Grantham can come out and say, with confidence, that they expect a 5% growth rate over the next five years in the stock market.

If you consider that the stock market is up 3.5% this year, that means that about 70% of the growth in 2013 has already happened in the first six or seven trading days.

Next, look at the price chart of the S&P 500 from the year 2000 until today.

 

1.16.13 Image3.jpg

 

Notice how the price has moved down 50% and then up 100%, and then down 58% and then up again 100%; which all equals an incredible amount of stress, but no gain. This is why the pink line is flat.

Why am I showing you all of this material?

If you get the big picture right, you get everything right.

The LTEC Strategy stands for “Long-Term Economic Cycles” as I said before; it is about identifying which direction valuations are trending.  Are valuations trending up on the S&P 500, or are they trending down?

Again, like I said just a minute ago, they are trending down.

When the valuations are trending down (P/E ratios falling), they are going to be falling for an average of 18 years. That means people will not grow their money for 18 years if they are just buying the stock market.

This is also the reason why diversification and re-balancing is a broken strategy while the stock market is in a long-term valuation fall. The market pulls 85% of all the stocks with it during bear markets.

But, during this time, there are assets that are trending up. Historically, over the past 100 years, gold and silver have done exceptionally well, while the P/E ratio has trended down over long periods.

We are in one of those long periods right now where stocks fall and gold and silver go up. Not every year, but over any three to five year period, gold and silver will crush the returns of the stock market.

Again, this is even true today.

On November 1st 2000 =
– Silver was $4 an ounce
– Gold was $250 an ounce
– The S&P 500 was at 1433

Today, January 16th 2012 (twelve years later) =
– Silver is $31 an ounce (571% higher)
– Gold is $1683 an ounce (536% higher)
– The S&P 500 is 1472 (2.7% higher)

So how does the LTEC strategy measure and monitor this?

Simple.

It monitors the direction of three numbers very closely.

It is constantly monitoring:

1) The direction of the P/E ratio.
2) The direction of the dividend yield, and
3) The direction of the Gold/S&P 500 ratio (how many ounces of gold it takes to buy one share of the S&P 500).

This is why I often talk about getting the big picture right. Simply follow this 110-year cycle based on human behavior, and you are going to be able to grow your money in the top 1% while working very little at it.

All that is left is for you to hire a therapist to visit once a month so you can share with him or her how difficult it is to not belong to the huge crowd of people losing their futures in the stock market. I’m not really being sarcastic here. It’s not trivial to tolerate not belonging to that huge group of people.

The LTEC strategy is almost this simple, but not quite. Keep a look out for my free training videos coming out next week.

As I’ve been telling you, I have put together a set of six training videos that will show you all the details of not only the LTEC strategy, but the other three too.

Next week, you can have them.

 

Together, we are growing and protecting your wealth,

rc_signature.jpg
RC Peck, CFP 

Fearless Wealth | Investment Independence
Helping Individuals Reach Financial Independence Sooner, Faster, Safer.

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