Gold News

Market Needs a Hero

And gold needs more time yet to reload for a bull market...
 
SCOTTY GEORGE is chief investment strategist at Alexander Capital. Here he speaks to Mike Norman at Hard Assets Investor about how the 5-year old US bull market in stocks needs a new "big idea" to keep running...
 
Hard Assets Investor: The Ukraine situation, sanctions imposed by the US and Europe, the possibility of another cold war – it's creating a lot of volatility and cross-currents in the markets. What's your big picture of what's going on?
 
Scotty George: If we could solve that issue in five minutes, we'd be heroes. The way these political events are affecting the markets is creating more uncertainty. The less certainty there is, domestically and overseas, the more the markets will roil at the top. That's exactly what we have.
 
We have foaming. We have upside/downside days. We have no consistency in market patterns. As a quantitative strategist, I'm used to seeing cycles, parabolas that move in an orderly fashion across the page. This reminds me, in terms of valuation, of how the market looked before the dot-com crash in 1999, 2000.
 
HAI: Really? That extended, that extreme?
 
Scotty George: Yes. Let's talk methodology. If markets move in cycles, and you can quantify those cycles, both for duration and magnitude, we reached the pinnacle of the magnitude of the market's five-year cycle about a year and a half ago. What we have now is a combination of froth, and a kind of linear expansion of the parabola. At the top, instead of turning over and nominally creating a recalibration that would enable us to go up, we're continuing to go straight up, or to the side.
 
Typically, definitionally, what would happen in that type of a configuration is that a linear upswing would be met by a linear downswing. And that's where I think there's danger in the market. There are stocks to be owned in here. But there are really no asset classes, nor categories that you can find, that are going to maintain an upswing at these valuations.
 
HAI: But if you look at the S&P's rally over a five-year period, from 2009, where it effectively, what, doubled on an annualized basis...in 2000 we had a huge move up. I think this is why a lot of people have not been involved in this move, because it's been kind of slow and gradual. And it's been the proverbial wall of worry where people thought it can't last. And it's overdone. And the economy is not that strong. And unemployment's still high. And then it seems like every phase, there's a new worry. Now it's about the Fed and taper.
 
Scotty George: That's not exactly how I see it. I think, from a configurative standpoint, what you've described is exactly what you would see if you looked at the market on paper. When this new rally began after the credit crunch in '07-08, we were at valuation levels where the only way to go would be up. There were no downsides left to the market, either in fixed income or in equities. So I don't think we've climbed a wall of worry. We've climbed a wall of uncertainty.
 
The issue now is that, after having climbed that wall, you only know you've climbed it when you look backward and you see where you've come from – at these levels here, the issue is, how long can corporations sustain pricing against their earnings dissipation? How long can we sustain momentum and consumer confidence in the wake of the kind of crises you're talking about, that affects not only the US but Europe and our trading partners?
 
I don't want to be negative, what I'd like to be is methodological. And from that standpoint, I had a lot more money invested at the crash of '08 than I do now. We're raising cash, we're not committing cash.
 
HAI: So what would change your view? Do you just stay in cash until, at some point, the market corrects?
 
Scotty George: That's the question our clients keep asking us. Last year, the S&P went up 30%- plus. Our balanced accounts were increasing at about 14%. That represented a market exposure of about 30-40% in equities and about 30-40% in cash. So the calls I got at the end of last year were, "Why did the market do so well and we did nominally well?"
 
I said, "Look back over the five years that we've been invested. We didn't experience a crash when the crash occurred, because we were smart enough not to be at the top. We were fully invested when the market was rising off of the bottom." What we perceive now is that, as we approach valuation expansion, it's good to take some money off the table.
 
So what do you do? What do we think is going to happen? I think a hero has to come in. I think we're going to have to see a kind of demographic theme that catches the imagination of the investment marketplace, whether it's in alternative energy, bio care and health and life sciences, even infrastructure redevelopment...
 
HAI: Isn't life sciences and health care that theme? You have Obamacare, the whole demographic aging population, the need for more healthcare services...
 
Scotty George: It is, but you've got opponents on every side of that issue. The kind of hero I'm looking for...we remember the space program. If you can galvanize capital toward a mission statement, what you do is you begin to bring leaders into the equation, and coincidentals begin to follow and the laggards begin to pick up. At this point in the market, everything is a leader, everything is expensive. There really are no hero focuses, no hero sectors that can pull this market up.
 
HAI: Moving into the commodity area, which is what we like to talk about, why wouldn't you be looking at that now, as a countercyclical play, as a contrarian play?
 
Scotty George: The question then would be, Where would you be invested? What are those countercyclical sectors in which to invest? Tangible assets, and the potential for price pressure and inflation in those assets – which already exists in agriculture, milk, beef, corn, grain – is where the pricing pressure is. So, tangible assets is one sector we favor right now.
 
HAI: And they're not the hot sectors anymore.
 
Scotty George: Well, it's a good thing for investors. It's a bad thing from a methodology standpoint. Because everyone is focusing at the apex and wondering, What do we do here at the peak? Where do we go? Well, you've got to revert back to those countercyclical sectors that have not yet pushed up in the market. And that would be an example of some of those heroics that we're looking for.
 
HAI: Let me ask you about gold prices. Because I went back and watched one of your appearances in 2011, when you said it was overvalued. That was an amazingly correct call. What's your view now on gold?
 
Scotty George: I think gold is not yet ready to take off. There's nibbling in precious metals in the silvers, the coppers, and the golds. I don't think it's quite ready to go. But that gives us an accumulation period in which we could probably put some money to work for future use.
 
Your question, and the fact that you brought up one of those previous interviews, really highlights the nature of what it is I do for my clients. There's the analysis part, which is pure empirical data. But there's the application of that. There's having the guts to be able to go out and put that money to work.
 
And that highlights the notion, Mike, that money is always traversing cycles – you're either in an upcycle, on the left side of the parabola, you're in a down-cycle on the right. Therefore, you've got to know how to rebalance risk. So, if gold was expensive at its apex two or three or four years ago, and now having come down, that makes it an opportunity now. So you've always got to be aware of the fluidity and the nature of cycles, and to know where you are.
 
HAI: I agree. A little bit like surfing. Always great to have you, Scotty.

Hardassetsinvestor.com is a research-oriented website devoted to sharing ideas about investing in the natural resources sector. Published by Van Eck Associates Corporation, the site offers an educational resource for both individual and institutional investors interested in learning more about commodity equities, commodity futures, and gold – the three major components of the hard assets marketplace.

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