In continuing my series of analysis on ETF's, Indices and Mutual Funds today I analyzed the S&P 600 Small Cap Index (NYSEARCA:SLY) with my Friedrich Algorithm . For those of you new to this type of analysis HERE is a detailed introduction.
Before I get into that though I thought that I would just mention a few things that are happening in the world right now that I find disturbing. The first is something that I never thought I would ever see in my career and that is the Swiss 30 year yield dropping into negative territory for the first time in history (happened today). So anyone buying the Swiss 30 year is basically letting the Swiss government borrow one's money for 30 years and at the same time will have to pay that government interest for the privilege of doing so for the next 30 years. Obviously things are kind of crazy out there in the world today as no sane person would lock their money in an investment for 30 years unless that same investor believed that interest rates are going more into the negative column, or are so scared of what is coming that they just want to park their money with the Swiss government for safety reasons. Sort of like not worrying about the return on their money as much as they are about the return of their money!
Then if that was not bad enough a client sent me the following link yesterday
Yes folks your eyes are not deceiving you and yes subprime lending is back!
"The federal housing agencies, specifically Fannie Mae, are all set up to buy these subprime loans from the banks.
Wells Fargo even puts this on its website: "Wells Fargo will service the loans, but Fannie Mae will buy them." Hilarious.
They might as well say, "Wells Fargo will make the profit, but the taxpayer will assume the risk."
Because that's precisely what happens.
The banks rake in fees when they close the loan, then book another small profit when they flip the loan to the government."
As you can see banks like Wells Fargo (NYSE:WFC) and Bank of America (NYSE:BAC) don't care what happens as the subprime loans each issues will be backed by the good faith of the US Government in a grand scheme to follow the immortal words that Representative Barney Frank spoke in this amazing speech 11 years ago.
It's pretty scary when you realize what is happening and that no one is paying any attention to it and even more amazing is the fact that the same Representative Frank is the "Frank" in the Dodd Frank Legislation, which is set up to regulate it all. But again these two things I mentioned above are just two of the 100's of things that I am worrying about as an Analyst and portfolio manager/consultant.
What really has me worried is the overvaluation of share prices on Wall Street compared to the great majority of companies' actual performance on Main Street? When investing in anything in life, the ideal is to identify and purchase bargains and once you purchase them, the smart thing to do is to hold each until it becomes fully valued and then replace it with another bargain. This is the classic "Buy Low, Sell High" scenario, but the problem that I have right now (as well as for some time now) is that I cannot find anything that is a bargain and the ones I did find (which are incredible free cash flow generators) are treated by Wall Street as if they were money losing disasters instead of the superior companies that each is. Companies like Gilead Sciences (NASDAQ:GILD), Apple (NASDAQ:AAPL) and United Therapeutics (NASDAQ:UTHR) are knocking the ball out of the park from a free cash flow point of view on Main Street, but on Wall Street are getting little respect these days.
How do I know stocks on Wall Street are overvalued?
Here is the proof after analyzing some 6000 companies:
As you can see the Total Average Score result is 29% out of a possible 100% perfect score. So when Janet Yellen and other Central Bankers of the world are telling you that the economies of the world are doing just fine, each is not being truthful. But nevertheless zero to negative interest rates are the holy grail for the stock markets, and money is basically being given away to any company that is willing to take on more debt. It's basically corporate lending at zero interest rates for companies or what is called corporate welfare. Here is just one example of what Toyota Motors achieved last week
If Toyota can get away with this eventually every other company will be doing so and despite the fact that the world is flooded with debt, governments want to issue more of it and as a result the world is heading towards negative interest rates. In the list above you will find that the S&P 500 (NYSEARCA:SPY), S&P 400 (NYSEARCA:MDY), S&P 600 and the Dow Jones 30 (NYSEARCA:DIA) are all scoring an "F" grade because of the excessive debt showing up on the balance sheets of the components of each, as my Friedrich Algorithm punishes companies with a lot of debt. Leverage is a wonderful thing when used wisely, but companies are lining up at the Fed chuckwagon and are just pigging out.
The markets simply need just one major negative catalyst, like next Thursday's Brexit to go the wrong way and a serious negative chain of events will enter the equation and will just overwhelm the markets, as most markets are trading at nose bleed territory. The force of gravity will enter the equation and there should be a very sharp drop once the real trap door finally opens.
Going forward it very well may happen as Central Bankers cannot possibly control a Brexit, so global markets could all fall apart all at once as there will be no backstop anywhere to be found and just an abyss.
For those of you following my series of analysis here on Seeking Alpha I will close by showing you my Friedrich Algorithms results for the S&P 600 Small Cap Index:
Disclosure: I am/we are long AAPL, GILD, UTHR.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.