Pundit's Perspectives – Thu 3 Mar, 2016

A Blended Fundamental and Technical Perspective on Where We Go From Here

As you can imagine the fundamental and technical outlook is not good. This is nothing new for all of us here but the charts and facts the author points out are significant.

This is actually the first time I have visited the posting site, FirstRebuttal.com but I have to say I am impressed. Please let me know what you all think.

And remember when I am at PDAC please email me questions and companies you would like me to chat with. If you are in town let’s meet up for a beer on me. Email me at fleck@kereport.com.

Click here to the visit FirstRebuttal.com.

So I’m currently teaching applied financial modeling at Marquette University in the beautiful blue collar town of Milwaukee, WI; home of the Harley, the (Miller) High-Life and SummerFest.  It’s a great town and a great school.  A few years ago the business college brought in a pretty savvy guy called David Krause who then started a program called AIM, where the top finance students actually manage more than $2M.  Because of the program’s success US News & World Report ranked Marquette’s finance program 21st in the nation this year.  Not bad for a small Jesuit school in the midwest.

Now I mention this because after 15 years in banking, teaching financial modeling has forced me to reacquaint myself with some of the basic tenets of markets and valuation.  Such things tend to get lost in the midst of “getting the deal done” and chasing paper profits.  This reacquaintance process has been quite illuminating for me and I thought perhaps for others too.

A reminder of what the market actually represents is a good place to start.  The stock market is simply an asset with some intrinsic value based on an expectation of future free cash flows to equity holders.  Those cash flows are generated from revenues less costs of the underlying companies that make up the market.  Let’s use the Wilshire 5000 Full Price Cap Index as the proxy market for this discussion as it is the broadest measure of total market cap for US corporations.  It’s level actually represents market capital in billions.

Screen Shot 2016-02-25 at 8.29.51 PM

So the market has put a valuation on those expected future cash flows to equity holders (as of today) at around $19.7T (a 55% increase from Jan of 2012) down from around $22.5T (a 77% increase from Jan of 2012) at the market peak last summer.  So let’s take a look at the growth in cash flows of US corporations over that same period.  We should expect to find a growth pattern in free cash flows similar to the above growth pattern in the overall market valuation (the Wilshire is a statistically large enough sample to be representative of total US corporations).  Let’s have a look…

Screen Shot 2016-02-26 at 11.53.09 AM

The above chart depicts corporate free cash flows (blue line) indexed to 100 in Jan 2012.  It is obtained by taking the BEA’s Net Cash Flow with IVA and CCAdj adding back depreciation and net dividends and subtracting net capex.  (The actual definitions of these can be found here.)

What we find is that while the current valuation of expected future free cash flows to equity holders (i.e. market cap of Wilshire) has increased by some 55% since the end of 2011, the actual free cash flows of US corporations have only increased by 4%.  This becomes a very difficult fact to reconcile inside the classroom.  Why would market participants be baking in so much growth when the actual data simply doesn’t support it?

Well there are plenty of potential explanations.  For instance, rarely are investors rational.  While buy low and sell high is rational investing behaviour, often market euphoria comes at the market top right before a major sell off, leading to a buy high and sell low strategy.  Another reason is that the Fed has been providing a free put to all investors for the past 7 years essentially significantly reducing naturally occurring risk factors.  But whatever the reason this dislocation between expected and realized growth begs the question, how long can it last?  So let’s explore this issue.

Below is a longer term growth chart of the Wilshire vs US corporate free cash flows to equity holders both indexed to 1995 (i.e. 1995 = 100).

Screen Shot 2016-02-25 at 7.31.21 PM

And so over the past 20 years we’ve seen this same type of dislocation three times.  That is, we see expectations of growth far exceeding actual growth of free cash flows to equity holders.  In the previous two dislocations we reached a peak dislocation (peak stupidity) followed by a reversion to reality (epiphany) where expected growth moves back in line with actual growth. Let’s have a closer look at specific indicators as to when the epiphany takes place.

Screen Shot 2016-02-25 at 8.12.12 PM

What we find is that the epiphany trigger occurs when YoY growth of free cash flows to equity holders drops down to or below zero.  The last two bubbles began their burst when medium term moving average of free cash flows dropped to zero.  We see the very same pattern occurring presently.  Today we appear to have just passed the peak stupidity inflection point as seen in the two charts above.

But let’s be sure not to ignore the technical patterns, so let’s do some charting.  If we look to volatility and price level patterns between our current market and the last bubble cycle (credit crisis) we find incredible similarities.

Screen Shot 2016-02-26 at 1.56.24 PM

The above chart depicts weekly high vs low intra-week price spreads and price level.  What we find is that at this point in the last bubble cycle we had a period of reduced volatility (small green box in 08) that followed a period of increased volatility as the market slowly rolled over.  Today’s bubble is just entering that period of reduced volatility following the period of increased volatility as the market rolled over.

And so what should we expect from here?

Well the fundamental charts above suggest we have significantly overvalued growth expectations and historically those over-inflated expectations can drop very sharply back in line with actual growth.  So from a fundamentals perspective we should expect a significant drop in overall valuations (i.e. market cap). And from a technical perspective, if we are in fact following the previous bubble cycle pattern (which we seem to be), we should expect a nice bounce in price level from the recent lows (to perhaps somewhere between 2000 – 2030) accompanied by relative calm before an explosion of volatility and a market price plunge that sends us into the next crisis sometime around May (give or take).  Happy trading!

  1. On March 3, 2016 at 9:04 am,
    CFS says:

    OFF Topic:
    It takes a RINO to recognize a RINO.
    or a New England liberal democrat to spot a lying N. Y. liberal Democrat?

  2. On March 3, 2016 at 9:08 am,
    CFS says:

    Brown cost the UK billions by his stupidity.
    How much did Canadians lose today?

    It’s only a barbarous relic.
    (But some relics are worth billions!)

  3. On March 3, 2016 at 9:19 am,
    CFS says:

    If the Chinese and the Russians can hack the DoD, why don’t you geeks out there have a go and get paid for it?

  4. On March 3, 2016 at 9:20 am,
    Jay Linn says:

    Cycle analyst, Gary Savage is expecting a 7 year cycle bottom and then a inflation driven bubble markets in equities and gold. This article is clearly presenting an opposing view. Gary is expecting the Fed to manipulate the stock market higher because the consequence of ‘letting it drop’ to the fundamental level would be disastrous to the US and the world economy. However I believe the scenario presented in this article is much more likely because even the Fed cannot control private fund managers. When they see that this is a ‘Risk Off’ period, they are going to go to cash – or even gold if the Fed goes negative interest rate on them. One way or another, the stock market will head to its business fundamentals – which means it is going to be a panic time in Wall Street! Perhaps this Spring, as this article forecasts.

  5. On March 3, 2016 at 9:22 am,
    bb says:

    Canada didnt lose much today cfs, they didnt have much to sell.

    It does make blatantly obvious Canada gets their direction from…..somewhere?

  6. On March 3, 2016 at 9:33 am,
    CFS says:

    1.7 tonnes ain’t chicken feed!

    And luckily there’s no price suppression. Right!

  7. On March 3, 2016 at 9:37 am,
    Marty says:

    Trader Dan shares a perspective on Goldseek.com today.

  8. On March 3, 2016 at 9:38 am,
    CFS says:

    They can do it overtly or they can do it covertly, but do it, they do.
    (You just don’t realize in how many ways……financial repression, negative interest rates, fees and taxes…)

  9. On March 3, 2016 at 9:48 am,
    gary says:

    The bears are going to be wrong on the stock market just like they were wrong on gold. The odds are good that the 7 YCL was completed last month. If not, then it will form in mid summer. After that we have a bubble phase ahead of us as central banks print, print, print.

    Focus on biotech, that’s where the bubble will manifest most aggressively.

    I noted yesterday and I’ll post it here again today. This rally has been the fifth strongest rally since 1957 in terms of breadth. Energy, metals, tech, everything is participating. Just exactly as I said it would once the 7 YCL is finished.

    Everything goes up together.

    • On March 3, 2016 at 10:00 am,
      Jay Linn says:

      With Donald Trump, we may have the first president who is not beholden to the Fed since Jimmy Carter. It may not be the business as usual for next few years…if Trump becomes the president. Of course anyone and everyone with their hands in the system’s pocket wants Hilary!

      • On March 3, 2016 at 10:36 am,
        Matthew says:

        Since Jimmy Carter??? Where did you get that one? His administration was STACKED with Fed friends.

        • On March 3, 2016 at 10:52 am,
          Jay Linn says:

          Well… he appointed Paul Volker, at least…

          • On March 3, 2016 at 11:23 am,
            Matthew says:

            Volker did what the Fed’s owners wanted and responded to (followed) market pressures. I don’t subscribe to the view that he’s some kind of hero.

          • On March 3, 2016 at 11:24 am,
            Matthew says:


          • On March 3, 2016 at 4:39 pm,
            Dick Tracy says:

            Matthew is a smart guy with stocks but when it comes to figuring out politicians he is a wasteland. DT

          • On March 3, 2016 at 10:32 pm,
            Matthew says:

            DT: It’s sad to see that you’re so easily fooled by Trump’s vacuous BS. He’s a statist lefty crony Keynesian. Those are the facts. I truly hope he wins so you will see that he will fix nothing.

          • On March 4, 2016 at 8:53 am,
            Matthew says:

            Do you think Gov Christie would have endorsed Ron Paul? And how about Larry Kudlow, would he have endorsed Ron Paul’s economic plan?

            Oh yeah, Trump is a some rebel! lol…

            If the windbag follows any principles at all, they aren’t good ones.

      • On March 3, 2016 at 2:24 pm,
        Chad says:

        He will be taken out then!

    • On March 3, 2016 at 10:07 am,
      Jay Linn says:

      I also note that Biotech has been soggy in its bounce from 2/11. I am voting for the mid summer bottom – same as the article.

  10. On March 3, 2016 at 9:56 am,
    Marty says:

    Harmony Gold has lapped the entire PM field. Stewart Thomson called HMY early on.

  11. On March 3, 2016 at 10:01 am,
    Marty says:

    His call on 321gold on Jan 5 @ $1. HMY

  12. On March 3, 2016 at 10:12 am,
    Marty says:

    Gwen Preston touts from yesterday all up 9+ % , Nexgen & Pretium, my largest holding

    • On March 3, 2016 at 10:24 am,
      CFS says:

      A bull market can make an average person look intelligent, and a bright person look like a God or Goddess….

  13. On March 3, 2016 at 10:21 am,
    CFS says:

    Calfornia is a state blessed with incredible weather.
    It has Silicon Valley, which has attracted many of the best brains in the world.

    But if you want to see how a stupid liberal Democrat bureaucracy can destroy an economy…..


    One of my homes is in California; you should see the fees for everything, because tax increases are supposedly limited,

    • On March 3, 2016 at 10:35 am,
      Matthew says:

      Just look at what Democrats have done to Detroit over the last fifty years. There’s our glimpse into America’s future if foreign money (mostly Chinese) is stopped from investing.

      • On March 3, 2016 at 2:35 pm,
        Excelsior says:

        That’s grim.

  14. On March 3, 2016 at 10:28 am,
    Matthew says:

    Dr. Leeb is no Austrian but he makes up for it to some degree with his intelligence and honesty. He certainly understands that holding no gold at all is stupid.


  15. On March 3, 2016 at 10:48 am,
    CFS says:

    In light of Chris’s comments yesterday about grains:

  16. On March 3, 2016 at 11:33 am,
    CFS says:


    You know the Fed is going to print and monetize debt.

    Brazil did……They just recently had an electricity price increase…


    The US is sliding down the slope to becoming a banana republic.

  17. On March 3, 2016 at 12:12 pm,
    Frank from moscow CCF says:

    GOLD LOOKING GOOOD………….1261……………

    • On March 3, 2016 at 12:32 pm,
      Frank from moscow CCF says:


      • On March 3, 2016 at 12:34 pm,
        Frank from moscow CCF says:


  18. On March 3, 2016 at 12:20 pm,
    CFS says:

    China finally realizes it has to restructure manufacturing.
    3/2/16: “China will lay off about 1.8 million steel and coal workers as President Xi Jinping drives efforts to cut the country’s industrial overcapacity and reform it’s bloated state-run enterprises. About 1.3 million workers in the coal industry and 500,000 in steel will be cut, Yin Weimin, human resources and social security minister, said Monday, according to a transcript posted on the government’s website. The employees would be reallocated, Yin said, without providing further details. The world’s largest steel and coal producer is seeking to ease a glut of industrial capacity as its economy shifts toward consumer-led growth and as it tries to curb pollution. The government has set up a 100 billion yuan ($15.3 billion) fund to be spent over two years to help companies resettle workers cut during restructuring.

  19. On March 3, 2016 at 12:22 pm,
    CFS says:

    Maybe some of the empty cities will start filling up.

  20. On March 3, 2016 at 12:26 pm,
    Marty says:

    I pray that Al is well.

    • On March 3, 2016 at 12:30 pm,
      Brian says:

      I think everyone is traveling to the conference today, so no interviews

      • On March 3, 2016 at 12:51 pm,
        Marty says:

        Thanks, I knew Cory was. I’m relieved.

  21. On March 3, 2016 at 12:31 pm,
    FranSix says:

    Breathe and push! Breathe and push!

  22. On March 3, 2016 at 12:39 pm,
    CFS says:

    I’m posting as many interesting articles as I can!
    Just call me C.ory F.leck S.ubstitute. Just joking.

    • On March 3, 2016 at 12:44 pm,
      Frank from moscow CCF says:

      At least we know someone is on the JOB………………. 🙂

      • On March 3, 2016 at 12:46 pm,
        Frank from moscow CCF says:

        This is a contributor self run site……………… except if you start talking religion.. 🙂

        • On March 3, 2016 at 2:36 pm,
          Excelsior says:

          Then it is a velvet hammer run site….. 😉

          • On March 3, 2016 at 2:37 pm,
            Excelsior says:

            ….then all the posts start getting screwy and nothing lands in the place where you post it.

          • On March 3, 2016 at 5:17 pm,
            Frank from moscow CCF says:

            Love it………velvet hammer………….. 🙂

    • On March 3, 2016 at 12:53 pm,
      Marty says:

      Thank God there can only be one each of us.

  23. On March 3, 2016 at 1:00 pm,
    jonnalin says:
  24. On March 3, 2016 at 1:10 pm,
    CFS says:

    The only new piece I could find today on global warming:


    It was a warmer 45.000 years ago

    We just have to find out where they buried all those carbon dioxide emitting cars!

  25. On March 3, 2016 at 1:13 pm,
    Lewis says:

    I would like to see what Doc is thinking now after today!

    • On March 3, 2016 at 1:14 pm,
      Frank from moscow CCF says:


  26. On March 3, 2016 at 1:22 pm,
    Lewis says:

    The thing that has me on edge now is that gold is already pricing in a miss on the jobs report tomorrow. If it comes in better than expected have another failed breakout!

    • On March 3, 2016 at 1:57 pm,
      Matthew says:

      Anyone who bought and held JDST after reading Clive Maund’s article about an imminent bloodbath are down about 28% this week. Get ready for the top-callers to bring more volatility tomorrow.

      • On March 3, 2016 at 2:44 pm,
        Excelsior says:

        Ah man you are being tough on good ole’ Clive. 🙁

        He really is a pretty good analyst, but like we discussed his imminent bloodbath call was a tad extreme and sensational. The run back up in gold has been exciting, but it still looks like Gold closed below $1263.90 today. I’m hoping it heads for the prior peak from Jan of 2015 and keeps chugging, but we’re right at resistance a present.

        • On March 3, 2016 at 5:01 pm,
          Excelsior says:

          Matthew – I just re-read your comments and missed that you were talking about JDST. On this Monday (02/29/16) I bought JDST at $8.72 and then sold it on Tuesday (03/01/16) at $9.50, so I was pretty happy with JDST earlier this week. However, it didn’t have anything to do with what anyone wrote, and I don’t normally hold the 3x leveraged ETFs for very long [typically less than 24 hrs].

          Personally, I don’t believe anyone should take any action based on one newsletter writer or economic pundit or their articles. A trader or a longer term investor should only take an action based on their own decision. This decision to buy or sell an equity should be made after analyzing all the data, and then they should take full responsibility and not blame anyone else other than themselves if their trade goes against them. In a scenario where a trade goes against them, the key is to cut losses quickly, and develop a new game plan accordingly.

          I am constantly amazed that people ride things down to oblivion or blame some dude that writes a newsletter for their own poor performance, but people love to skirt personal responsibility and point their finger at anyone other than the man in the mirror.

          • On March 4, 2016 at 4:20 am,
            Frank from moscow CCF says:

            ditto……………do your own dd……….

      • On March 3, 2016 at 10:41 pm,
        Matthew says:

        I don’t mean to single him out or to knock him. I just pointed out what happened. I’ve followed his free work for many years and briefly subscribed many years ago and he seems to be right about half the time overall. His views are worth considering along with many others.

        • On March 3, 2016 at 11:44 pm,
          Excelsior says:

          Yeah I know, and Clive did put a little more “sizzle” on his editorial than normal, and so fare there has not been a bloodbath. However, the PDAC curse doesn’t typically strike until the last day of the conference or a few days after the conference so we may not be out of the woods yet. 🙂

          I am not a subscriber or anything, but do like Clive’s charts and technical analysis of the Dow or S&P, and Oil, and PMs and related miners. However, nobody’s right all the time, and you’re correct that the best move thus far was to have held onto the miners, and so far his projection has not been correct.

          As shorting gold, I just wanted to make the case that even on an overall “up week”, that there was still a good shorting opportunity from Monday to Tuesday in the miners. It was very short-lived, and when I sold JDST I rolled the winnings right back into Silvercorp since it had pulled back hard on Tuesday. That worked out well.

          • On March 3, 2016 at 11:53 pm,
            Matthew says:

            Too many now think the curse is a foregone conclusion. Get ready for the PDAC blessing. 😉

          • On March 4, 2016 at 12:15 am,
            Excelsior says:

            I agree. Just having a little fun with importance people put on the PDAC curse. I like throwing it out there for some “sizzle” in my response. (ha!)

            Seriously thought, in watching all the videos from this week at the GSA investor conference, and the BMO investing conference, the mood with most of the CEOs and pundits was pretty upbeat and positive. It may be a PDAC blessing after all.

        • On March 4, 2016 at 4:25 am,
          Frank from moscow CCF says:

          Thanks for the Clive update………..

    • On March 3, 2016 at 2:06 pm,
      Jerryck says:

      Gold may just use the volitility tomorrow to move higher. I don’t think a good or bad report matters. Gold’s looking at the big picture. But it could be volitile 🙂

    • On March 3, 2016 at 2:41 pm,
      Excelsior says:

      Lewis I hope for Gold’s sake that it does close above the $1263.90 level decisively and then make a move at $1308. That would be the best outcome. If gold double tops here at resistance then it would not be a positive.

  27. On March 3, 2016 at 1:49 pm,
    Jerryck says:

    Is the bull in the throats of the bear? Analysts are a little quiet today.

      • On March 3, 2016 at 1:57 pm,
        Jerryck says:

        Think that lion felt like the Bears. Cough cough.

    • On March 3, 2016 at 1:54 pm,
      Jerryck says:

      IMO…sometimes it helps to stop looking at all the squiggly lines. Some have missed a massive move because of it.

      • On March 3, 2016 at 2:06 pm,
        Matthew says:

        I look at them constantly and have benefited enormously but you’re right, many would have been much better off if they hadn’t been so “respectful” of an overbought reading. Many more would have been much better off had they simply bought into weakness rather than constantly anticipating new lower lows that, finally, didn’t come.

  28. On March 3, 2016 at 2:11 pm,
    Jerryck says:

    Matthew, you’re right. It gives you a framework of where your at in the present cycle. They have their place. There are times when simple price action, relatively speaking, speaks enormously. In powerful moves they can be a bit untrustworthy.

    • On March 3, 2016 at 2:45 pm,
      Excelsior says:

      Well said Jerryck.

  29. On March 3, 2016 at 11:57 pm,
    Matthew says:

    Let’s see if gold can close the week above the 233 week EMA (currently almost $1260).


    • On March 4, 2016 at 8:19 am,
      Frank from moscow CCF says:

      thanks for the chart………..

  30. On March 4, 2016 at 12:05 am,
    Matthew says:

    I wouldn’t be surprised if short covering takes gold right through the next Fibonacci arc resistance at about 1290 and on to the more important one at 1333+/-