Follow Farrell’s Rule No. 9

Bob Farrell is a legend on Wall Street.

He built Merrill Lynch into a market powerhouse, capitalizing on the markets in the mid-1960s, mid-80s and during the big downturns in the ’70s and Black Monday in ’87.

Over his decades in the teeth of the greatest and fiercest markets in modern history, he put together a list of 10 rules that are key for any investor or student of the markets. One good detailed explanation of the list is here.

Given where we are right now, I think it’s crucial for you to keep a copy of this list bookmarked or on your bulletin board or refrigerator!

Here’s Farrell’s unadorned list:

1. Markets tend to return to the mean over time.
2.  
3. Excesses in one direction will lead to opposite excesses in the other direction.
4.  
5. There are no new eras — excesses are never permanent.
6.  
7. Exponentially rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways.
8.  
9. The public buys the most at the top and the least at the bottom.
10.  
11. Fear and greed are greater than long-term resolve.
12.  
13. Markets are strongest when they’re broad and weakest when they narrow to a handful of blue chip names.
14.  
15. Bear markets have three stages: sharp down, reflexive rebound and a drawn out fundamental downtrend.
16.  
17. When all the experts and forecasts agree, something else is going to happen.
18.  
19. Bull markets are more fun than bear markets.

Now, none of this is rocket science but the fact is, after decades in the middle of the most of the dynamic markets in the 20^th Century these simple rules are at the heart of successful investing.

They make up what I consider an ‘Easier Said Than Done’ list.

It goes along with, say, the Ten Commandments or other lists that are very simple but somehow are the hardest to follow.

But the one on Farrell’s list that sticks out right now is number 9 — When all the experts and forecasts agree, something else is going to happen.

That’s not to say that 1-4 aren’t very timely as well, but 9 is the biggest concern I have right now.

For example, there was ‘great’ news that U.S. gross domestic product (GDP) was upgraded from 3.2 percent last quarter to 3.5 percent. But what most talking heads fail to mention is that much of that big move was related to a spike in soybean demand. Consumer spending was tepidly higher.

Simply put, there is no news that isn’t spun to light the path to higher highs on Wall Street. There are no voices that are warning about the market excesses. Everyone is cheering it on.

The markets continue to push toward — and through — record highs. But earnings are not growing in parallel to stocks’ growth.

A recent article from the blog Wolfstreet.com states that since 2011, S&P 500 firms have spent $3 trillion on stock buybacks. This should be troubling. But is this story anywhere in the lamestream media? Nope. Hurts the fake narrative that the U.S. economy is going gangbusters.

Corporations are buying back shares instead of investing in their businesses. And they’ve done it so big shareholders like Wall Street hedge funds that own big stakes and their own share-owning corporate chieftains can make more and more money through artificially inflated stock prices.

This kind of money shuffling does not create growth, and does nothing to help the U.S. economy. It’s the classic vicious circle — you buy back stock, which helps boost earnings per share, which raises the value of the stock, which gets paid out in performance bonuses.

The problem is, share buybacks are now drying up. In the past two quarters they’re off $52 billion — the largest drop since a $57 billion drop in 2007/2008.

The public is told the fake news that the economy is prospering because Wall Street is.

This is not the case. Real America has suspected this for quite some time. And Bob Livingston has been on the forefront in warning Americans — and investors — that the system continues to distort what’s really going on in the domestic and international economy for the benefit of the few at the top. His new report is all about how to protect yourself from the downside and possible rough seas ahead.

But the more specific point I’m trying to make now is, we’re getting flashing red signals from one of the market’s greatest insiders that we’re headed for a reckoning very soon. Don’t wait to do something before it’s too late.

Take your profits in January and get out of bonds and most stocks, except the few I am going to show you in an upcoming report I’ve written. More on that soon, but if you want something to hold onto, stick with physical gold and silver until this market corrects. They’re both cheap now, but that won’t last. And it’s easier to wait on a good investment than it is to sell a bad one at the right time.

Also remember that the stock markets are no reflection of the economy any longer. They are completely distorted by central bank money that has been used by companies to boost their own share prices, so that these valuations have no real underpinnings — kind of like real estate about eight-10 years ago.

And we know how that turned out.

— GS Early

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