EARLY TOWARD THE EXIT / CASEY RESEARCH

EARLY TOWARD THE EXIT

Dear Reader,

Most of you will recall our recent warning to prepare for the Crash of 2014. In that communication, I alerted you to the extreme danger facing global markets and the technical indicators pointing toward an imminent and significant market correction.

Our recommendations were to:

• trim your portfolio to only its strongest stocks, the issues with the most emphatic fundamental reasons for owning them;
• hold the resulting cash in US dollars;
• keep your gold;
• but buy "gold insurance," in the form of puts on GLD, to counter potential weakness in precious metals and related stocks; and
• buy long-term Treasuries as a speculation that interest rates would move still lower.

As of today, the Crash of 2014 I warned of hasn't happened. Yet.

Everyone at Casey Research knows that we don't have a crystal ball. We do have solid analytical skills and a realistic view of the world on our side, but we can't predict the exact timing of a market crash. We can only assess the risk of one occurring. We continue to rate the risk as high, given the now worldwide folly of limitless QE, currency debasement, spiraling government debt and investor leverage, and the metastasizing tangle of financial derivatives. It is not going to end well for conventionally thinking buy-and-hold stock market investors.

Adding a sense of urgency to long-held concerns about such fundamentals was the number of critical technical indicators that turned bearish this fall.

All of a sudden last month, market players seemed to wake up to the geopolitical and economic worries they'd been ignoring. They got spooked.

 

Sentiment turned extremely bearish, but it wasn't just a matter of volatile investor emotions, and it wasn't just the long-scheduled wind-up of the Fed's Quantitative Easing. The market seemed to be waking up to the plain facts and recognizing them as frightening.

Then the Federal Reserved started backpedaling on its plan to end QE immediately. That was no great surprise, but the announcement from the Bank of Japan that quickly followed was a surprise to almost everyone: a commitment to purchase all the bonds that Japan's high-deficit government wanted to issue, i.e., QE from here to over the rainbow. The largest Japanese pension fund promptly announced that it would diversify into equities - and not just Japanese stocks, but US stocks as well. That was all it took for Wall Street bulls to come raging back. Mario Draghi topped it all by signaling that the European Central Bank would jump on the QE infinity bandwagon. Now, a few weeks later, markets are making new highs.

So while 2014 isn't over yet, it appears I was early with the warning of a crash. Of course I was. An early warning is the only kind likely to do any good.

It's not fun - and for some subscribers it's been painful - to watch the stocks they sold keep rising. But the alternative to getting out early is to stay fully invested and hope you'll get out at the last moment, just as the crash is starting. Many investors are telling themselves they're going to do just that - so many, in fact, that the eventual result will resemble one of those horrible stories of soccer fans getting crushed as thousands stampede and jam the stadium exits. If you judge that trouble is coming, leave the stadium early, even though that means missing part of the match.

Leaving early entails a cost in foregone profits, but all in all, for most readers the cost has been modest. Our call for asset deflation, including commodities and energy, has been correct; we've avoided losses in that area. Staying in US dollars rather than any of the competing paper currencies has also saved us some losses. By holding on to our strongest stocks, we've profited from the market's overall rise. And we still expect long-term Treasuries to do well next year.

I want you to know that all of us at Casey Research drink our own Kool-Aid and invest according to the recommendations we publish. We believe that the last round of unprecedented central bank actions has - at most - only postponed the inevitable for a little while longer and has done so at the cost of making the inevitable even messier.

We are confident that we and our subscribers are positioning themselves well by owning the best companies in recession-proof sectors, and lots of cash and gold. That way, we won't risk getting crushed in the exits, and while we wait for the crash, we'll have a free hand to exploit the speculative opportunities that Casey Research works diligently to identify.

The best of those opportunities may soon come to us from the resource sector. We likely are close to a final market capitulation for junior resource stocks, which could coincide with tax-loss season in the Canadian markets and the need for junior stock funds to raise cash to pay for year-end redemptions by their investors.

But don't let those opportunities draw you back toward a portfolio that is fully invested, with little or no cash. The unprecedented market backdrop of QE everywhere and QE all the time is pushing the world economy toward more and more leverage and hence exposing the markets to more and more danger.

Fear's brief October appearance on Wall Street wasn't a false alarm. All the most serious market crashes have been preceded by such early tremors.

Remember that the October 2008 crash triggered by the Lehman bankruptcy was preceded by: (i) Bear Stearns' $2 billion loss reported in June 2007; (ii) the Northern Rock collapse three months later; (iii) the distress sale of Bear Stearns to JP Morgan in March 2008; and (iv) the bankruptcy of IndyMac in July 2008. The markets, encouraged by Federal Reserve assurances, shrugged off every one of those warning signs. Then the market cracked.

So while today the urgency of the matter seems to have subsided, it would be a grave mistake not to prepare for a crisis that will make 2008 look like a walk in the park. We'll be ready.

On behalf of Casey Research, I wish all our American subscribers a happy Thanksgiving, and to all of our subscribers, I extend my best wishes for the coming holiday season.

 

Sincerely,

Olivier Garret
Chief Executive Officer
CASEY RESEARCH