3 September 2007

Two very different analysts call the market top

Dr. Marc Faber and Jim Shepherd both have lively investment newsletters. But there the similarities end, their market analysis is from different ends of the spectrum. Yet both the top Asian based guru and this well respected independent US commentator now think the end is nigh for US equities.
Saturday, December 11 - 2004 at 14:24

It is quite a co-incidence that both these leading gurus have reached the same conclusion. I don't know if they have ever met, but it is unlikely.

Dr. Faber is based in Asia and rooted in global economic history, while Jim Shepherd is very much an American independent analyst whose commentaries often sound as though the rest of the world did not exist and history began in 1929.

Jim Shepherd is more specific in his latest newsletter. He compares the present US stock market charts to 1929-32 - the year of the Great Crash and subsequent 90% market wipe-out - and today.

His argument is that greater liquidity in modern times has distorted the exact timing - but that the 50% market recovery from the initial crash in 2000 has now been repeated, and that we are now in for the final grand sell-off.

The famous Shepherd 'model' is flashing a red indicator - and the time to exit is now while the market is still listening to the analyst pack whose self-interest leads them to support the market whatever their private concerns.

Likewise Dr. Faber is signaling a 'major top' in US equities. He is fairly comfortable with the idea of a year-end rally but is worried about February. This would follow the pattern set on President Nixon's re-election in 1972 - namely a brief rally followed by two of the worst years in US stock market history.

Dr. Faber is a celebrated contrarian, and the accuracy of his market calls over the past few years is almost uncanny.

He called the Nasdaq top in 2000, foresaw the rise of gold and even penned a book 'Tomorrow's Gold' which only really required an investor to note the title, and was virtually alone in seeing the Chinese takeover in 1997 as a negative for Hong Kong.

Thus far he has been fairly sanguine about the US equity market, and correctly saw that loose monetary policy and irrational optimism amongst investors would be enough to drive the market forward.

Now a combination of rising taxes and interest rates, and falling house prices combined with the twin US deficits have convinced him that US equities are very overvalued, and ripe for a major correction.

For a rational investor to conclude that both these commentators are wrong would appear a little fool hardy. Of course, there are powerful entrenched commentators that would always have investors invest. These are the guys who take a commission whether the punters win or loose.

You just have to ask yourself, 'Am I happy investing at a time when two of the major independent market gurus are in agreement that this is not the time to invest?'

But they don't agree on what to do. Dr. Faber thinks US bonds are also doomed and counsels the holding of cash in US dollars or buying gold. Jim Shepherd tells clients to invest a third of their assets in US Treasuries because a deflationary period is around the corner.

However, it will be interesting to see how the alternatives stack up in the months ahead. Will the US economic recovery continue and equities follow? Or will other factors over-power a manufactured, pre-election US economic boom?

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