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If you’re afraid of heights, then don’t look down. The current median price / sales ratio on large cap stocks will make your palms sweaty and your mouth dry.
At 2.5x revenue we are at incredibly high levels. Back when the crisis was ending in the first quarter of 2009 and many people had unloaded their stocks at the lows, the price / sales ratio was at the low, low price of 0.80. It was a generational buying opportunity.
What use price / sales?
Conventional wisdom suggests that it’s harder to manipulate revenue than earnings so using a measure of revenue to value the market provides a clearer picture of where we are at today.
That’s simply not true. In my book, What’s Behind the Numbers?, I spend a chapter talking about many ways management teams can pull the wool over investors’ eyes and make revenues look a lot healthier than they really are. This late in the stock market cycle, there’s much more incentive to goose the numbers because management’s wealth is increasingly tied to higher stock prices.
But, even if we assume that the revenues reported by large cap companies is true and sustainable, we are at nosebleed levels.
You don’t need to be a math major to know that when an asset class is trading nearly three standard deviations higher than the norm that risk has increased dramatically. It doesn’t really ever happen. We are in uncharted territory.
Not only are the valuations extreme, it’s the case across the market. When the Internet bubble popped, it was mostly technology stocks that took a beating. In the 2008 financial crisis, many stock rebounded faster and more sharply than the major indexes.
This time around though, there’s nowhere to hide. Everything is priced to perfection. That doesn’t mean the stock market is going to crash tomorrow. But, it does mean future returns are likely to be much lower. In fact, when the ratio is over 1.5x, the returns are just 2.5% annualized! It also means that in this game of hot potato you might be the one getting your fingers burned if you’re not starting to work some hedges into your portfolio.
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Active Alts Contrarian ETF (SQZZ)
Investment Objective: The investment objective of the Active Alts Contrarian ETF is to seek current income and capital appreciation.
Active Alts Contrarian ETF (SQZZ) Risks:
http://activealts.com/risks/
It is possible to lose money by investing in the Fund. The Fund may invest in other investment companies, and will fluctuate in response to the performance of the acquired funds; therefore, there may be certain additional risk expenses and tax results that would not arise if you invested directly in the securities of the acquired funds.
The Fund may invest in unaffiliated and affiliated money market funds; therefore, the Advisor is subject to conflicts of interest in allocating the Fund’s assets among the underlying funds, as it will receive more revenue from affiliated funds than from unaffiliated funds.
Although the Shares of the Fund are approved for listing on the NASDAQ stock market, there can be no assurance an active trading market will develop and be maintained for the Fund’s shares.
The Fund invests in foreign companies, which may be subject to greater risks than investing in domestic companies. Investing in the securities of small and medium capitalization companies generally involves greater risk than investing in larger, more established companies.
The Fund’s investment strategy seeks to invest in stocks in which a significant amount of market participants have taken short positions, when the market participants believe the value of these stocks will decline in the future. If these market participants are correct, the value of stocks in which the Fund invests will decrease, and the Fund will lose money on its investments.
Due to the practice of lending securities, the Fund may lose the opportunity to sell some of its securities at a desirable price.
The Fund’s portfolio is actively managed, and will likely have a higher portfolio turnover rate than non-actively managed portfolios; and it will likely experience short-term capital gains, taxed at shareholders’ ordinary income tax rates.
Shares of Exchange Traded Funds (ETFs) are not individually redeemable and owners of the shares may acquire those shares from the ETF and tender those shares for redemption to the ETF in Creation Units only, see the ETF prospectus for additional information regarding Creation Units. Investors may purchase or sell ETF shares throughout the day through any brokerage account, which will result in typical brokerage commissions.
SQZZ Prospectus: http://activealts.com/downloads/2016.09.21_Active_Alts_Contrarian_ETF_PRO.pdf
SQZZ’s distributor is Foreside Fund Services, LLC
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