The End of a Bull Market Doesn't Feel Like This

by Nicholas Vardy

"Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria."

- Sir John Templeton

The date was August 27, 1997.

I found myself flying in a rusty old Soviet transport helicopter over Lake Issyk-Kul in Central Asia.

I was petrified. (We learned earlier that a similar helicopter had crashed the previous week.)

There were no passenger seats on board. The pilot told me to sit on an old kitchen chair next to a fuel tank in the back.

So how did I end up there?

I was on the first-ever investor trip to the former Soviet republic of Kyrgyzstan.

Upon our arrival, we met with the great and the good of Kyrgyzstan, including the head of the Kyrgyz central bank... and the 20-something head of the Kyrgyzstan stock exchange.

Our group - which included future billionaire Jim Mellon - debated whether to risk taking a return trip on that same helicopter... until we learned that a bus would take two full days, winding through treacherous mountain passages.

Upon arriving back in Almaty, Kazakhstan, we learned Princess Diana had died in a car crash the previous night.

Less than two months later, the MSCI Emerging Markets Index peaked.

More than 20 years have passed since that terrifying helicopter ride. And emerging markets have yet to recover the highs they last saw in October 1997.

So what does this story have to do with the state of financial markets today?

Surprisingly, I'm not recommending that you pile into emerging markets stocks.

The lesson I want you to draw is much more general.

It's a lesson that applies to any market... and to any asset class.

And it's a lesson that could both make and save you a fortune.

Let me explain...

Investors focus on a wide range of measures to gauge the current state of the stock market.

Financial analysts generate elaborate financial models. Technical analysts interpret charts and complex indicators. Quant investors design intricate algorithms.

Each of these approaches is legitimate in its own right.

But each ignores the elephant in the room: market sentiment.

Maybe that's because market sentiment is hard to quantify, making it the red-headed stepchild of market analysis.

But in the real world, market sentiment often matters more than a market's fundamentals.

So what does market sentiment tell you about the U.S. stock market today?

I've written previously about how Yale professor Robert Shiller believes the U.S. stock market is among the most overvalued on the planet.

Even after the recent pullback, the U.S. stock market still trades at a cyclically adjusted price-to-earnings (CAPE) ratio of 32. That's about twice its long-term average.

And as Chief Investment Strategist Alexander Green recently pointed out, "History's best stock market indicator is flashing red right now."

So does this mean you should dump your U.S. stocks and run for cover?

No... and understanding market sentiment can tell you why.

Today, most investors know U.S. stock market valuations are high.

The good news is they are nervous about it.

And bull markets, as Sir John Templeton pointed out, "die on euphoria."

So unlike emerging markets in 1997...

Or the dot-com bubble in 1999...

Or the real estate boom in 2007...

When I look at the U.S. stock market today, I see no signs of euphoria... no siren calls of, "This time it's different."

(The exception being the cryptocurrency market, which marches to the tune of its own drum... and for which I have a tin ear.)

That's why I believe the bull market in stocks still has a little way to go.

Yes, you will have to adjust your portfolio in the years to come.

But we're not there yet. You can still make money in U.S. stocks.

So stop worrying about the stock market collapsing tomorrow...

And worry only when you begin to believe it can go up forever.

Good investing,


A "Bigly" Rally

Was he saying "bigly" or "big league"? I don't know if anyone knows for sure. Irregardless (to use another president's favorite word), Nicholas isn't our only strategist who believes there's still more upside to the second-longest bull market in history.

Last week, Chief Income Strategist Marc Lichtenfeld gave Oxford Income Letter subscribers an update on Helmerich & Payne (NYSE: HP). The stock's rallied "bigly" since last August and likely has more ground to cover. Here's what Marc had to say...

Back in August, our shares of oil rig maker Helmerich & Payne (NYSE: HP) were down... bigly - to use a recently misused word.

On August 10, when I wrote about the stock in Oxford Income Weekly, the position was down 33%, not including dividends.

As you can imagine, I was getting angry emails from people understandably upset about the big loss we had on paper.

In that August 10 column, I said H&P was still a "Buy." The number of oil rigs in use in North America had doubled over the past year, and H&P's technology and management were the best in the business.

Since then, the stock has rebounded, also bigly. It's up 57% from August 10 and 73% from the lows. The original position is in the black by double digits, and H&P's future looks bright.

The company's success will always be tied to oil prices. The higher the price of oil goes, the more exploration will take place, which increases demand for rigs. When oil prices sink, exploration stops and rigs sit idle.

H&P emerged from the 2015 and 2016 doldrums in oil prices a stronger company. It increased its market share to about 20% from 14%. Over the next five years, Wall Street analysts, who are mostly bearish, expect the company to grow earnings by 12% per year.

Despite the expected double-digit earnings growth, only 4 of 30 analysts rate the stock a "Buy."

Keep in mind these same clowns were bearish in August prior to the stock's 73% gain. On August 10, only 5 of 30 analysts rated the stock a "Buy." Twenty-five of 30 highly paid analysts missed a huge move in the stock. So you can see why I don't worry about what they think.

The company reports earnings this Thursday, before the market opens. I'll be listening to the company's conference call to hear about any changes to cash flow forecasts. I expect them to be positive, as management has stated it is seeing increased interest from customers since its last call in January.

The stock yields 3.9% on the current price and 4.1% on our original price. The dividend has increased every year for the past 45 years, so I expect another boost this August.

H&P has a very healthy balance sheet, with $426 million in cash and short-term investments and a very low 10% debt to shareholders' equity.

H&P's share price will likely always be linked to the price of oil, so investors need to be able to withstand those fluctuations. But considering the company has raised its dividend every year since the Nixon administration, it knows how to handle all kinds of macroeconomic environments, political climates, and oil and stock markets.

Helmerich & Payne remains a "Buy" in the Compound Income Portfolio.

- Donna DiVenuto-Ball with Marc Lichtenfeld

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