There are lots of commentators arguing both sides about whether or not we are at peak stock market valuation.  Certainly there is evidence that the market is richly valued, yet the market still goes up.

John Hussman just published a compelling analysis of where the market is valuation wise, showing how by one measure the current stock market overvaluation already exceeds the 2001 tech bubble.  This chart breaks valuation down by market breadth, showing that if you look across the whole market, the value sectors are more overvalued that in 2001:

Note that the mid to low valuation stocks are at higher levels than in 2001, showing the market is much more broadly expensive than when the tech stocks were all the rage.  One analysis of this could be that this is all due to the lower bond rates, and by comparsion to current bond rates the market is in an expected valuation range (kind of reminds me of the old joke about a guy bragging to his friend that he just bought a dog for $20,000 – when asked how he paid for it, he said ‘I gave the seller two $10,000 cats’).  Valuation is relative.

So this doesn’t tell me conclusively that the market is at a top.  Indeed, John Hussman had a similar market top article a year ago, and the S&P 500 is up over 13% since then.  My current leaning is a major market correction will happen before the next presidential election, but I don’t currently see any signs within the next 6 months.  I will agree though that we are in risky territory.

Many Economists are making dire predictions about the next economic slowdown due to the increases in world leverage since the 2008 crash.

Bill Mauldin is the latest to publish an interesting commentary on this.   The main thesis of his post is he sees far more dangers than the Federal Reserve.

His biggest beef is with Janet Yellen’s recent quote:

Would I say there will never, ever be another financial crisis? You know probably that would be going too far, but I do think we’re much safer, and I hope that it will not be in our lifetimes and I don’t believe it will be.

Contrast that quote with this chart Mauldin included showing how much more the world is leveraged than in 2008:

So who is right:  Was 2008 a once in a lifetime economic experience, or is there another disaster looming?  As is true in most cases, hopefully the answer is somewhere in the middle.  But the leverage is something to think about.  In 2007, the GDP of the G7 countries (which is a decent approximation of the above chart) was 31 trillion.  In 2017, it is estimated to be 36 trillion.  In 10 years, the G7 economic output as increased just over 16%, yet leverage is now more than tripled.

So for an analogy, lets say in 2007 you were earning $31,000/year, and had outstanding debts of $4,000.  In 2017, you think you will be earning $36,000/year with debts of $13,000.  Would you consider yourself fiscally better off in 2007 or 2017?  How worried would you be if there was a recession on the horizon.

Some economists may question whether this is a valid analogy or not, but it does show the magnitude of how the countries fiscal health has changed.  Obviously Janet Yellen doesn’t consider that analogy totally on target,  based on her above quote.  I would sure like to see better evidence as to why she thinks we are so much better off now.

If I had to pick between the two camps in this argument, I would lean toward’s Mauldin’s thinking.  His quote:

Generals always fight the last war. The next crisis probably won’t originate in residential mortgage loans. It will come from somewhere else, and we have no idea whether the banks are actually ready for it.

I don’t get the impression this worldwide glut of debt greatly concerns the Federal Reserve Board.  Hopefully they are right.  If they are wrong, history will likely place the blame for any major economic downturn squarely on the Federal Reserve and all worldwide central banks.

After a long break from writing for Seeking Alpha, I have gotten back in the groove again and just had another article posted.

3 Questions For Fitbit Investors

This article has been brewing in my mind for several months, and I finally had a chance over the long weekend to get my thoughts organized and in ‘print’.

To read the whole article, you will have to register with Seeking Alpha (which I recommend to any investor).  This site has interesting articles written by a wide variety of authors – a great resource if you are looking for investment opinions.

I have been doing some portfolio pruning of late, and have decided to drop two stocks from the Puget Investor Portfolio.

Nordstrom (JWN) has been a long time holding that I finally decided to drop altogether.  Last year I wrote about my concerns about Nordstrom, and why I unloaded most of my holdings.  The thesis from last year remains – Amazon is going after clothing retailers, and I don’t want to bet against Amazon.  When I saw that Amazon has come out with the Echo Look Style Assistant, I knew it was time to fully abandon my Nordstrom position.  The Echo Look appears to go after the young fashion conscious consumer that would shop at Nordstrom – and I don’t know if Nordstrom has an answer for that.

Last week Nordstrom’s announced it was considering going private and the stock bounced a bit.  An interesting development, but I am not sure if that is the answer.  But I wish them good luck.

One related interesting stat I heard regarding retail.  Because brick and mortar retailers have such high fixed overhead – if online takes just 25% of the traffic from stores, the store cannot survive.  Most retailers are operating under such tight margins already, even a small drop-off in traffic could have painful consequences.  Something to think about.

My reasoning to drop Hooker Furniture (HOFT) was a different story.   I originally bought HOFT a couple years ago while perusing AAII‘s model portfolio of cheap, small cap stocks.  After looking at a few of these stocks, I opened a small position in several of the stocks that looked like they had decent business models.  As is often the case, this strategy had mixed results, some stock had done well – some did not.  At the time Hooker was amazingly cheap – price to book around 1, little debt, flat to growing revenues.  Seemed like a no-brainer, so in March of 2016 I picked it up around $32.  It soon got cheaper, for no apparent reason (my thesis was still intact), so I picked up some more at $25.  I was beginning to sweat my decision as the stock went no where for months, but I held on, and suddenly this month it surged to $46 on decent earnings (who new.. millennials are buying furniture!).  Since the stock no longer is dirt cheap, and I am not a big bull in the growth of home furnishings, I decided there is no reason for me to keep this.  So I am out.

I still have a couple stocks from my foray into the AAII model portfolio, Rocky Brands (RCKY)  and Ultra Clean Holdings (UCTT).  I am going to have to make a decision soon on these stocks also, as these have started to move up and I am not sure I can call them cheap anymore.  Either come up with a new thesis, or drop them.

I am re-evaluating how many individual stocks I should own, so I may not replace these stocks with new holdings.  I may go back and look at other AAII Model Portfolios for ideas, or just add to existing positions.

Snap (SNAP), best known for it’s SnapChat app, is the latest tech IPO, the largest since 2014.  I have never used the app, don’t really follow the company,  and for the most part feel like most people that this is way overvalued and may end up with the same painful stock price route of GoPro.   However, I did have a couple thoughts on  yesterdays IPO.

1. Yes, it’s likely overvalued, but they do have an innovative marketing angle which has the potential to unleash something big.  Snapchat allows you to put various filters on the picture of yourself, to make it more amusing to whomever you send the picture to.   Key to this is their ability to support sponsored filters – filters branded to the company developing the filter – an example of which is the Taco Bell filter on the right. Sure, its kinda silly (but this whole app that they built a 33 billion market cap around is pretty silly),  but as far as building brand awareness and ‘hipness’, it seems to me to be pretty unique.  Any company looking to strengthen its relevance should find this more intriguing than any banner or pop up ad.  Teenagers are the primary demographic for this app, so  it would be an interesting ad choice when promoting a movie and its characters, or other product aimed teens.  It is sure more interesting than  TV advertising, banner ads or popups.  It will be interesting to see if this gets traction, or if the founders of Snapchat find other innovations in advertising.
2.   Economist Steve Liesman of CNBC had an interesting offhand comment when talking about the IPO.   He essentially stated this exemplifies what is wrong with the economy and why growth is so slow.  Snap is a company getting a 31 billion market cap,  bigger than Paccar and Nordstrom combined.   Snapchat has 1,200 employees – Paccar and Nordstrom combined have 95,000.   Snapchat has 550 million in long term assets (i.e. plant and equipment) – Paccar / Nordstrom have 9.5 billion in long term assets.  The new economy requires very little capital investment – which is great for 1200 people, but it siphons away capital from companies that spread it across the economy.  Maybe this helps explain why the Fed can’t get growth going even at near zero interest rates.

I won’t be following Snap closely, but it may turn out to be in interesting story going forward. It will be interesting to see if this is the next Facebook or the next GoPro.

I am a fan of Twitter the product – I think it provides a unique niche for news and events in a time where more people are getting engaged in social networks.  However, this week I finally threw in the towel and closed out my position just barely breaking even.

Why? I am reminded of a quote I heard from Jordan Ritter on Triangulation.  To paraphrase, ‘the most important thing for an organization is a good team. A great team can be successful with an average product, but a bad  team will screw up the next Facebook every time’.

That’s how I feel about Twitter – great product, but the current team is not making the moves to make it work.   I had hoped when wunderkind Jack Dorsey returned as CEO, he would provide the leadership necessary to make the team move the product forward.  After a year and a half, I am seeing few signs of improvements.  And if you looked at the stock based compensation numbers for its employees, it looks closer like a pre-bubble bust company of the early 2000’s.  Factor in that earlier in the year several companies looked into buying Twitter, and all walked away after due diligence.

Hopefully someone will buy out the company and build a great product and make product enhancements to better monetize the platform and make it easier for new users to get engaged with.  I still think this platform has potential to be great, but I am on the sidelines until I see signs of a great team in place.

I typically have been a bottom up investor- look for companies I think are undervalued, and invest in the hope that others will see the bargain out there and raise the price.  This is called ‘Bottom up Investing‘, focusing on the individual market vs the stock sector or the asset class.

However, the market action of the last month has shaken my belief that bottom up investing is rational.   Since the Presidential Election, stocks in the Financial and Industrial sectors have taken off, on really no fundamental news.  For example, take a look at Columbia Banking (COLB)  and the Vanguard Financial ETF (VFS) over the last 3 months:

No news, no management changes, just a lot of stock being pumped into the financial sector because of the new administration.

Here is another example, FLIR Systems (FLIR) systems, in the industials sector, compared to the Vanguard Industrials ETF (VIS):

Again, no news, just happens to be in a sector where money managers are moving money too.  FLIR Systems has a number of industrial products centered around imaging and surveillance cameras – I hope this doesn’t reflect a belief that this administration is going to ramp up spending on domestic surveillance, but this isn’t a positive sign.

And what caused this huge shift in sector allocation?  My best guess is Trumps leaning towards rebuilding infrastructure and piling up bigger government debts.  That’s a lot of money moving around based on an administration whose policies are murky at best.

So, should I abandon bottom up investing and switch to top down investing?  No.  I won’t abandon it – I cling to the belief that undervalued companies will be recognized eventually.  However, I do think I need to increase my focus on watching asset class and sector indicators.  It does appear in this world where so much money is managed by a small pool of investors, there is is something to watching what the so called ‘smart money’ finds attractive.

I have been watching Gold lately as an asset class – Gold has always been a curiosity of mine as to why people would invest in gold.  Over the last few years as I have been watching how momentum impacts markets, I feel I understand a little better about the hows and whys of how gold prices move.

As of this writing gold is up 26% YTD, and the gold miners index is up 136%:

So you might think you are an idiot for not investing in gold this year – except if you thought that 5 years ago, people would call you an idiot because gold had been steadily declining for the last 5 years:

Obviously Gold is a tricky investment, and lots of people stay are recommended to stay away from it.  However, it seems that as interest rates approach zero – people are wondering the downside of holding gold?  I think there is an increase in people’s nervousness that with all this sovereign debt floating about the world, some event will explode on the scene and inflation will kick in.  If that happens, bonds yielding 1% is not the place to be.

The argument against gold would be a deflationary scenario – in which prices fall – gold will follow.  Apparently markets don’t see that as a significant risk.

Jim Grant, who has consistently been a gold bull, and points to worldwide monetary shenanigans as the reason for golds new found popularity.

In a recent radio interview, former Fed chief Alan Greenspan suggested if we returned to the Gold Standard, ‘we’d be fine’.  Returning to the gold standard has long been talked about as a kooky idea by economists, and it may well be an antiquated idea.

However, something is driving the new found interest in gold, and I think the worldwide decoupling of printed money from government assets is leading the world to wonder about the value of currency.  So whether or not a formal move to the gold standard ever gets momentum, it appears investors are wanting their assets backed by tangible goods.