September 2018 - Introduction -

“Funding secured”, two very expensive words for Elon Musk, which has resulted in a 20 Million dollar fine and a 3-year ban on being the chairman of Tesla. It might be seen as relatively good news by many, because he can still stay on as CEO of the company. His reference to a stock price of 420 was supposedly linked to the code-term in cannabis culture for the consumption of weed.
Weed itself was also in the news this month, as it has properly replaced the cryptocurrency hype. A cannabis company called Tilray has reached a peak valuation of 25 billion dollars on 19 September, after it IPO`ed at 1.5 Billion just two months prior. Hence, I would like to award Tilray with the “Bubble of the month” award!
- Phillip Fisher -


While many parts of the world economy are struggling, with most stock markets not having seen an all-time high in months and sometimes years, the U.S. stock markets are moving in full force and continue to make all-time highs, despite the fact that the Federal Reserve is now in “tightening mode” and interest rates are rising. One can ask themselves; will the U.S. markets catch up to the downside, or will other stock markets catch up to the upside?


"The stock market is filled with individuals who know the price of everything, 
but the value of nothing." 
- Phillip Fisher - 


As you would probably expect, I fully believe that the U.S. will catch up with the rest of the world. Rising interest rates, exuberant consumer confidence, skyrocketing national debt, trade wars… the list of potential triggers for decline keeps on going.

Looking at the charts, the smart money flow index shows that “smart money” has stopped participating in the U.S. markets since the decline in January of this year, and hedgers now have a 65 Billion dollar short position against the major index futures. Almost matching the January levels, and close to all-time highs. More and more it seems to become a question of when, not if the U.S. markets will see a big decline.


Enjoy the ride, and don`t forget to stay positive after reading this newsletter, this too shall pass!

Robbert-John Sjollema






Next page




The information contained in this publication is not intended to constitute individual investment advice and is not designed to meet your personal financial situation. The opinions expressed in this publication is that of the publisher and is subject to change without notice. The information in this publication may become outdated and there is no obligation to update any such information.
















September 2018 - Bubbles and Bottoms for Consumers -



Last month i`ve shown that consumer confidence is reaching levels that were last seen during the dot-com bubble. As you can see below, the consumer comfort index, which measures American citizen`s perception of the state of the economy, personal finances and whether it`s a good time to buy needed goods or services, has increased to dot-com levels as well.
An interesting development is the fact that the difference between the male and female consumer comfort levels have grown to all-time highs. The last time such a large disparity occurred, the great recession was right around the corner. Is this time different?




























This consumer comfort is also boosted by an all-time record number of consecutive positive months in Non-Farm Payrolls. It`s practically double the previous record set in the late 80`s.













When consumer confidence reaches high levels, it is traditionally a bad time to invest in stocks. Consumer confidence always leads to a rise in household equity holdings as a percentage of total financial assets. In the first quarter of 2000 for example, 38.6% of household financial assets were invested in equities. Currently that level is at its second highest, at 34.3%.























It`s quite amazing to think that 34.3% of household assets are now invested in equities, since we also have an all-time high in the “hours of work needed to buy the S&P 500 composite”. This chart shows that it now costs more than 119 hours of work at the average hourly earnings of 22.24 dollars to be able to purchase the S&P 500 composite index. To put this in perspective: from the mid 70`s until the mid-80`s it only took about 20 hours of work to be able to purchase the index.






















This excessive optimism, combined with a high percentage of equity holdings by households (Remember that household equity holdings are considered “dumb money”), leads to a good indicator that one should stand on the sidelines and let the stock market go through a decline. Or, if you`re more adventurous, it`s a good indicator to short the U.S. stock indexes.




























The whole problem with the world is that fools and fanatics are always so certain of themselves, and wiser people so full of doubts.
- Bertrand Russell -









The information contained in this publication is not intended to constitute individual investment advice and is not designed to meet your personal financial situation. The opinions expressed in this publication is that of the publisher and is subject to change without notice. The information in this publication may become outdated and there is no obligation to update any such information.

September 2018 - Bubbles and Bottoms for Companies -



The bubble of the month undoubtedly goes to Tilray, having grown tenfold since the IPO two months ago. The grand finale started on 18 September with a stock price of 115 dollars, going all the way up to 300 on Wednesday, and crashing back down to 135 on Thursday.

This stock price of 300 dollars reflected a market cap of 25 Billion Dollars. To put this in perspective, that`s equal to the market cap of HP, or the Formula 1 group!
To think that Tilray reported a net loss of 12.8 Million Dollars on sales of 9.7 Million Dollars in the second quarter of this year, is just mind boggling. A true bubble indeed!
My other favourite bubbles are of course the FAANG stocks (Facebook, Apple, Amazon, Netflix and Google), although some prefer to call it the FAANGM, including Microsoft.

These 6 stocks combined now represent 17% of the entire S&P 500 valuation! The last time such a small group of companies represented such a large chunk of the index, was during the dot-com bubble, when Microsoft, Intel, Lucent, Cisco, Oracle and Dell made up almost 18% of the total S&P 500 valuation.




















Over the past 30 years, only 5 companies have managed to be worth more than 4% of the entire S&P 500 valuation: Microsoft, General Electric, Cisco, Exxon Mobil and currently Apple. How long did they manage to stay above this “magic” 4% level? 12 months, 15 months, 1 month, 12 months and 15 months respectively. Apple is therefore the “winner” in this contest, but the question is: for how long? The other 4 companies incurred massive declines after reaching this 4% threshold, and the only thing I can ask myself is, “is this time different?”



















A company like Apple will definitely withstand the coming downturn, be it with a 50% or 60% lower valuation, but they`ll survive. My worries are more targeted towards companies who have a smaller financial “war chest” and are drowning in debt. 

During the ZIRP (Zero Interest Rate Policy) period, many companies loaded up on cheap 5-10 year loans. These loans are now set to expire, and a wall of outstanding debt will mature over the coming 5 years. Normally a company would just roll over these debts for another 5-10 years, but with interest rates spiking the way they`ve done over the past year, it becomes highly likely that companies just won`t be able to afford this. The result will be mass bankruptcies, which could cause a chain reaction on stock markets, consumer spending and eventually economic growth.






























“You only find out who is swimming naked when the tide goes out”
 - Warren Buffett -



To not make this newsletter sound too negative (again), I will leave this chapter with a great potential bottom: General Electric. As shown earlier, in the late 90`s it was the darling of the stock market, having over 4% weighing in the total S&P 500 valuation, but things quickly turned south, and the stock never recovered the valuations from its peak in September 2000. In September 2007 it reached a lower peak, and mid 2016 another lower peak was set. To top off all the negativity surrounding the company, it got removed from the Dow Jones Index in June this year.
Currently the stock sits at a valuation of just over 100 Billion Dollars, with revenue of 122 Billion Dollars last year. Lots of potential if you`d ask me!




































The information contained in this publication is not intended to constitute individual investment advice and is not designed to meet your personal financial situation. The opinions expressed in this publication is that of the publisher and is subject to change without notice. The information in this publication may become outdated and there is no obligation to update any such information.
















September 2018 - Bubbles and Bottoms for Commodities -



Coffee futures are touching a multiyear bottom that has been touched in 2014, 2009 and 2007. What`s behind this move? A huge increase in supply from countries like Brazil and Vietnam. Since the currencies of both these countries have been declining, it has become cheaper to import their coffee.


Lumber is another commodity that got hit hard and lost almost 50% since May this year. To be fair, it`s only back to its February 2017 levels, after seeing a massive 200% increase in a bit more than a year. The commodity has benefited from Trump`s protectionist policies, which resulted in import duties for Canadian lumber. Now that WTO is investigating these duties, the price has been collapsing back to “normal” levels.




















My darling commodity silver has practically been in a constant decline since 2011 but is now reaching levels that are highly interesting for investors. Last month i`ve shown that JP Morgan is holding record amounts of physical silver in their vaults, which indicates that they see huge potential in the precious metal in the foreseeable future.


This following chart shows the relationship between silver and gold. It peaked late 2011 and has gone down ever since. It is now reaching a bottom that was last seen in 2009, and before that in 1995 and 1994. I am confident that this ratio between silver and gold will soon normalize, which means that the price of silver will go up relative to gold. This can mean two things: either silver goes up and gold goes down, or they both go up, but silver rises at a faster pace. I would choose the latter possibility.



























"I believe the very best money is made at the market turns"
 - Paul Tudor Jones - 






The information contained in this publication is not intended to constitute individual investment advice and is not designed to meet your personal financial situation. The opinions expressed in this publication is that of the publisher and is subject to change without notice. The information in this publication may become outdated and there is no obligation to update any such information.






September 2018 - Bubbles and Bottoms for Stock Markets -

Another month, another all-time high. At least for the U.S.! Strangely the U.S. stock markets are diverging from the rest of the world, and it now accounts for 120% of the year-to-date move on the MSCI index (stock market index with companies from around the world). Comparing this to the year-to-date contribution from other countries, and you`ll see the massive divergence that`s taking place.



















Checking out the forward-looking price-to-earnings ratio, you get to see that since early 2016 there has been a wider and wider gap between the S&P 500 index and the MSCI index minus the US. Reversion to the mean will surely take place at some point, but the question is when? And will the MSCI index meet the S&P 500 index to the upside, or will the S&P 500 index meet the MSCI index to the downside?
























Strangely enough, this divergence takes place at a time when the FED (Federal Reserve) is already tightening (increasing interest rates and tightening fiscal stimulus) while the ECB (European Central Bank) and BOJ (Bank of Japan) are still lenient in their fiscal policies. But more on that in the next chapter.

According to many different types of economic models, U.S. stocks areovervalued and in proper bubble territory.
Profit margins are at a record high for S&P 500 companies, now above 12%, while the long-term average is just slightly above 8%. Corporate profits have also reached record levels, but as a percentage of GDP, as shown below, it has levelled off since 2015. More about this later.



















The manufacturing index is almost at the high levels that were last seen during the early 80`s.


























The ever-increasing profit margins have resulted in an S&P 500 index that has seen a record number of days above its 200-day average level, currently being above that level for a record 570 days. I have said this a few times now, but reversion to the mean WILL happen, it`s just a matter of when.















Goldman Sachs` bull/bear indicator, which combines the average percentile for ISM (manufacturing index), slope of the yield curve, core inflation, unemployment and the Shiller P/E ratio, has been a great indicator for recessions, and has practically predicted every single recession in the past 7 decades. The indicator is now reaching levels that are surpassing the 2000 and 2007 peaks, and goes way back to levels that were last seen in the early 70`s.
























Going back to the earlier mentioned Shiller P/E ratio; this is one of my favourite ratios that smoothes out the average S&P 500 price to earnings ratio by taking the average inflation adjusted earnings from the previous 10 years, and thus giving a better view of cyclically adjusted P/E levels.
To make this ratio even more effective, John Hussman decided to take it one step further, and introduced the “margin adjusted Shiller P/E ratio”, which is basically the Shiller P/E ratio normalized for variation in corporate profits as a percentage of GDP. In the past two months i`ve shown you corporate debt as a percentage of GDP, as well as stock market cap as a percentage of GDP, and below you can find the final comparison between corporations and GDP: corporate profit margin as a percentage of GDP.













































Last month I told you in depth about the Hindenburg Omen and the effectiveness of the indicator. Basically, the more times it is “triggered”, the higher the likelihood of a stock market decline becomes. Below is an updated version of last month`s chart. Over the past 4 weeks, 20 Hindenburg Omens have been triggered, the largest number in over 40 years.



















"Get out when you can, not when you have to."
- Jesse Livermore -



The final chart that I want to show you is a macro model from Crescat Capital, which basically combines 17 indicators, most of which i`ve shown to you over the past 3 months, and gives all of these indicators a percentile score. As you can see, the average of these indicators is currently at its highest historical percentile ever, even higher than the 2007 and 2000 peaks. This chart speaks a thousand words.







































The information contained in this publication is not intended to constitute individual investment advice and is not designed to meet your personal financial situation. The opinions expressed in this publication is that of the publisher and is subject to change without notice. The information in this publication may become outdated and there is no obligation to update any such information.

September 2018 - Bubbles and Bottoms for Governments -

As I said earlier in this newsletter, the FED is currently the only central bank out of the three largest central banks that is tightening their fiscal policies, which can be clearly seen in the chart below. It shows the bond holdings as a share of GDP by each of these central banks and clearly indicates that the FED is on its way out, while the ECB and BOJ are steadily buying up every bond they can find. The BOJ has now practically reached a level of asset holdings that is equal to its GDP!
























Where does all this money go to, you might wonder. Much of it has ended up in the pockets of 1% of the population, who now hold a combined amount of wealth that is higher than the entire world GDP.



























The information contained in this publication is not intended to constitute individual investment advice and is not designed to meet your personal financial situation. The opinions expressed in this publication is that of the publisher and is subject to change without notice. The information in this publication may become outdated and there is no obligation to update any such information.

September 2018 - Summary -


This has now been the third newsletter that i`ve written and the content has only become more and more gloomy. Sure, the economies are doing great, we feel great and we earn good money, the engine is running full steam, but what was the fuel that powered this engine over the past 10 years?

For three months i`ve been explaining that debt has been the number one fuel to power up all the economic engines worldwide, but that this is now coming to an end. Will the ride come to a sudden stop? Will it just slow down gradually? This is something I won`t be able to answer with certainty, but the fact that margin debt is at all time highs, proofs that people and businesses are investing with leverage, which is great during upturns, but incredibly damaging during downturns. Margin calls might be accelerating the upcoming downturn at a faster pace than anyone could imagine.

 “Reversion to the mean” are the key words when it comes to the charts that i`ve been showing you. Anything always reverts to its average level, and often shoots below it. Simple math tells you that the amount of time spent above the average, will be just as long as the amount of time spent below the average. Can this amount of time that is spent above the average deviate, and stay higher longer than expected? Definitely. But it is always compensated by a period of time below the average, that is of an equal duration.
I`ll leave you with the below chart from Advisor Perspectives, indicating that we are currently 121% above the trend line and ready for mean reversion!
























Thank you for reading, and don`t forget to stay positive!

Robbert-John Sjollema





The information contained in this publication is not intended to constitute individual investment advice and is not designed to meet your personal financial situation. The opinions expressed in this publication is that of the publisher and is subject to change without notice. The information in this publication may become outdated and there is no obligation to update any such information.