March 25, 2022
By Steve Blumenthal

“I love Hot Fudge Sundaes; I could die for Hot Fudge Sundaes.”
– Bob Farrell

Since 1972, Institutional Investor has added more than 15,000 names to its All-America Research Team, which ranks the best research analysts in America. In 2011, they published the best of the best in their inaugural AART Hall of Fame. On that list at number 20 is Bob Farrell.

Farrell earned a bachelor’s degree in economics and finance from Manhattan College. He then studied under Benjamin Graham and David Dodd—authors of the investment researcher bible, Security ­Analysis—at Columbia Business School, where he earned a master’s degree in investment finance in 1955. After a two-year stint in the U.S. Army, Farrell entered the analyst-training program at Merrill Lynch.

When I began my career at Merrill in 1984, he was the chief stock market analyst and senior investment advisor.

Back then, every institutional and retail advisor had something called a squawk box on their desk—picture a small square speaker with a volume knob. When it was time for Bob to present to the team, the chatter on the floor would cease, we’d turn up the volume on the box, and Bob’s voice would fill our room and every Merrill Lynch office across the U.S. and around the world. Bob Farrell was my hero.

What I loved most about him was the way he combined his fundamental understanding of value investing with technical analysis. The internet was still in its infancy when I left Merrill in 1989, but Bob frequently shared his views in Barron’s, and I’d pick up a copy at the newspaper stand each week.

His wisdom is immortalized in his “Top 10 Rules of Investing,” which remains widely quoted today. The rules are:

1. Markets tend to return to the mean over time.
2. Excesses in one direction will lead to an opposite excess in the other direction.
3. There are no new eras—excesses are never permanent.
4. Exponential rapidly rising or falling markets usually go farther than you think, but they do not correct by going sideways.
5. The public buys the most at the top and the least at the bottom.
6. Fear and greed are stronger than long-term resolve.
7. Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names.
8. Bear markets have three stages: sharp down, reflexive rebound, and a drawn-out fundamental downtrend.
9. When all the experts and forecasts agree, something else is going to happen.
10. Bull markets are more fun than bear markets.

The most recent data on individual investors’ allocation to stocks is out, and when I read through the above list, Bob’s rule number 5 jumped off the page to me. I thought I’d share the data with you within that context. A picture paints a thousand words, so check out the graph below.

Rule 5: The public buys the most at the top and the least at the bottom.

There are many ways to measure public participation in stocks. My favorite is stocks as a percentage of household financial assets, captured in the following chart from NDR. I’ve noted previous bull market peaks in 2000, 2007, and 2018. Also take a look at 1966 as well, during which the secular bull market peaked preceding the 1966–1982 secular bear market. And look at what happened following all of those peaks, notably 1982, 2003, and 2009. The data shows that the public buys the most at the top and owns the least at the bottom. The current ‘Stocks as a Percentage of Household Financial Assets’ is higher than the all-time high reached in 2000. Rule #5!

A hat tip to the great Bob Farrell for his remarkable work. If you are interested, I recently came across his insights in an old podcast hosted by the Chartered Market Technicians Association. It sure did warm my heart to hear his voice again. You can find the link here.

Speaking of market technicals, you’ll find the latest Trade Signals next. Investing is not a game of perfect; it is a game of probabilities. To be successful, you must understand the magic of compound interest and how merciless the math is when you lose. Overcoming a 10% decline requires an 11% subsequent return. If you are down 50%, you don’t need a gain of 50% to get back to even, you need a 100% gain. Unfortunately, many people don’t know this.

This is why I am obsessed with understanding degrees of risk and making sure task #1 is defending CORE wealth.

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Trade Signals – Between a Rock (Inflation) and a Hard Place (Recession)

March 9, 2022

Posted each Wednesday, Trade Signals looks at several of my favorite equity markets, investor sentiment, fixed income, economic, recession, and gold market indicators.

For new readers – Trade Signals is organized into three sections:

• Market Commentary
• Trade Signals — Dashboard of Indicators
• Charts with Explanations

Notable this week:

Last week’s OMR took a look at What Current Valuations Tell Us About Probable Future Returns.  Investors are expecting 10%, valuations are signaling 0% to 2%.  Worth a review if you missed last week’s post.

Favorite tweet of the week that seems appropriate for the current market state. A quote from famed value investor Jeremy Grantham:

Second favorite tweet (well, more depressing than favorite). “28% of ALL dollars EVER created were done so in 2020 – 2021.”  Yikes…

With the Fed’s first few tightening moves behind us and Powell’s signaling of aggressive tightening ahead, now is a good time to recall how past Fed tightening cycles ended:

When there are more buyers than sellers, prices go up.  Margin debt is used by investors to leverage up their bets.  On the way up, it provides extra capital to buy stocks.  One the way down, it is not so good for stock prices.  Leverage is always at the heart of major market dislocations.  Keep the following on your radar. Coming off the highest level since 1947:

The market is overvalued, overleveraged and the Fed wind is no longer at our backs.  And we currently sit at the greatest “sell when everyone else is buying” opportunity in the last 70-years.  This is absolutely the right time to have a disciplined risk management process firmly set in place.

The Trade Signals Dashboard is next.

Click HERE to see the Dashboard of Indicators in Wednesday’s Trade Signals post.

Not a recommendation for you to buy or sell any security.  For information purposes only.  Please talk with your advisor about needs, goals, time horizon, and risk tolerances.

Personal Note –  The Opportunity to Play

“Do you know what my favorite part of the game is? The opportunity to play.”
– Mike Singletary, Former NFL Football Player, and Coach

During his decorated career with the Chicago Bears, Mike Singletary was known for his tenacity and his eyes. As a coach, he inspired.

My favorite coach, my wife Susan, will be in Virginia at the annual Jefferson Cup youth soccer tournament this weekend. Teams come in from all over the country. Her girls have been doing well and their hopes are high. “The opportunity to play,” indeed! My favorite part of the game is when Coach Sue gives me the post-game run down.  I’ll be looking forward to that.

I hope to sneak in some golf this weekend, though the weather is questionable and there is much on the “to do” list to get done. And yes, March Madness is on the list.  I hope your March Madness bracket is still alive with your favorite team(s) still in the competition.  I’m amazed at how many people follow the college basketball playoffs; there is so much passion for the sport and it’s great fun to watch. The heart and grit and buzzer-beating tension are on full display. I’m rooting for Villanova, as the University is just a few minutes down the road from me here in suburban Philadelphia. I love what coach Jay Wright has done with his team. Go Wildcats!

If you are in need of a happy pill…  Click on this link for 55 seconds of pure joy.  A young child, her loyal dog, and a puddle.

Wishing you and your family the very best.

With kind regards,

Steve

Stephen B. Blumenthal
Executive Chairman & CIO
CMG Capital Management Group, Inc.

During his Hall-Of-Fame career with the Chicago Bears, Mike Singletary was known for his tenacity and his eyes. This must have been the result of a child-like vigor that he brought every day. As an inspiring coach, he continued to inspire greatness. Source: Inspirational Sports Quotes.

The flowers are coming up and the trees are beginning to bud.  It’s 60 degrees and sunny in Phila today and I’m checking in happy.  Susan will be in Virginia at the annual Jefferson Cup youth soccer tournament. Teams come in from all over the country. Her ’07 girls’ team (age 14) is playing well and their hopes are high. “The opportunity to play.” Indeed!

Speaking of sports, I hope your March Madness Bracket is alive with your favorite team(s) still in contention.  I’m amazed at how many people follow the college basketball playoffs.  There is so much passion in college basketball.  It’s great fun to watch. The heart and passion and buzzer-beating tension are on full display. I’m rooting for Villanova as the University is just down the road here is suburban Philadelphia. And I love what coach Jay Wright has done with his team.  Go Wildcats!

Next week, I’ll be traveling to Savannah GA for a due diligence trip (and some golf). I’ve only been to Savannah once before and I’m really looking forward to visiting again.  Susan’s oldest son Tyler is in the Marines and stationed about 90 minutes from Savannah.  Susan is joining me on the trip and we’ll hope Tyler can meet us. Finally, a happy 24’th birthday wish to our son Matthew (Matt, the beer money Venmo is on the way).  Time sue is moving by much too fast.

Wishing you and your family the very best.

With kind regards,

Steve

Stephen B. Blumenthal
Executive Chairman & CIO
CMG Capital Management Group, Inc.

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Stephen Blumenthal founded CMG Capital Management Group in 1992 and serves today as its Executive Chairman and CIO. Steve authors a free weekly e-letter entitled, “On My Radar.” Steve shares his views on macroeconomic research, valuations, portfolio construction, asset allocation and risk management.

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