What do the latest GDP numbers tell us?

The GDP numbers came out this week and there was 2.4% growth yoy:
http://www.reuters.com/article/2013/05/30/us-usa-economy-idUSBRE94T0HI20130530

So what does this mean to your equity positioning?

The following chart is used to give a valuation on the stock market and gives you the tool to position yourself. It is based on the total stock index (DWCF) divided by the GNP.

The latest data says that GNP was 16.236 trillion in the first quarter of 2013.

Table 1: GDP and GNP

If we look at the Total Stock Market Index (DWCF), we have 17015.

Now divide 17015 by 16236 and we get: 1.05.

105% is modestly overvalued according to the Stock Valuation Table.

Stock Valuation Table

So I wouldn't buy equities at this stage.

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Record High Insider Selling Marks The Top In The Stock Market

There are several indicators today, marking a major top in the stock market. One of those indicators is the overvaluation in the stock market according to the "Warren Buffett Valuation" of the total U.S. stock market index as compared to U.S. GNP. We found out that stock markets are overvalued today, because the total U.S. stock market index is at 100% of  U.S. GNP. Normally we see that the total U.S. stock market index is at 80% of GNP. We just recently had news that U.S. GDP was negative and I wrote about it here. When GDP declines, it inherently means that the stock market must decline, taking into account the Warren Buffett Valuation theory.

Investors are much too bullish on stocks at this moment and we can see that in the Dow-Gold ratio, which is hitting a ratio of 9 to 1 as we speak.

I believe though, we shouldn't be so complacent about stocks. After all, the P/E ratio of the Dow Industrials stands at 15.3 right now, while in the 70's, the P/E ratio was on average at 10, which is much lower than 15.3. The question is: "Do we expect higher or lower earnings in the future?". I believe the earnings are going to get worse in the future. One way to measure this is to look at the Citigroup Economic Surprise Index (CESI). This index is defined as weighted historical standard deviations of data “surprises”. In human language it means that if the index turns negative, the chance of an "unexpected" downward revision goes up. You will hear more bad news out of the media. And what do you know, the CESI did turn negative in the previous month. So you can expect more bad news coming. Historically, when the CESI goes down, the stock market goes down a few months later as you can see on chart 1.

Chart 1: Citigroup Surprise Index Vs. S&P

To read more evidence on a top in equities, go here.

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Japanese Equities Outperforming Japanese Bonds

As I warned everyone already in March 2012 in this article, it is finally happening. Japanese equities are indeed outperforming Japanese bonds and we can see this event starting in one of the most important equities brokers, Nomura Holdings (Chart 1). In my previous article I said that Nomura Holdings would flourish as it is the primary brokerage service in Japan.

Nomura, which pays a dividend that's higher than the 10 year Japanese bond yield, has skyrocketed just recently and is going to keep going upwards according to me.

Chart 1: Nomura Holdings

To find out why this is, go here to read the analysis.

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