Couple days ago, one of my closet friends called me and said something doesn’t feel right about the stock market. “The market is gonna crash!” In the back of my head, I was like “No Shit Sherlock”… She feels things most normal human beings do not feel. She is often right. No one can predict the exact date of the crash, but beyond the writing on the wall, we are face to face with red warning lights flashing at us.
Major market indexes rose to record highs on Fri, 24 Nov 2017, the S&P broke above 2,600 for the first time. The Dow Jones closed at 23,590.83, Nasdaq at 6,862.48 an all-time high. The volatility is extremely low as the VIX “Wall Street’s fear index” is at 9.65 it dropped to a record low -8.56 – this year. The market is doing well. On the surface, everything seems fine. But Not so fast. Could it be the calm before the storm? Let’s take a step back.
Warren Buffett favorite Market Valuation indicator is the ratio of the total market cap (TMC) to GNP. He calls it the “best single measure”. As of 11/26/2017, that ratio is 138.8%. This means it is Significantly Overvalued. It is critical that you understand that we have seen the stock’s valuations this expensive only twice before: prior to the 1929 crash an all-time high of 143 percent in 1999 just before the dot-com bubble. There is a bear market every 3 to 5 years. We have had 32 since 1900. Now we have gone 8 years without one. We could go another year, two without one. No one knows for sure.
Renowned economist Harry Dent who predicted Harry the crash of 2008, predicts ‘once in a lifetime’ market crash and the Dow could plunge 17,000 points. “I think this is going to be a stock market peak of a lifetime followed by a crash very similar to the early 1930s. This happens once in a lifetime,” he said.
Another looming factor on the horizon is that the Federal Reserve wants to gradually begin to tighten monetary policy to shrink its $4.5 trillion bloated balance sheet. That was part of the problem in 2007 and Total assets of the Federal Reserve then were $869 billion as of August 8, 2007. Now its five times that number. I can go on and on. You get the point, there is a solid case that can be made for a crash happen soon. I am an optimistic guy, I believe in our country and our financial system. No one can predict when the only thing you can control is your readiness for it and you can position your portfolio for it. I would like to discuss two major and distinct issues and the ways to protect yourself against them; The market downturn and the Fraud.
THE MARKET DOWNTURN:
As a fiduciary registered Investment Advisor, I can’t make blanket recommendations online. I can do it based on the client-specific circumstances.
That being said, find an advisor who is qualified, and who you can trust. Work with your Financial planner to create a customized financial plan that meets your specific needs with the right diversification and asset allocation.
I wrote an Article on how to choose a qualified Investment Adviser that went viral. I recommend you read it here: http://www.samalaoui.com/2016/01/24/find-the-right-advisor/
The reason I am writing this Article is the Fraud; The Wizard of Lies (Movie 2017). I just saw this fantastic movie with an Oscar-worthy performance from Robert De Niro who played the disgraced Wall Street financier Bernie Madoff. I think everyone should watch it especially investors.
The movie is heartbreaking:
Here is an example of what you will see in it:
Mary Thomajan recalled, “In the 50 seconds it took to read that fax, I went from being a multimillionaire to having my life savings wiped out and life as I knew it altered forever.”
Robert Halio’s son called him at his retirement home in Boca Raton with the news. It’s all gone, Dad. I don’t… I don’t know what to do.
The list goes on and on…Unfortunately, this is real, it happened in real life.
What hit me the most was Madoff’s arrogance and defiance. After stealing their money, he called his investors “greedy fucks.” And made them accomplices and responsible too because as long as they were making money, they didn’t do their due diligence “they didn’t wanna look too hard. They looked just far enough.” It’s that defiance and arrogance that made me want to write this article!! If you are responsible and do your homework as I explain, that won’t happen to you.
In the previous crisis of 2008, we saw Investment Fraud Soaring hand in hand with the Market because as long people were making money many weren’t going to do their due diligence. Today we are seeing again the stock market soaring along with the fraud levels. Here are some current examples:
- On Feb 5, 2016, Harry Markopolos, Madoff whistleblower warns of 3 New Ponzi Schemes, one of them Bigger than Bernie Madoff’s. “For now, Markopolos is declining to name names, because he wants the regulatory and enforcement agencies to get the information first.” Source: http://time.com/money/4209599/bernie-madoff-new-ponzi-schemes/
- On November 7, 2017, in a Risk Alert issued by the Securities Exchange Commission, the SEC found widespread compliance failures among municipal advisors.
- On Nov 9, 2017 – New York Attorney General Eric Schneiderman has subpoenaed information from TIAA, regarding its sales practices.
“The subpoena to TIAA, which handles retirement accounts for over four million workers at 15,000 nonprofit institutions across the country, followed an article last month in The New York Times that raised questions about tthe firms selling techniques. TIAA oversees almost $1 trillion in client assets.”
This is how you help prevent becoming a victim of a fraud. Ask your financial Adviser to put the following on a company letterhead and sign it and have his chief compliance officer sign it too. These are the crucial questions any client needs to ask their financial advisors AND keep a written record of the answers:
To the Financial Advisor: Please Confirm the YES Answer the following questions in writing:
- Do you work with me in a fiduciary capacity all the time? YES
- Are you legally obligated to put my best interests ahead of yours all the time? YES
- Your Total compensation on my account is fully disclosed with no hidden fees? YES
- Do I have an Investment Policy Statement? YES
- Are all my assets held in my name, not in the firm’s name (“Street Name”)? YES
IF any of the answers are NO please provide a written answer and explanation.
For details on why these questions are crucial, read the following:
Your Financial Advisor could be your childhood friend, your nephew, your neighbor, someone who is a good person and that you totally trust. However, there are changes in the financial regulations that he might not fully understand or know about. Even if you are in a reputable firm, they might be investing with someone like Madoff and they don’t realize it.
If you receive the document signed with the “Yes” answers; chances are everything should be fine, you still have to do more due diligence with third parties such the clearing bank. If your advisor refuses or decides to call you or meet with you to explain why you don’t need that document. It could be a red flag. Ask for a written explanation to keep for your records. Then investigate further. If an answer is No, it doesn’t mean that your advisor is doing something wrong or illegal at all, it means you need to research and understand more your situation. A Ponzi scheme is sometimes very complex, this should help you start your investigation.
He might refuse and refer you to the agreement you signed. The contracts are sometimes complex to understand and even if you read the fine print you might not know what to look for. That’s what you need the written record.
Look on the SEC.gov and Investor.gov websites and get the advice of securities lawyer.
I will write another blog post to explain why those questions are important and why you need a written record.
Get a financial Check Up to answer your questions here: http://www.samalaoui.com/financial-checkup/
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This information is provided for general information only, and is not intended as personalized investment or legal advice. Reading the above is in no way intended to be a substitute for individualized investment advice, and no conclusions should be drawn from this information regarding any potential investment. Reproduction or distribution of this material is prohibited, and all rights are reserved.