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Are Stock Prices Too High?

In this video, I’ll explore whether stock prices are too high, and therefore likely to crash.

Bearish pundits frequently say the stock market is overvalued. What does this mean?

Usually that prices are higher than they have been in the past when compared with another measurement, such as earnings or sales or even as a percentage of GDP.

[CNBC story and chart shown at 0:48.]

[John Hussman excerpt shown at 1:55.]

What’s the purpose of such observations? To indicate whether a crash is imminent. If it is, we should sell.

Are valuation measurements reliable indicators of this? No. They’re sometimes right, sometimes not, just like everything else in the coin-toss environment of stocks.

Look at the CNBC chart of market cap to GDP.

[CNBC chart shown at 3:34.]

The straight line shows the long-term average of the measure, where it’s almost never at.

Compare it with SPY since 1996:

[SPY chart shown at 4:09.]


1. No overvaluation into the dot-com crash.
2. Rising as stocks fell after the crash.
3. Crashing with stocks in 2008.
4. Rising with stocks since 2009.

So what? There’s no usable pattern in there.

How about Hussman’s ominous-sounding warning? He doesn’t share his valuation measurements, calling them just “the most reliable” ones he identifies, but are they reliable? Not recently.

Here’s an excerpt from this year’s Kelly Letter Note 11 sent to subscribers on March 19, 2017:

[Summary of six false alarms about overvaluation from Hussman since July 2014, shown at 5:55.]

Stock market valuation measurements are not reliable. They cannot be used to time entries and exits.

The market can keep rising above where people think it’s expensive, and fall below where they think it’s cheap.

I pay no attention to valuation, and suggest you ignore it as well. Nobody knows whether stock prices are too high or, frankly, what that notion even means.

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Thank you for watching!

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How to Improve Stock Market Backtesting

In this video, I’ll show you one way to improve your stock market backtesting results.

This method is the one used by my research partner Roger Crandell and me when refining The 9% Signal.

One common problem with backtesting is curve fitting, which is finding a system in retrospect that would have maximized returns in the past market. For example, getting the most out of this two-year TQQQ chart:

[Chart shown in the video, at 1:09.]

The problem is that how the market moved in any period of the past is not guaranteed to repeat. What worked then, probably won’t work now.

We can extract elements from past price behavior, however, to construct a market characteristic.

For instance, this a seven-year scatter plot of TQQQ’s daily percentage price changes:

[Scatter plot shown in the video, at 3:20.]

We can defining this price behavior profile.

Then put it into a restricted randomizer that generates daily changes within this profile to simulate many markets.

This is key: Why is the real market of the past any more valid than a simulated one of the same profile?

We believe it’s not, and put the 9Sig plan through a rigorous test bed of not just a lengthy real-life backtest of 30 years, but 100 simulated 30-year markets.

Listen to this pull quote from this year’s Note 1 from The Kelly Letter:

[Quote shown in the video, at 5:42.]

From this, we zeroed in on the parameters that delivered the best results most of the time.

Could still be wrong, but offers better odds than just the one test bed of actual historical market data.

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Thank you for watching!

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How to Handle Rising Interest Rates

In this video, I’ll consider whether you need to take any steps to prepare for higher interest rates.

The Federal Reserve has signaled its desire to raise interest rates. From The Telegraph:

[Story shown in the video, at 0:24.]

There are three primary areas of your financial life to review in preparation for higher rates on the way: stocks, bonds, and debt. Let’s look at each.

The one thing to certainly NOT do in the stock market is sell everything because you were told to “never fight the Fed” because higher rates are bad for stocks.

[Story shown in the video, at 1:41.]

In the three months after John Hussman’s stock-market warning shown in the video, the S&P 500 gained 6%, a very strong showing, and…

Now pundits are saying that the Fed’s desire to raise rates is a vote of confidence in the economy, and therefore good for stocks.

As usual, nobody has a clue in this department.

If you actively manage your stock portfolio, sector allocation can make sense to move your money where rising rates should help.

Financials do well when rates rise because their profits go up. Just look at the Financial Select Sector SPDR (XLF) over the past few months:

[Chart shown in the video, at 3:45.]

Finance is not alone. The classic five defensive sectors were covered by the Financial Times a year ago, and they still apply:

[Story shown in the video, at 5:19.]

In you’re running my Signal system, and you should be, then you need not worry about any of this. Keep running the system because whatever volatility unfolds will boost the system’s profits.

We thrive on changing prices, not constant up or down.

If you actively manage a bond portfolio, consider laddering. What’s a bond ladder?

Here to answer that is Neighborly, the municipal bond broker. From Neighborly.com:

[Story and image shown in the video, at 6:33.]

If you use a general bond fund in conjunction with a stock fund, the way my Signal system does, then just stay put.

As rates rise, bond prices drop. But most of a bond fund’s profit is from payouts, not price change, so eventually the higher rates offset the price drop.

Plus, my system moves money back and forth between the stock and bond funds, enabling benefit from moving prices on both sides of the equation.

Personal finance reminder: The only good debt is the type used to buy an appreciating asset that will be worth more than the cost of the debt, i.e. a house.

Consumer debt, car loans, all of that borrowed money for depreciating assets should always be zero. If it’s not zero for you, now is a good time to pay it off.

For your home, is now a good time to refinance?

This is tricky to answer. To see why, look at this chart of 30-year rates from the St. Louis Fed:

[Chart shown in the video, at 10:02.]

Key points:

1. Bottomed below 3.5% end of 2012
2. Spiked in 2013 on taper tantrum fears, not increase
3. Jumped only a little when rate rose 25 bp Dec 2015
4. Rose a lot after rate rose 25 bp Dec 2016

Tough call, but I would say there’s no rush.

The Mortgage Bankers Association is predicting a 30-yr rate of 4.7% in Q4

The National Association of Realtors is predicting a 30-year rate of 4.6% in Q4

The current rate is slightly above the midpoint between the recent low and the predicted year-end rate. The easy low rates are gone and there’s no reason to expect a quick jump, so sitting tight hoping to grab 4% later this year is probably as good a plan as any.

To recap: If you’re running my Signal system, keep running it as usual because it’s already built to take advantage of price fluctuations for any reason.

If you’re actively managing your stock and bond funds, consider buying defensive sector stocks and funds, and creating a laddered bond portfolio.

For your mortgage, sit tight and see if you can snag 4% sometime this year, about the middle of the recent range.

Surprisingly, not a lot to do!

Want more videos like this? Subscribe to The Kelly Letter YouTube channel.

Thank you for watching!

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Stock Market Analysts Are Useless

In this video, I’ll provide more evidence that stock market analysts are useless, with help from Sarah Gordon at the Financial Times, who recently summarized today’s installments.

I call analysts “z-vals” for their 50% mistake rate. It’s a shorthand of the term “zero-validity environment” used by Daniel Kahneman in his book Thinking, Fast and Slow when discussing stock pickers and political scientists whose “failures reflect the basic unpredictability of the events that they try to forecast.”

A 2002 academic paper found that analysts merely follow glamour stocks.

[Paper abstract shown in the video, at 1:20.]

They’re just stock cheerleaders, with far more buy recommendations than sell. A waste of time.

In April 2013, the personal finance website Nerdwallet reported that 49% of analysts’ ratings on the 30 components of the Dow in 2012 were wrong. Have a look:

[Key findings shown in the video, at 2:39.]

Of course they’re better at identifying winners — the stock market rises twice as often as it falls!

If you have to guess, guess that a stock will rise because up is where the market usually goes.

A stock market analyst guessing a stock will rise and then bragging when it does is about as sophisticated as somebody guessing that the sun will rise and then jumping for joy when it does.


The strong odds of the market rising is why almost no analyst ratings are “sell.” In February 2015, Bespoke Investment Group put a finer point on it, as reported by CNBC. Take a look:

[Article excerpt shown in the video, at 4:45.]

In this round-up of evidence, we see analysts chasing the same glamour stocks everybody sees in the news, and almost never advising to sell.

This is completely unnecessary to you because you can already accomplish the results of this advice by just owning index funds, which go up with the market two thirds of the time.

Stick with a system of rational price reaction, the way I do. Analyst ratings are useless.

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Thank you for watching!

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Do Investors Need News?

In this video, I’ll consider whether investors should see any difference between fake news and useless news.

Since Donald Trump was elected, there’s been an obsession with fake news. This story from Politico shows Facebook in the fray:

[Story shown in the video, at 0:25.]

Factually incorrect news is obviously useless, but what about factually correct and still useless news? For investors, this type has been damaging for longer and remains so.

A pundit’s honestly held belief about the future of markets is not fake, but it is useless because it’s unreliable. Ditto information about, say, interest rates or the price of oil or another war.

These are unhelpful for purposes of portfolio management because you don’t know the impact of the news, if any.

Consider this May 19, 2016 installment from The Economist’s Free Exchange blog:

[Story shown in the video, at 2:06.]

What shall we do? Sell stocks to avoid higher rates? It doesn’t seem good, what with the “ruins summer” quip.

Yet, here’s the Huffington Post on June 15, 2016, just one month later:

[Story shown in the video, at 3:40.]

There was nothing fake about reporting of the Federal Reserve’s key interest rate last May and June, but it was useless to investors.

You should not be guessing how to respond to news. You should run a proven portfolio system of price reaction only, like mine.

For rational investors, all news is pointless. We could say, “Don’t sweat the useless news, and it’s all useless!”

Want more videos like this? Subscribe to The Kelly Letter YouTube channel.

Thank you for watching!

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