No real turn yet in the bull market...
WILL 2019 prove a disaster or yet another boom year for US stocks?
Here the co-author of The Bill Bonner Letter, Dan Denning, interviews Jason Bodner, the editor of Palm Beach Trader.
Before Jason picked up the pen, he spent nearly 20 years working on Wall Street. During that time, he was the head of equity derivatives North America for Cantor Fitzgerald. And as you'll see, Jason's view of the stock market is very different from Bill and Dan's.
But with the S&P 500 rallying 4.4% year-to-date, dear readers are wondering if they should expect "the big one", or if US stocks still have room to run. Read on for the spirited debate...
Dan Denning: Hello there. This is Dan Denning. You know me as the co-author of The Bill Bonner Letter. Today, I'm speaking with someone whose view on the markets is completely different from mine and Bill's.
But since it's never a bad idea to challenge your assumptions, look at your strategy, and see if there is an alternative view, my guest today is Jason Bodner from Palm Beach Trader. Hi, Jason.
Jason Bodner: Hi, Dan.
Dan Denning: I'd like to start by asking you about something you said at a conference we both attended back in October. You said that if you were to look at a 100-year chart of US stocks, they go in only one direction: up. You said that the game is rigged to the upside and that the bull market's best days are still ahead. Is that still your view, even after our recent correction?
Jason Bodner: That is my view. It's my view, both in the near term and the long term as well. The game is rigged to the upside. Again, you look at a 100-year chart of equities. You can assign various reasons as to why it may be, but the fact remains that stocks have, undeniably, gone up over the past 100 years.
It's an asset class that continues to gather investment capital. And it continues to do so year after year. The US stock market is the largest in the world. We have the best companies out there. So, provided that long-term trend continues, I see stock prices going up.
Dan Denning: I ask because Bill and I typically base our view on the idea of mean reversion. So we primarily look at valuations. And when we look at P/E [price/earnings] ratios, CAPE/Shiller ratios, or the total market cap-to-GDP ratio, we get nervous. Because it looks like 2000 or 2007, right before the two worst market crashes in recent history.
Jason Bodner: From my perspective, you can't look at valuations alone. A cornerstone of my system of investing is gauging liquidity. It's not the only stone, but it's important to understand how liquidity and volume impact the direction of stocks. Let me tell you what I mean.
Before I was the editor of Palm Beach Trader, I sat at a trading desk. My job was to handle the largest order flows out there: big institutions moving money. So if Fidelity wants to buy a stock, it might take days, or even weeks, to accumulate a position. My job was to facilitate that trade.
Keep in mind, we're talking about astronomical amounts of money. If you're a sovereign wealth fund that manages $1 trillion, you're not buying $50,000 worth of stock. You're buying tens, sometimes hundreds, of billions of Dollars' worth of this stock.
I executed these sorts of trades every day on behalf of my clients. And I saw what it did to stock prices.
Dan Denning: It pushed them up.
Jason Bodner: That's right. I remember one occasion where I literally bought one million shares of a company on behalf of my client every day. I did this for 20 trading days. By the time I was done, I had purchased 7% of the outstanding float. With the help of several of my competitors, the client eventually owned 15% of the company.
Here's the kicker: The fundamentals of the stock in question were so poor. They had massive amounts of debt and shrinking sales; I don't think they were profitable. It was a disaster of a company. But it didn't matter. The stock went up 70% in a month because this one client wanted to own it.
That's what I mean when I say liquidity and volume play an important role in the direction of stock prices. When the smarter money moves into a stock or a sector in a big way, it goes up. That's why this "unusual institutional buying" as I call it is so important.
Dan Denning: That may be the case. But I would say that it is not "smarter". As you said yourself, that client was wrong about the stock and the company. But he was prior, and that's all that really matters.
Jason Bodner: Absolutely. I think that's a very good distinction.
Dan Denning: But you do believe buying by large institutions is what will propel the bull market onward?
Jason Bodner: I've seen various studies showing that institutions account for 70% of the buying and selling in the market. And if you can follow what 70% of the market is doing, you pretty much know what the sentiment of the market is.
My system of investing tracks this large, institutional buying. And from the data I'm seeing, large institutions are still buying. After all, US equities are really the only place to put large sums of money to work.
I feel confident we'll see a good year in stocks. However, it won't be a good year for all stocks. I think we're headed into a more selective bull market.
Dan Denning: When you look at it, what do you think is the biggest risk to your view over the next year or so? Is it debt? Is it interest rates? Is it something outside the market? Is there something that's on your radar that would change your view if it came to pass?
Jason Bodner: Geopolitical is always the big question, right? Instability and governance. Brexit took the world by surprise in 2016. So there are unpredictable events that I can't possibly factor in.
Barring any major geopolitical instability, I look at interest rates. Some of Fed chair Jerome Powell's comments about putting rate hikes on hold were perceived as dovish. Everybody got excited and bought stocks. And that's great for guys like me.
But I think interest rates are largely priced in. We know, over time, they're going higher.
There will be a threshold – and I'm thinking that's around 5% or so – where it becomes less compelling to buy stocks over fixed-income instruments.
But for now, rates are still historically low. The 10-year US Treasury yields about 2.7%. If you buy a portfolio of dividend stocks, you're getting maybe a close to 2% dividend yield. And you have the upside capital appreciation of stock prices that can rise in a bull market.
Another thing to consider is the tax rate for stock dividends and bond interest. For this year, the most you would pay in taxes for qualified dividends is 20%. But the tax on bond interest is about 40%. So collecting dividends from stocks is more attractive. It offers a more favorable risk/reward ratio.
So until we get to that threshold where it really becomes less compelling to buy stocks, that's not a worry of mine.
Dan Denning: Well it will be interesting to see what happens this year. But since we are just getting started in the new year, one of the things I've been encouraging my readers to do is to also take stock of their non-financial wealth.
By that I mean things that bring value to your life that don't have a price tag on them. Perhaps that's the quality of your relationship with your family. It could be where you live or your lifestyle. But I believe it's a real thing. And it's something people can lose track of. Would you agree?
Jason Bodner: Oh yeah. I think that's fascinating, right? Because there are countless stories of the grumpy old men who have all the money in the world, but they're miserable.
So it's not all about money. Money is very important. We want to leave generational wealth and take care of everybody. But if you're miserable your whole life in pursuit of it, it doesn't seem very gratifying, does it?
Like you said, you can't put a price tag on your relationship with your family, your kids, your grandkids, or your lifestyle. But that doesn't mean it's not a type of wealth. That's absolutely something to keep in mind in the year ahead.
Dan Denning: Thanks for your time, Jason.
Jason Bodner: Thanks for having me, Dan.