U.S. Federal Reserve - Changing Of The Guard

On Friday, February 14th, the Nasdaq Composite Index traded at its highest level since September 2000. And the S&P 500 Index is now less than 1% from its all-time high set last month at 1850.84. The new Federal Reserve Chairman Janet Yellen provided comfort to nervous investors this past week with comments indicating that she will effectively "stay the course" of easy monetary policy. While planned "tapering" of the Fed's monthly purchases of Treasury securities and Mortgage-backed Obligations is still on the table, the zero-interest-rate path will be preserved until the economy demonstrates additional strength.

Both the S&P 500 Index and the Nasdaq Composite Index corrected less than 7% from their mid-January intra-day highs to their early February intra-day lows. And both of these widely followed stock market barometers have now erased all or most of these losses.

Is it safe?

In the 1976 suspense film Marathon Man, one of the scarier scenes was when Laurence Olivier asks his prisoner Dustin Hoffman "Is it safe?". Hoffman, of course, has no idea what Olivier is talking about and responds to this effect. Olivier than asks again "Is it safe?". Hoffman then says "Yes, it's safe". Olivier than asks again "Is it safe?". Hoffman is confused and scared and then says "No, it's not safe". For those of you who have never seen the movie, the real answer for Olivier's character was IT WAS NOT SAFE!

For investors in the U.S. Stock Market, my view is that IT'S NOT SAFE to commit new money here. I believe that the current path of "Fed Tapering" will soon take its toll on investors. Is it possible that we now have a "Yellen Put" in place of the previous "Bernanke Put" for U.S. stocks? The answer is maybe. Will the current Federal Reserve under Yellen's stewardship react the same way as the Bernanke Fed if a major stock market correction unfolds? Probably yes, but we won't know for sure until we actually see a real correction. My view of the the landscape here is that the U.S. economy is heading into a new recession. The level of current stock prices clearly does not reflect the probability of this potential recession. And while the Federal Reserve may be there to "cushion the blow" of any recessionary winds, most major stock indices may be down 20% to 25% before the new Yellen Fed responds appropriately.

What else is happening in the financial markets? The Gold/Silver Mining Stocks Sector is the number one performing stock sector year-to-date so far. The widely followed Philadelphia Gold/Silver Mining Index (XAU) was up 10.59% last week and is now up 21.20% year-to-date so far in 2014. The next best performing sector is Biotech at +13.01% year-to-date. REIT's, Energy, and Tech-related indices are up between 3% and 5% year-to-date, but most other indices are flat-to-down on the year so far.

The financial press is finally starting to focus on the extraordinary rebound in Gold/Silver and related investments. Naysayers on Wall Street have lost all credibility now with their bearish calls for this sector, and any investor who was willing to "trade against the bearish herd" last December 2013 has been handsomely rewarded.

Here are Friday's closing prices in the most popular Gold and Silver ETF's as compared to the panic intra-day lows as posted on Tuesday, December 31st:

                                                                          Panic 

                                                                  Intra-day Low      Closing Price

                                                                      12/31/13            02/14/14          Change

Gold ETF  (Symbol GLD)                               114.46               127.15           +11.09%              

Silver ETF (Symbol SLV)                                 18.26                20.65            +13.09%  

Here are Friday's closing prices in the most popular Gold and Silver Miners ETF's and a representative sampling of individual Gold and Silver Mining Stocks as compared to their December lows:                                                 

                                                                           Low        Closing Price

                                                                      Dec 2013           02/14/14          Change

Gold Miner ETF  (Symbol GDX)                     20.24                26.35            +30.19%              

Silver Miner  ETF (Symbol SIL)                      10.46                14.53            +38.91%  

Goldcorp (Symbol GG)                                       20.54                27.55            +34.13%

Primero Gold (PPP)                                              4.27                  6.75            +58.08%

First Majestic Silver (AG)                                     8.82                 12.19            +38.21%

Endeavour Silver (EXK)                                       3.12                   5.60            +79.49%

Fair or not, it's been my experience that "you're only as good as your last trade" in the investment advisory business. The bullish call on Gold/Silver mining stocks in this column over the last eight weeks has worked out well for anyone who listened. The bearish call on the U.S. stock market has yielded only mixed results. 

So what now? 

Bottom line: Gold/Silver mining stocks are probably "fairly valued" now and should therefore be scaled back or completely liquidated in most portfolios. While the rebound in U.S. stock prices over the last two weeks has been impressive, I remain convinced that a major correction is imminent and that a new bear market in equities will dominate the financial landscape for most of 2014. As of Friday's close February 14th, according to my proprietary valuation screen, here are the 25 most overvalued U.S. stocks:

Twenty-five (25) Most Overvalued U.S. Stocks (Proprietary Computer Screen)

The average stock on this list trades at 115x Forward 12-month earnings estimates (F P/E), 11.56x Sales (P/S), and 24.68x Book Value (P/B). The average stock on this list has a current market capitalization of more than $14.5 billion, but produced negative earnings of $0.09 per share over the Trailing Twelve Months (EPS ttm). At one point in 2014, I believe that most of these stocks will be down as much as 50% or more. Biotech and drug-related companies have been purposely excluded from the above list given the need for special valuation metrics to analyze this particular sector. In the interest of full disclosure, I am NOT short any of the stocks on this list, but I do currently hold a large position in the Pro-Shares Ultra-Short S&P 500 ETF (symbol SDS) in one of my managed accounts.