Market and Meaning is our weekly update on market movements and their meaning for you as an investor. Market and Meaning is reserved for premium subscribers but is currently being offered for free to all our readers. As always, everything here represents our personal views and not official recommendations, please do your own due diligence and come to your own conclusions. To follow us more closely at Investor in the Family, be sure to subscribe by entering your info in the field to the right of our website and follow us on Twitter, Facebook, Scutify, and even Pinterest.
The Dow and S&P 500 are at all-time highs, again. Events in Iraq and Ukraine continue to deepen as the Fed winds down QE and Amazon enters the smartphone race.
The markets are again at all-time highs for the Dow and the S&P 500, but the red caution flags of "irrational exuberance" are no where near being waved. Most major market "crashes" are preempted by an increase in value of 10% or more in roughly a one-month time frame. This is not a magic formula, but gives perspective on what this kind of exuberance can look like. The truth is that the general public buys most at market highs and least at market lows. For this reason alone, we highly value a contrarian investing perspective.
While this is an important sign to watch, it is not the only factor to consider by any means. Another important factor is how strong is the overall market? Is the market being dragged by a few big players or is everyone enjoying the party? On this front, we are seeing signs of momentum loss, which is not bullish or optimistic.
QE is all but ended now. The program has been cut back by another $10 billion per month and the markets are not even reacting any more. The big issue is interest rates. When will the Fed raise them again? Not likely until mid-2015 or later. Even so, bond investors are already becoming antsy about the impact of rate increases.
The Islamic State of Iraq and al-Sham (ISIS) continued its advancement in Iraq, albeit a bit slower than the previous week. The conflict has brought much criticism upon existing Iraqi Prime Minister Nouri al-Maliki, a leader the U.S. helped put into place. The rebel movement is made up of Sunni Muslims and Maliki is a Shiite. This creates a delicate situation, how does the U.S. help quell the rebellion without choosing sides between Shiite and Sunni? Also complicating the situation, Maliki is on shaky ground with support of his leadership eroding not only from foreign allies, but within Iraq as well.
Even more interesting, the rebellion has created a situation where the U.S. and Iran could potential cooperate as allies against a common enemy. Iran is a primarily Shiite nation who likes having a Shiite leader in charge of neighbor Iraq. Both the U.S. and Iran have reasons to see the ISIS rebellion put to rest. We don't believe there is any chance this conflict will end any time soon. It's not likely we will see ISIS continue its quick advancements continue, but they have strong local support from Sunnis who are tired of being mistreated by Maliki. There are also plenty of former military and political leaders from the former Sunni dominated regime of Saddam Hussein who are happy to fight the new establishment that replaced them. Expect ground gained by ISIS to become even more deeply entrenched.
Tensions in Ukraine continue as Russian troops have returned to the Ukrainian border. The U.S. has increased sanctions on Russia as Ukrainian President Petro Poroshenko announced a cease-fire in the ongoing battle against Pro-Russian separatists fighting in eastern Ukraine. Poroshenko hopes to find some diplomatic solution and end the fighting. Even with the cease-fire, fighting continues. We continue to believe that Russian President Vladimir Putin is the key to everything in Ukraine. If he wants the fighting to stop, it will stop, if he wants it to escalate, it will escalate. Our expectation is that this is all part of a bigger and longer term plan by Putin to reclaim "Russian-speaking areas" that once belonged to the former Soviet Union.
The World Cup marches on with form champion Spain eliminated from advancing out of pool play. England will join them with an early departure. The U.S. controls its own destiny, but has two tough matches ahead against Portugal and Germany.
Amazon (AMZN) revealed their new smartphone this week, calling it the "Fire Phone" to match its existing Kindle Fire line. By all counts it appears to be a phone with potential to be competitive in the already intensely competitive and increasingly important smartphone market currently dominated by Apple (AAPL) and Samsung using Google's (GOOG, GOOGL) Android software.
Following Apple's release of a "kill switch" last September, Google and Microsoft (MSFT) are now adding a similar feature to their new smartphones. The kill switch function prompts users to enter their Apple ID and password before erasing data, turning off "Find my iPhone", or reactivating the device. Since the feature has been added, iPhone thefts have plummeted.
We have officially added GT Advanced Technologies (GTAT) and Micron (MU) to our portfolio and are very excited to have done so. We would have loved to have been earlier to the game on both of these stocks, but have been persuaded to believe that there is still a lot of room to grow for each. Matt Margolis at PPT Research has been very helpful in helping us understand how much potential each of these companies have. His bullishness has not been lonely either, there appears to be unanimous analyst expectation of great things ahead for both. See our articles Analyst Price Target for GTAT: $87.50 and Everyone's Talking About Micron! for more.
What does all of this mean for the investor? The markets continue to benefit from low interest rates allowing for "easy money" to come into the markets and keep prices high. At the same time, many individual investors have yet to jump into the mix. If they do jump in, prices will likely go much higher. At the same time, the market is being pulled higher by fewer and fewer stocks, relying heavily on a few strong companies. It's possible this drag could lead to a pullback to reduce some of the strain. That could provide an opportunity for investors waiting on the sidelines to jump back in, eventually leading to the irrational exuberance we've warned of. This is all really conjecture over outcomes that seem more possible in our view. We are still very invested in stocks with very little cash reserves. Much of our portfolio took a big hit in the spring when the entire small cap market took a dive. We took advantage and bought back in heavily. Hopefully we will not come to regret it.
Current Market Outlook: YELLOW ALERT
The Current Market Outlook is like our traffic light for investing. Green means all systems go, yellow means to be cautious, and red means we believe there are major reasons to be concerned.
Our opinion on gold and silver holds firm. As we have said for some time now, we are still looking for one more big drop. Gold below $1200 is a good range for us, but we are hopeful for even lower toward the $1000 range. As always, we prefer to spread out our buying to get a better average cost. It's possible these lows could come before the end of June, but we are holding that expectation lightly especially as this date draws near. It is possible there will be another rally before the new lows drop in.
That said, if we did not own any physical gold or silver, we would consider the current prices to be a very good entry point for long-term investment. One of our favorite gold sources recently said that he expects the metals to at least double from current levels in coming years calling this a "generational buying opportunity." It is important to reiterate that we are talking about owning physical gold and silver coins and bars, not stocks or ETFs. Our favorite coins are U.S minted Silver and Gold Eagles, they are universally recognized and offer tax protection. For information on how to buy gold and silver, please see "How To Buy Gold And Silver."
Bitcoin is sitting at around $590.79, up 7% for the week, recovering about half of last weeks losses. After weeks totaling nearly 50% growth, the currency gave up 12% in the previous week alone before a slight recovery this week. The price chart in Bitcoin does look pretty bad with each high and low lower the than the last. At the same time, it appears that major players like PayPal (EBAY), Ebay (EBAY), and Apple (AAPL) are beginning to take Bitcoin more seriously. Acceptance on these levels could be exactly what the currency needs.
We continue to urge caution as we still think Bitcoin is a lottery ticket that could grow 10-100x or more and could even more easily go to $0.Caution and small amounts of money are strongly advised. For information on how to buy Bitcoin as well as our views on investing in it, please see our article, "How To Buy Bitcoin."
Disclosure: I am long GTAT, MU, AAPL and own gold and silver bars and coins as well as some Bitcoin.
Disclaimer: This article is for information purposes only. There are risks involved with investing including loss of principal. All readers must be responsible for and make their own investing decisions. Each reader bears the full responsibility for any decision to buy, sell, or hold any securities, precious metals, real estate, or other asset class as well as any decision regarding the starting or running of a business. Nothing in this newsletter is to be considered a formal recommendation. Investor in the Family LLC makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made. There is no guarantee that the goals of the strategies discussed by Investor in the Family LLC will be met. Please see full Disclaimer.
Disclosure: The author is long GTAT, MU, AAPL.
Additional disclosure: We own physical gold and silver bars and coins as well as some Bitcoin.