Markets usually move more than investors think possible. And that is the theme of today's interview with David Skarica. How much higher can the market rise and how much lower can gold stocks go?
David Skarica is the founder and Editor of Addicted to Profits, a popular newsletter known for its stellar performance in both up and down markets. Skarica entered the financial markets at a very young age and, at the age of eighteen, became the youngest person on record to pass the Canadian Securities Course. He is a regular speaker at trade and investment conferences in Canada and is a guest on the Business News Network (BNN), Canada's flagship business broadcasting network.
Palisade Radio Host, Collin Kettell: Welcome back to another episode of Palisade Radio. This is your host Collin Kettell. I am back in the Bahamas with my good friend David Skarica. He publishes the website www.addictedtoprofits.net.
Before we get started, we have a book giveaway that we started last week when we interviewed Jordan Roy-Byrne at The Daily Gold. We are going to leave that up for one more week. All you have to do is visit www.palisaderadio.com. There is a web form at the top. Just plug your name in there and you will get the book sent directly to you. Thanks again to Jordan for that. David, welcome back to the show.
Founder and Editor, Addictedtoprofits.net, David Scarica: Thanks for having me.
CK: We were talking about this guy, Bill Fleckenstein. He is a guy that you know. He runs a group called Fleckenstein Capital. He is a short guy; he is on the short side of the market. We were watching an interview the other day, and he brought up a theme that we have been discussing. He said things might be crazy right now, but then they get crazier. I want to use that to talk about the market today and also we are going to, later on in the interview, talk about gold and gold stocks and how that theme can play out.
DS: Yeah, what we want to talk about is that we had this big bubble in the last six years in the stock market. I wrote a book last year called Collapse, and I am doing a follow-up book called Bear Market Rising, and I am talking about why this was a bubble, why the valuation was extreme. But what always happens in these bubbles, they go further than you think they would.
Like for example, in 2000, 1999-2000, the NASDAQ, after going up for years, doubled in the last six months of its trading. We had dotcom stocks that had no hope of ever becoming a viable business, trading billions and billions, if not tens of billions of dollars in market cap. Of course, in housing, I remember having a Haitian cab driver in Miami, in 2005, tell me that his $60,000 house that he bought for is now worth $150,000, and of course, all these collateralized loans and just absolute insanity going on there.
Then, of course, now, we have had, again, this kind of stock market bubble which has kind of had also another dotcom and technology-type bubble. Example of crazier getting crazier is one of the stocks that has done quite well in my shorts, especially in the last six months, one of the stocks that I have tried to short via put options and have not done so well on is Netflix (NASDAQ:NFLX), which I thought topped out last year. It is like a $100 now, went up to almost $130 and trades like 8, 9 times revenues. That is just how insane the market can get on the way up. That is just like a real lesson of how these bubbles work and how markets work.
A lot of the stocks that I am short now were not even on my radar last year because even though I turned bearish in the middle of last year, these stocks, after the October low of 2014, all began to go parabolic or straight up or turned into bubbles, really, from that October until this spring and summer. Some of them are up 3, 4, 500% just from that period.
Again, things usually go further than you think, but, by the way, they also can go further than you think on the downside as we have seen in the gold stocks that when this bubble burst many of these stocks are going to go down 80, 90, 95%. People are going to be shocked at how some of these so-called "leaders" basically go down 90, 95, 99%. Like, for example, that happened in companies like amazon.com (NASDAQ:AMZN) and priceline.com (PCLN) back in the 2000 bubble.
CK: Yeah, it is interesting that you talk about gold because I think the mantra of things can get even crazier, applies to gold right now, whether you subscribe to the manipulation theory or just the gold is in a correction for a few years, because it did go up for 12 years. People are surprised that gold is sitting and bouncing around this spot. It has got a nice base forming, but a lot of people think for a lot of different reasons that gold should be going up already. I want to ask you, in terms of being a trader, this is probably the most difficult part about trading. You have a theory and you have to stick with it for longer than you might want because things take a little while to play out.
DS: Actually, the perfect example of this was when I started my newsletter in 1998. Actually, that was in my first book which was called Stock Market Panic. Ironically, another book about how the market was a bubble and going to crash, and that you should be getting into gold and precious metals, which I thought at that time when gold was $300, we are ending a secular bear market, about to enter a secular bull market.
We can go look at what happened is that late 1998, gold was probably like just over $300 an ounce and it bottomed in the mid $200s in both '99 and into 2001. It essentially took two-and-a-half years from late '98 into about April of 2001 for gold to really start moving higher. So, yeah, that is the problem when you are having these kind of bottoming base formations. Sometimes they can take six months like the stock market did in '08, '09, and sometimes it can take years to unfold.
I think we are unfortunate the gold market has taken years. Actually, this scenario right now really reminds me of the late '90s or early 2000. Again, we have a stock market bubble, and we have a multi-year bear market in the gold stocks. Back then, it was from about '96 to late 2000, just over four years, and this time it is from 2011 to 2015, just over four years. It is very similar where the market disconnected from the gold stocks and probably the gold stocks will start trading inverse to the market or really outperforming probably starting later this year or even now. I should note we have very, very nice basing formations in the gold stocks, in gold and precious metals.
Silver has a really nice base in the $14 to $16 range that if it breaks over $16, I think it would really, really move. By the way, this is something we are going to talk about, too. When this gets going to the upside - and one reason I do not think we have seen the top in gold, even though it seems very unlikely right now that gold revisit $1,900 an ounce, is the way that gold equity is trading. If you look at the way that these gold equities traded in times like '96, '97, 1987 or even 2007, 2008, if you go look at them they traded much more bullish than they traded - or I guess parabolic than they traded in the last top, and I will get into that in a second.
CK: Two points that we discussed yesterday and they tie into each other. We were discussing the fact that in 2001 to 2007, that was an extreme bull market because you had that length and the multiplier effect especially when you are investing in juniors. You can make a ton of money, whereas the move was much more violent coming out of 2008 crash which was short, and so your ability, especially if you are investing in warrants, was not that strong to make that much money over that time frame.
The other thing which you just touched on is the prices of these juniors. We did not see $10, $20 juniors across the board. You were saying that back in 1996, especially with the Bre-X scandal, you were seeing these junior companies on the exchange trading for $10, $20 per share. That indicates to us that the high is probably not in.
Last piece before I turn the microphone back over to you is the bear market has been going on for four years, and I need to look back at history. But I do not think that a bull market in the gold stocks has ever been shorter than the preceding bear market, so I will turn the microphone back over to you.
DS: Yeah, because about the longest two bear markets I can think of, just to get to that point before I talk about what the parabolic top will look like, were the '80 to '82 bust when the bubble burst and that was about two-and-a-half years, and then that '96 to 2000, 2001 level which was about four years.
After the '87 bust when the gold stocks did bust and the juniors did bust with the stock market crash, it is really difficult because by some indications the market started higher in 1990 after three-year bull market, and by some indications, it did not start getting hot till '93. But for the most part, the juniors just bottomed in '90 and just there was not very much going on in early '90s. But they bottomed and started slowly moving higher.
But in terms of that, I remember I was a big fan of Bob Bishop. I just started actually in my late teens, but I was trading a small amount of money which I had saved. I had stocks like Arizona Star, which was taken over, go from $1 to $6, $7. Actually, it went as high as $15 at one point. I sold that thing around $6 at that time. I had a stock called Corriente, which was a copper deposit, go from $4 to $20, and then that crashed back to a dollar.
These were the things. I remember looking at the stock charts during Bre-X, during Diamond Fields, during all these bubble names. Diamond Fields was legitimate, but during that time there were all kinds of juniors trading at $5, $10, $15, $20. There were some juniors that - especially when they were in Indonesia because of Bre-X, they would just have grab samples and trade in the teens. Forget about in the dollar range. We never really saw that. We saw a bit of that in 2007, 2008 with stocks like Northern Dynasty (NYSEMKT:NAK) that go in to low-double digits. But, really, in the last move we never really saw that, and I think that is still why we are ultimately - even though everyone can be so negative in the precious metals now, we will still see one more big bubble move where you are going to see those kind of moves in these stocks.
Everyone hates junior mining so much right now. It is probably a good time to start looking at some of these companies, the ones that will survive. But I think we are going to see that. We are going to see these double-digit moves. By the way, that is one simple indicator I use. When I start seeing too many junior stocks trading north of a dollar, I think that is just a sign, especially if they are $10 or $15, that the market is too frothy and about to stop.
By the way, we saw that recently in the Canadian biotech sector. Again, these are penny stocks and there is literally dozens and dozens of Canadian biotech companies trading at $5, $10, one is even - that I am short right now is up to over $100, and these stocks were all penny stocks or low, single-digit stocks just three years ago. That is usually just a simple sign. A psychological indicator you can use is to see how many stocks are trading at these excessive high valuations.
CK: So, David, coming back to where we started the interview, things are a little bit crazy right now. The valuations in the Dow are high. The valuations in the gold stocks that we discuss all the time - extremely low. And, of course, the saying that things can get crazier means it is hard to predict exact timing, but I am going to ask you the difficult question here. What are you doing right now and what do you think about the timing? I mean when do you think that these gold stocks are going to turn, and when do you think that the Dow is going to turn down?
DS: I think the stock market is a little tougher because we do not know how the market will act even if it is a bear market. Like you could still see - you know, even though we have seen a surge for over 2,000 like could still see another surge at 2,015 in the S&P which should be 60, 65% retracement, which is perfectly normal in a bear market. In 2000, when the market began to fall in the fall, what happened is it really just grinded lower all the way up to March of 2001, and then finally kind of got oversold and had a good bear market rally then.
We could see it grind lower. We could see a crash situation where the market peaks in the next week or two and then again goes lower into October, November. With the stock market, I got to say the timing, I do not know. I thought all along we would see another leg lower this fall, and I have kind of positioned myself for that. But I am also willing to be very flexible that does not happen and kind of change. With the gold and gold stocks due to the length and time of this bear market, I really think it has got to start the bottoming formation by the end of this year. Maybe the last flush out due to tax is less selling in the October to November period.
But I would think with the HUI to gold ratio where it is even lower than it was at the 2000 low and how beat-up these stocks are, that we really can see a final low in gold no matter what the market does. Here is kind of the scenarios. The two scenarios would be like this. Let us say it is just a correction in the stock market. If it is just a correction, probably China would stabilize, all these emerging markets will stabilize, demand from commodities will start again. That would really help gold and precious metals even if the Fed is raising rates.
If it is a bear market that starts the next three, six, twelve months, which I think is more likely because I think this emerging market stuff has a chance of turning into a crisis again, what would happen then is the Fed - the US market has dumped 20, 25, 30, 35% whatever it would be, maybe even more, and then the Fed would fight it with even more QE. I think this time the QE, the mentality would be they really do not know what they are doing and they caused this last crisis, so we want to be in PMs. We want to be in commodities. We want to be in stuff that they cannot deflate the value of by money printing. They cannot print gold or silver or copper, whatever.
Those are my two scenarios; that either we are going to see a turnaround in the EMs and then you have more demand for commodities which should help, or you are going to see some kind of crisis and then the Fed come back with QE4, and gold can just take off at that point. I think right now, I actually bought some long-term call options and a couple of intermediate size producers. I think that way or just buying the producers themselves is kind of what you want to do now between now and the end of the year.
Remember I have been on the show not that bullish on the PM recently saying that the market needed a bust for Fed to act, for the PMs to go higher. But now that we finally have seen a correction lower, I think we're getting close to the point where the PMs are going to be a very, very good and strong buy.
CK: The other thing that you were saying to me yesterday is, listen, even if the precious metals are potentially going to get cheaper, they are so cheap right now that if you are not already invested it makes sense to take a sizable bite and see how things play out moving forward. David, I want to ask you if there is anything else at this point that you want to share with our listeners or talk about.
DS: There are actually two more things in terms of the stock market. I think the two key things that people should be watching now is actually two ends of the debt market. One would be the high yield energy, which now is 15% of the US junk bond market, and a lot of these loans are reset in October. A lot of these companies are going to ask for money because they are just producing right now to try to cover debt. A lot of banks actually doubled down in the spring hoping that oil would go back to $70 by the end of the year, which, obviously, is not occurring.
I think that you could see some major default into the energy markets and maybe even a large foreign producer maybe like Petrobras will run into some debt problems here, and that could trigger like a debt default. Then one of the big offshoots in bubbles of QE was not just the stock market going up and not just a bubble in biotech stocks or something like that, but something much more serious was that there is a bubble in emerging market debt that was created.
By the way, in my new book I have chapters on each of these debt bubbles: the energy bubble and the emerging market bubble. If we look at the emerging market bubble, what we see is countries like Turkey, Brazil, and many others issued a lot of their debt in US dollars because the idea was while the Fed is printing they are going to keep the dollar low. Then when they keep the dollar low, you know, let us go to Brazil, let us go to top tier company there like Petrobras or one of the telecom companies, and we will get bonds at 6, 7, 8%; even we will get bonds at 6, 7, 8% from Brazilian local municipal state and federal governments. That is way better than getting the US dollar bonds at 2% and the Real is going to stay strong because the Fed is keeping the dollar weak. That is all being unwound and there was literally trillions of that debt issued. Actually, way more of that debt issued than ever there was issued in subprime.
If these two things kind of blow up, you get defaults in the oil patch and you get defaults from EMs that could definitely be the trigger for the next crisis. I think that is actually closer to happening than what people really believe.
CK: Alright, David, thanks so much for coming on again. For all of our listeners, it is David Skarica with www.addictedtoprofits.net. One final reminder that we're doing the book giveaway for one more week with Jordan Roy-Byrne's new book The Coming Return of Gold's Secular Bull Market. Thanks for listening.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.