Beyond Cyprus: 4 Warnings the Market is Trying to Send Us

Markets got rocked early yesterday after the surprise announcement that the Mediterranean island nation of Cyprus — to secure a 10-billion-euro rescue package — would force citizens to help bail out their banks through a one-time tax on deposits.

Fears of a potential bank run that could easily spread to other economically weak European nations diverted U.S. markets from their recent upward march.

Although the damage was less-extensive than many expected, there are bigger forces weighing on the markets — four of them, in fact, which I'll detail in just a moment — that warrant your attention more than the latest dismal headline out of Europe.

Regardless of this event, however, if you've followed my lead, you should be sitting on some very handsome profits. Today we'll look at how you can keep them ...

As recently as Feb. 5, I told you in this column that stocks would be headed higher.

Here's what I said:

"Of course, nothing is guaranteed in the investment world, but a profitable January has been a pretty darn accurate predictor for the rest of the year and strongly suggests that the rest of the year is going to be even better."

"If you've been sitting on the sidelines or burdened with a cash-heavy portfolio, I suggest you consider increasing your stock market allocation on this or the next dip."

Today, however, I want to suggest that you temper your stock market enthusiasm and consider taking some of your chips off the table.

Until last Friday's tiny 25-point Dow Jones drop, the stock market had strung together 10-straight days of gains. That winning streak was the longest since 1996.

And even without external events like those in Europe in the equation, those winning ways can't go on forever.

In an almost-eerie coincidence, the last time the Dow Jones put together such a long string of consecutive gains, then-Federal Reserve chairman Alan Greenspan warned that investors were experiencing "irrational exuberance."

I have always considered Greenspan to be as blind as Mr. Magoo. But I see a lot of reasons to believe that we are in another period of dangerous, irrational exuberance.

In just the last week:

Warning Sign #1: The University of Michigan consumer-sentiment index dropped from 77.6 in February to 71.8, the lowest level since December 2011. This drop surprised the "never-wrong" Wall Street crowd, who were expecting an increase to 78.

Is this just a blip or the beginning of a trend? Right now it's looking like the latter.

That's because consumer-confidence expectations — a forward-looking measure that more-closely projects the direction of consumer spending — looks even-bleaker than current sentiment. The reading on where expectations lie for six months from now has plunged to 61.7.

Keep in mind, those discouraging numbers are before the yet-to-be-felt impact from the automatic across-the-board federal sequestration spending cuts.

The U.S. isn't the only country with a hot stock market. Australia and Sweden are doing even better.

Thanks to its abundance of natural resources and proximity to Asia, Australia's iShares MSCI Australia Index Fund (EWA) has handily beaten the S&P 500 over the last 12 months with a 23.5% return.

Sweden is one of the strongest economies in Europe because of its low levels of public debt and large current account surplus. The iShares MSCI Sweden Index Fund (EWD) is up 18.1% over the last 12 months.

Warning Sign #2: It is only a matter of time before QE I, QE II and QE-Infinity morph into inflation. And that inflation pressure is just starting to make an impact.

The Consumer Price Index rose by 0.7% in February, the largest one-month gain since June 2009. A lot of that was because of gasoline, which increased by 9.1%. But I see higher prices just about everywhere I look, and so do most other consumers.

To make things even worse, the Labor Department reported that inflation-adjusted hourly earnings dropped by 0.6% in February.

Higher prices and lower wages = unhappy consumers. Especially if this puts them in danger of losing their homes.

Warning Sign #3: I've heard lots of "experts" on CNN, CNBC and Bloomberg proclaim that real estate has bottomed. I agree that the worst may be behind us. But it is too early to say that real estate prices are headed higher. reports that home foreclosures are up 2.26% from January to February, with some states showing alarmingly high rates.

Nevada +334%
Maryland +319%
New York +139%
Washington +172%
New Jersey +70%

Data courtesy

In the first two months of this year, RealtyTrac reports that some 1.5 million U.S. homes were in some stage of foreclosure or in bank repossession.

We can blame the early waves of the housing crash on banks approving numerous loans for people who probably weren't entirely qualified to receive them. Now, many people who were qualified then may not be able to continue hanging on to their property because of a change in their employment status …

Warning Sign #4: Perhaps more than any other indicator, employment numbers may be the most important.

Unfortunately, more than 12 million Americans are still without work and another 8 million are working part-time but would rather be working full-time.

Worse, many Americans have just given up looking. The percentage of working-age Americans holding jobs is the lowest it has been in decades.

And Americans are working harder for less pay on an inflation-adjusted basis. The real median wage is about 8% below where it was in 2000.

I see a very clear disconnect between our still-very-weak U.S. economy and the red-hot stock market. That irrational exuberance can last quite a while. But sooner or later, you should expect stock prices to adjust to reality.

Are we in the midst of another round of "irrational exuberance" in U.S. stocks? Greenspan says no. Regardless, the best thing you can do for your money right now is to take at least some of it global!

How You Can Adjust to a
New Reality for Stock Prices

That reality will be a bear market, and bear markets have historically occurred about every 4 1/2 to five years.

The average loss during a bear market is 38%. Ouch!

Fortunately, it has only taken about 2 1/2 years for the stock market to recover. But don't let averages deceive you.

In the 1973-'74 bear market, investors had to wait 7 1/2 years to get back to even. And in the 2000-'02 bear market, investors didn't get back to even until 2007.

My point is that you need to have a plan in place to deal with the next bear market.

There are three basic options:

Option #1: Do nothing, get clobbered, and wait 2 1/2 to 10 years to get back your money.

Most people think they can ride out bear markets. But the historical reality is that most investors, professional and individual alike, panic and sell when the pain gets to be too much.

Option #2: Have some sort of defensive, market timing strategy in place to avoid the big downturns. I highly recommend the use of stop-losses.

Option #3: Diversify your portfolio into assets other than U.S. stocks, such as bonds, cash, precious metals and non-U.S. stocks.

I think the biggest mistake most investors make is that they keep most, if not all, of their money in dollar-denominated assets. You should have a significant portion of your portfolio in non-dollar assets, such as foreign stocks and foreign bonds.

Long-time readers of this column know that I favor the fast-growing Asian region, which is growing faster AND selling a lower valuation than U.S. stocks.

Whether it is next week, next month, or next year ... a bear market for U.S. stocks is coming. And I believe that international stocks and international bonds may be one of the very best places to ride out the storm.

Best wishes,


This investment news is brought to you by Uncommon Wisdom. Uncommon Wisdom is a free daily investment newsletter from Weiss Research analysts offering the latest investing news and financial insights for the stock market, precious metals, natural resources, Asian and South American markets. From time to time, the authors of Uncommon Wisdom also cover other topics they feel can contribute to making you healthy, wealthy and wise. To view archives or subscribe, visit

Posted 03-22-2013 5:24 PM by Tony Sagami
Filed under: , ,
Related Articles and Posts