On a Triple-top or a New Bull Market?, Gold, and Why a High-Carb & Low Fat diet – Part 5!

From: aditya rana
Date: Sat, Apr 6, 2013 at 2:25 PM
Subject: On a Triple-top or a New Bull Market?, Gold, and Why a High-Carb & Low Fat diet – Part 5!

Hi!,

With stock market indices in the U.S. reaching record highs in recent weeks, the big question which looms ahead is whether this is a major top for the market which heralds a renewed downturn, or are we headed for higher highs? To help form a market view at this critical juncture, it is useful to look at history and with that objective in mind I present below a summary of a recent note written by the market veteran Jeffrey Saut, Chief investment Strategist at the money management firm Raymond James, who had made unusually prescient calls on the market during his 50-year career. To summarise:

-With the S&P index reaching a record high of 1569, it is informative to look back at 1982 when the Dow approached the “secular” high of 985 reached in 1968. At the time the market gurus advised selling, as the prevailing view was that whenever the Dow had reached a level of 1000 over the previous 17 years , it had paid to sell and then wait for a buying opportunity when the market pulled back to 700-800.

-This mindset had been instilled into investors – not just because of the range-bound market from 1965 until 1982 – but for the entire 19th century. For example, the market peak of 1929 was not exceeded until 1954, which was subsequently followed by a 12-year bull market. The next major high was made in 1966 which was followed by a 2-year bull market which peaked in 1968, bringing an end to the 1947 – 1968 secular bull market.

-The next major “nominal” peak was made in 1973 , which was not exceeded until late 1982, leading to a subsequent 18-year bull market. History suggests that a decisive break to a new all-time high is more likely to indicate further gains than a trigger for a significant downturn.

-Sir John Templeton’s famous observation – “Bull markets are born on pessimism, grown on skepticism, mature on optimism and die on euphoria” is helpful in identifying the different stages of the market, with two extra stages added to the market cycle.

Stage 1 (Shock and Fear): Brings an end to the bear market – either with a bang or a whimper. The 1962 bottom was a panic bottom (triggered by Kennedy’s “steel price” policy), while the 1974 bottom was a subtle bottom ensuing over several months. However, both these bottoms were met with investor “pessimism, concern and apprehension” and widespread cries of “I will never buy stocks again”, followed by cries of “This is just a rally in the ongoing markets” when the initial stock market “lift off” took place.

Stage 2 (Guarded Optimism): Every rally after a bear market is met with comments like “This is the last chance to get out”, as was widely witnessed during the March 2009 bottom. This was driven by the experience in the aftermath of the 1929 crash, when the post-crash market rally was followed by a 90% drop in the Dow, finally reaching a level of 41 in 1932. This was a result of policy blunders by the Fed and the Hoover administration. However, by the mid/late 1930s guarded optimism had set-in as investors bought stocks conservatively for dividend yield.

Stage 3 (Optimism): The economy starts to get better, leading to greater enthusiasm for stocks, which in turn improves the economy further which then propels the stock market higher. Earnings and P/E multiples expand, and confidence grows about a sustainable recovery. At some point the broad public starts participating in the market and hints of speculation arise.

Stage 4 (Exuberance): As confidence builds, investors start believing that nothing can go wrong, companies increase inventories, all stocks go up, portfolio managers are geniuses, IPOs trade up dramatically eliciting comments like “Institutions will buy all the IPO and there will not be any stock left for the public”, and waiters, barbers and taxi drivers give “tips” to professionals in the hope of getting stock insights.

-Stage 5 (Surrealistic Phase): An advanced stage of exuberance is reached, with new stock offerings of questionable value trading up from their offering price – i.e. the “onic” phase of the late 1960s where any company with a name ending in “onic” soared after the IPO, or the new era internet stocks of the late 1990s which traded at “eyeballs per minute” and at valuations of “merely” 200x earnings. This is the phase of lavish $100,000 dinners and $25,000 per month starting salaries for brokers and bankers.

Stage 6 (Disillusionment): The stock market bubble bursts – triggered by a myriad of factors ranging from the oil shock of 1973, 9/11, collapse of the housing bubble, and the financial fiasco of 2008 to name a few. However, the reality is always the same as the economic outlook is not remotely as positive as priced into stocks. Investors hold into losing positions, hoping to get out at their cost price and end up losing significant capital, and lose sight of Benjamin Graham’s timeless advice, “The essence of portfolio management is the management of risks, not the management of returns. All good portfolio management begins (and ends) with this premise.”

– “If this is a new secular bull market, I think we are only in Stage 2 with many more years yet to come. While it is true at session 61 (today) this is the longest “buying stampede” ever chronicled in my notes of over 50 years and we are due for some kind of pullback, I continue to think any pauses/pullbacks are for buying.”

An interesting historical perspective, which highlights the danger of getting too bearish at this stage of the market up cycle. While, I do not necessarily agree with his assessment that we might be at the start of a secular bull market, a slowly improving economy combined with the Fed’s aggressive monetary easing program, should be supportive for the markets. The chart below (from JPM) illustrates the concerns about the market possibly reaching a “triple-top”, but also highlights why it is unlikely – the valuations have improved significantly since the previous tow tops: a current 1-year forward P/E of 13.8 versus 25.6 in 2000 and 15.2 in 2007; and current 10-year interest rates at 1.9% versus 6.2% in 2000 and 4.7% in 2007. And of course, most importantly, we currently have open-ended QE and a zero rate policy to stay until June 2015.


Source: Standard & Poor’s, First Call, Compustat, FactSet, March 31, 2013

Additionally, market sentiment remains negative with sell-side strategists on Wall street being most bearish since 1985.


Source Merrill Lynch

On Gold:

Recent calls for the imminent demise of gold are widespread, an example being Soc Gen’s report titled: “The end of the gold era”. An old (and very smart) friend said to me recently that he is short gold, and expects to double or triple his position soon! While the Gold 12-year rally is a bit “long in the tooth”, I continue to believe that it is prudent to hold some gold (5-10%) as part of a well diversified asset portfolio, to hedge against open-ended QE policies followed by central banks around the world. Sprott Asset Management recently wrote a report on gold which had some interesting observations:

– “The chart below illustrates the relationship between the growth of central bank balance sheets in the US, EU, UK and Japan and the price of gold. This relationship has an extremely high correlation with an R2 of about 95%. As central banks increase the size of their balance sheets , they inject more fiat dollars into their respective banking systems. As gold has a relatively stable supply, if there are more dollars available, the price of gold should rise in dollar terms. It’s really a very simple and intuitive relationship – as it should be”.

Source: Bloomberg and Sprott Asset Management LP

-“This relationship between central bank printing and gold has existed since the beginning of the gold bull market in 2000. In fact, this relationship shows that for every US$1 trillion increase in the collective central banks’ balance sheets, the price of gold has generally appreciated by an average of US$210/oz.”

-“Somewhat surprisingly, it turns out that the collective central bank balance sheets have actually shrunk over the past three months – by approximately US$415 billion. The biggest drop was seen in the ECB’s balance sheet, which shrunk by the equivalent of US$370 billion, while other central banks also experienced small declines. Based on our simple model above, a decrease of US$415 billion should produce a gold price decline of roughly US$87/oz. And as it turns out, gold fell by US$76/oz over the first quarter of 2013. Gold is performing almost exactly as it should – by acting as a currency barometer for the amount of money being injected into or withdrawn from the economy.”

-“The Bank of Japan’s US$75 billion equivalent per month of yen printing, coupled with the US Federal Reserve’s $85 billion per month (through its current QE program) will addUS$1.97 trillion to the collective central bank balance sheets over the next 12 months. We also don’t see the US Federal ending its QE programs, despite the continual jaw-boning by various Fed officials of a planned QE exit strategy. There is simply too much risk to the US bond market for the Fed to cut the US$85 billion in monthly Treasury and MBS purchases that the current program employs.”

Why a High Carbohydrate & Low-Fat diet? – Part 5.

A month ago I wrote about the remarkable life-story of Nathan Pritikin, a pioneer in the field of diet and health, who argued the case for a largely vegetarian high complex-carb diet to battle heart and other chronic diseases. This week I present below the fifth and final part of the summary of a path-breaking article (“High Carbohydrate Diets; Maligned and Misunderstood”) he wrote in the Journal of Applied Nutrition in 1976, whichstill resonates today!

-Can unsaturated fats be less harmful than saturated fats? A study on 44 firemen, where they were fed butterfat (saturated fat) cream and safflower oil (unsaturated fat) with the same fat content on separate days, showed similar blood thickening occurring but the safflower oil kept the triglyceride levels higher for as long as 9 hours, while the butterfat cream led to the triglyceride levels returning to normal within 9 hours.

-A U.S. Dept of Agriculture study showed that a 25% fat diet instead of the usual 40-45% for a group of healthy people, showed that in addition to a drop in blood cholesterol and blood pressure, the platelet aggregation (a precursor to blood clotting) dropped by 50%. Once they resumed their usual diet , the platelet aggregation levels returned to previous levels.

-A study at a U.S. army hospital, showed that feeding soybean lecithin (polyunsaturated fat) to healthy males between the ages of 19 and 25, showed blood thickening in the lung vessels and reduced lung function for up to 48 hours. A similar result was found in a study of rabbits fed lecithin. The possibility of this leading to a fatal obstruction in lung capillaries was confirmed by a study two years later on unexpected natural deaths of otherwise healthy people between ages of 17 and 40 years, whose only abnormal findings were obstructions in the lung vessels.

-The dangers of excess fat and cholesterol are easily seen by observing their effect on the gallbladder and intestinal tract. Population studies have clearly indicated that cholesterol gallstones are found exclusively in a population on the western diet.

-A study where people were fed a cholesterol free diet and another containing cholesterol in the form of egg yolks, showed that in three weeks the cholesterol diet showed the formation of cholesterol crystals in their bile.

-A study analysing data on colon cancer from the WHO showed a very high correlation (0.99) between a high fat intake and colon cancer and 0.8 for breast cancer. The underlying cause seemed to be anaerobic bacteria which converts bile acid into carcinogens, people from the high incidence areas had 100 times more anaerobic bacteria in their faeces than people in the low incidence areas. Another study showed that switching from a western diet to a low-fat and cholesterol diet caused a significant drop in anaerobic bacteria and bile acids.

-A study testing 44 patients with colon cancer showed that 82% had high bile acid and anaerobic acid concentrations, while only 9% of 90 other patients with other diseases had high bile acids. Another study showed that high fat diets is associated with another type of bacteria which converts bile into estrogens, which have been implicated in promoting breast tumour growth.

And it is interesting to note that the above paper, written in 1976, has been corroborated by many studies over the years (including the “China Study” which was chronicled in this newsletter last year), with the latest being the recent release of the following study:

April 3, 2013 American Institute of Cancer Research:

-A major study was published in the American Journal of Clinical Nutrition, and it’s the first time a study has applied American Institute of Cancer Research’s (AICR) recommendation for cancer prevention to mortality. The study included almost 380,000 people in nine European countries. At the start of the study, participants answered questions about their diet, activity and other lifestyle habits. After almost 13 years, 23,828 of the participants had died, primarily from heart disease and cancer. Those who followed at least six of AICR’s recommendations were 34 percent less likely to die compared to those who least followed the recommendations. This study adds powerful new data that suggests following AICR’s cancer-protective lifestyle also prevents deaths from other diseases, including cardiovascular disease.

-"Our major finding is that a healthy lifestyle and diet are very likely to be protective against premature mortality from the three most common causes of death," said Anne-Claire Vergnaud, PhD, an epidemiologist at Imperial College London and first author of the study. “At least four out of seven WCRF/AICR recommendations were strongly associated with each cause of death and all the recommendations were inversely associated with at least one cause of death. Thus all recommendations are relevant to prevent premature death”

-The recommendation with the greatest impact on reducing the risk of death from disease overall was also the recommendation most strongly linked for cancer prevention: body fatness. Those who were lean while being a healthy weight had a 22 percent reduced risk of death. Those who ate at least five portions of fruits and vegetables a day along with whole grains had a 21 percent reduced risk of death compared to those who ate the fewest plant foods.

-Following at least six of AICR’s recommendations for cancer prevention cut risk of premature death from all diseases by about one-third when compared to those who adhered to the fewest of the recommendations. For cancer alone, adhering to highest numbers of the recommendations led to a 20 percent reduced risk of a premature death during the course of the study. The seven recommendations are: 1) being lean but within the healthy weight range, 2) being physical active at least 30 minutes a day, 3) avoiding sugary drinks and limiting calorie-dense foods, 4) eating plenty of plant foods, 5) Eating less than 500 grams of red meat (less than 18 ounces) and avoiding processed meats, 6) Limiting alcoholic drinks, 7) for women, breastfeeding.

Here is to further evidence supporting the health benefits of a plant based diet!

Regards

Aditya

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