Buffett Thinks it is Different This Time

This bull market is as hated as it is relentless; only 35% of individual investors agree that the market will be higher in six-months compared to 65% who think it will be the same or lower, yet the market has not had a 5% pull-back since September of 2016. Those sentiment numbers demonstrate more fear than exuberance, and is evidence that the market continues to climb the proverbial “wall of worry”.

Why is the market pushing higher without the normal periodic pull-backs? Warren Buffett may have the answer, at least in part. On October 3, Mr. Buffett was interviewed on CNBC, and among the many insights he provided, the following two stood out:

Stock valuations are historically high, but not as high as the bears are claiming when viewed within the context of historically low real interest rates.The 10-year yield is at 2.36% and Mr. Buffett would expect lower stock prices if the rate climbs to 5%.
Berkshire Hathaway is not selling as long as changes to the tax code remain possible. Berkshire, like most long-term equity holders, is sitting on capital gains that would benefit from the expected changes to the tax code.

Mr. Buffett has not made his billions by letting politics dictate the timing of his investments, which makes his second statement sound a lot like “it’s different this time”. Normally, this would raise some very big flags for us, but not this time, for two reasons. First, because of who is speaking, and second because if the tax plan includes allowing $200 billion of off-shore profits to be repatriated, then most of that money will likely be used to buy back shares, and we all know what that could do for equity values.

In addition, the above scenario fits with our time-line analysis which…{This section is for paid subscribers only}

Equities

Our long-term view continues to be bullish. From a sentiment perspective, there is just not enough exuberance in the market. Tops in the S&P 500, tend to correlate with spikes in the AAII sentiment index; almost all tops during the last 20-years occurred when bullishness was over 50%, and bearishness was less than 30%. This week, we are at 35.6% and 32.8% bullish and bearish respectively (chart below).

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Oil

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Gold

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Long-term (months) and short-term (days/weeks), gold continues to form head-and-shoulders patterns (purple and red caps on graph below). This places the balance of probabilities on the side of a continued slide in the gold price (chart below).

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The commitments of futures traders (as of last Tuesday) show that the money managers reduced their net long positions slightly, while the swap dealers and commercials left their net short positions essentially unchanged. All positions remain at elevated levels, which fits with our longer-term view that gold will continue under pressure (chart below).