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The Aftershock

A Publication of Newsmax & Moneynews

INVESTOR REPORT

Robert Wiedemer, Editor

Vol. 1, No. 4 / May 2013

The Stock Bull Run Is Doomed! Here’s How to Prepare for What’s Next

S

By Robert Wiedemer and the Aftershock Investment Team

tocks are back and back in a big way — if you believe Alan Greenspan. That’s right, Alan Greenspan, the former Federal Reserve chairman, the man who uttered the famous words “irrational exuberance” to describe dot-com stocks in late 1996, well ahead of the eventual crash. As it happens, people forget that he also was several years ahead of the tech-stock bubble’s ultimate, full expansion, but no matter. The “maestro,” as the press dubbed him, is repeating himself. Exactly a year ago, Greenspan also said it was time to buy. “Stocks are very cheap,” he said at a financial forum in Washington, D.C., on May 1, 2012. Stocks were a good value then, the former Fed chief said, because of a “very low” priceearnings ratio. “There is no place for earnings to grow except into stock prices,” Greenspan said. Ten-and-a-half months later, on March 15, 2013, the maestro was back. This time, he dusted off his infamous “exuberance” rhetoric, arguing that there was nothing irrational about the exuberance for stocks we’re seeing now. “Irrational exuberance is the last term I would use to characterize what is going on at the moment,” Greenspan told CNBC. The stock bull market still has “a ways to go, as far as I can see,” he said. Remember, this is the man who in 2005 claimed a housing bubble wasn’t building, just that there was a bit of “froth” in the market. At least on stocks he hasn’t been wrong — yet. Since June 1, 2012, the S&P 500 Index put on nearly 20 percent through the end of March. Other than the downdraft in equities around the time of

the most recent presidential election, we’ve seen the type of steady “wall of worry” climb that stock buyers love to see. Most who lost money in the 2008-2009 credit crisis has been made whole and maybe collected some fat dividends along the way. The market trend has led a lot of people to construct a fantastical theory about the current state of equities. Bond holders, they argue, will be forced to liquidate and buy stocks. “Cash on the sidelines” is set to pour into the market. The bull is ahead of us, they say, despite turning four. Historically, few bulls last five years, though the run-up to the Great Crash in 1929 went on for eight years, all told. It also has brought on a bout of wishful historical projection. The theory goes something like this: Back in the Reagan era, we had a very strong Fed chairman in Paul Volcker. He made tough decisions in an effort to put the brakes on years of inflation. People in the early 1980s hated the immediate effects of Volcker’s policies, but when inflation finally subsided a real bull market began. As investors began to realize that there was no money to make in fixed income, stocks took off. The result was a wealth-creation machine: Since that early 1980s low the Dow has put on 1,776 percent. An investment in the S&P 500 in August 1982 earned an inflation-adjusted 8.7 percent over the same period, with dividends reinvested. The after-inflation figure is important, as Aftershock Investor Report readers know. Unadjusted, the

Picture the U.S. economy in 1982. Inflation is at 17 percent. Unemployment 19 is 10.8 percent. Aiming to derail the GDP Potential GDP 18 U.S. inflation train, Volcker lets the Actual Projected 17 federal funds rate rise to 20 percent by 16 the middle of 1981, just two years into 15 his tenure. Importantly, even when the 14 economy begins to improve in 1983, 13 Volcker keeps the pressure on, forcing 12 Congress to cut spending. 11 Where are we now? It couldn’t be 10 0 2 4 6 8 0 2 4 6 8 0 2 4 0 0 0 0 0 1 1 1 1 1 2 2 2 a more completely opposite scenario. 20 20 20 20 20 20 20 20 20 20 20 20 20 Money supply has exploded. Inflation, at “Potential” gross domestic product is the Congressional Budget Office (CBO) estimate of the maximum sustainable level of output of the U.S. least officially, is very low. Unemployment economy. The CBO sees the U.S. economy returning to its potential at some is high but not catastrophically so (again, point in 2016. Yet stock prices seem to have moved to reflect an immediate relying on official data, which is at odds recovery today, with no future roadblocks such as inflation or rising public debt payments. with reality, as we know). The interest rate SOURCE: Congressional Budget Office; Department of Commerce, Bureau of Economic Analysis. is near zero, essentially a negative interest rate taking into account the mild official return was 11.8 percent, a correct but misleading inflation of late. figure you read in the financial press all the time. Interestingly, retail stock investors and even Essentially, you could have put your money professionals on Wall Street seem to rely heavily into stocks and gone to sleep, just to wake up a rich on the kind of future economy you see projected retiree. It was a spectacular run, one characterized by the folks at the Congressional Budget Office by very low inflation — what economists now (CBO). Under their scenario, growth will be steady refer to as “the Great Moderation” — plus some and strong for the coming five years, at 3.4 percent pretty crazy spills along the way, such as the dotin 2014 and then 3.6 percent through 2018. That’s com crash. Nevertheless, until 2008 happened, just not rapid growth but pretty good for the U.S. being patient paid off big. economy, which is large and quite mature. It really was a simple, “no-brainer” investment The following is a verbatim quote from the strategy, one that unfortunately lulled most CBO, which claims it doesn’t make predictions Americans completely to sleep. If you could make about the economy but rather “projects” based your investments so blindly and still come out on current circumstances. That sounds like a well ahead of inflation, would you bother to learn distinction without a difference, but here goes: anything at all about the markets and your money? “In particular, CBO expects that the effects of the housing and financial crisis will continue to Sleepy and Compliant fade and that an upswing in housing construction You would not, which is exactly how Wall (though from a very low level), rising real estate and Street likes its customers — sleepy and compliant. stock prices, and increasing availability of credit Now an entire generation of near-retirees pine will help to spur a virtuous cycle of faster growth for those golden days to return. Yet they won’t, in employment, income, consumer spending, and and they can’t. That’s the huge danger of the business investment over the next few years.” Aftershock: It’s not that you can’t prepare for Just like magic, we’ll have steady growth, what’s to come. The danger is that most people will relatively benign circumstances, no recessions and not prepare. They’re sleeping far too comfortably. no rapid rise in interest rates. According to the It’s not 1982. There will be no massive increase CBO, 30-year Treasurys will pay 5.2 percent by in stock prices. Paul Volcker is not in charge; the end of 2017, rising from about 2 percent now. instead, we have “Helicopter Ben” Bernanke. The economy is far different as well. Never mind the trillions of dollars the Fed printed Trillions of 2005 USD

GDP and Potential GDP

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May 2013

up to buy bonds, pushing rates lower. That doesn’t seem to matter at all.

Through the Looking Glass

The fact is, the market since 2007 has been utterly artificial, a through-the-looking-glass version of 1982 where things look similar but really exist in a completely different reality. We got a sense of how things work in this looking-glass world in 2008 and 2009, when Bear Stearns and Lehman Brothers evaporated and the big banking and automotive bailouts occurred. In fact, the market crash then is exactly where the economy would be and should be — were it not for massive government intervention. Stocks aren’t inherently bad investments. They can be great wealth-building tools. From the end of World War II until about 1960, there were a lot of reasons to buy stocks. The early 1980s also were a great time to buy stocks. At the time, the market price-to-earnings (P/E) were low and interest rates were as high as they were to go. Obviously, I don’t believe all of the growth of the 1980s and ’90s was solid, but it was a better time to buy. Consider for a moment that in 1972 and 1973 the P/E of the S&P 500 was 18 times earnings. By 1979 it was 7.88 and again in 1982 even lower, down to 7.73.

We’re back to up to 18. (The long-term median is 14.5.) That is, it would take you 18 years to “earn back” the price you would have to pay to own stocks now. It’s just not a good deal. It’s even worse when you look at the cyclically adjusted priceequity (CAPE) ratio, also known as the “Shiller P/E,” after the Yale economist Robert Shiller. The Shiller P/E takes the typical one-year backward look at earnings and instead averages it out over a decade in an effort to smooth distortions from short-term bumps up (or down) in earnings. At the end of March, the CAPE ratio was an astounding 23.46 — senselessly high. (The longterm median is 15.88.) Stocks by any reasonable measure are expensive, yet the bulls are stamping the ground and considering another charge, or at least talking it up. Put more simply, would you rather pay six times earnings for stocks, or triple that number?

Understanding Market Value

Think of P/E ratio as the cost of buying a business. If you were interested in owning a chain of auto parts stores or fast-food places, you would take a close look at how much money the stores earn. Assuming you were financing the deal with a bank loan, the question you have to answer is: How long will it take me to pay off the loan, with interest, from the earnings? Of course, you’d want that number to be as low as possible. Let’s say it would take you seven years to pay back the bank loan, relying solely on profit from the stores. After year seven, you have a cash cow and, potentially, you can reinvest and expand. That’s what was going on in 1982. You could have bought the entire U.S. corporate machine as represented by the broad stock market for what amounts to a seven-year bank loan. After that, the cash flow was yours to keep and reinvest. So, what’s the P/E ratio of the market today? May 2013

Moneynews.com

About Robert Wiedemer Robert “Bob” Wiedemer is the author of the New York Times and Wall Street Journal best-seller Aftershock, with more than 700,000 copies sold, and the Wall Street Journal follow-up bestseller, The Aftershock Investor. Wiedemer predicted the latest downturn in the economy in his landmark 2006 book, America’s Bubble Economy, which Kiplinger’s chose as one of the best business books of the year. A regular speaker to hedge fund captains and elite international investors, Wiedemer often is quoted in the financial press, including The Wall Street Journal, Financial Times, Dow Jones Newswires, Barron’s, Reuters, The Associated Press, and others, and is a frequent commentator on CNBC and Fox Business Network. He is also a managing director of Absolute Investment Management, an investment advisory firm, and holds an MBA from the University of Wisconsin in Madison. Wiedemer lives in Virginia with his wife and two children.

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The bigger problem behind the calculations of the bulls is that every analyst presumes 3.5 percent GDP growth for the next 10 years. They assume the status quo will hold. You can’t assume the status quo, because it just won’t be this number. The best case we can manage to support, upon close analysis, is closer to GDP growth of between 1 percent and 1.5 percent, assuming no Aftershock. Once the Aftershock hits, growth will be strongly negative.

The Media Bulls Are Back

But, just like the CBO, the stock analysts look down the road a quarter or two and assume a glide path upward that looks much the same. They imagine that the most recent earnings cycle will be repeated every three months for the next 10 years, and they are wrong. That recent earnings have been good at all is due heavily to our artificially low interest rate. The problem is that analysts seem to believe that low rates can be sustained for years and years to come, something even the Fed doesn’t believe. It’s just not reasonable. Another major warning sign, in our view, is the re-emergence of the media-friendly stock bulls. These folks have their points of view and, in their defense, probably haven’t changed their minds at all over the years. We wouldn’t accuse them of chasing media attention for their own fame. No, the problem is the financial press. Eager to build on a hot story, they dig up reliable old sources from past press clippings and innocently ask them to do the dance once more. Longtime bull Abby Joseph Cohen, now at Goldman Sachs, is all over CNBC talking up the stock rally based on “improving fundamentals in the U.S. economy” and, of course “valuation,” that is, the supposedly low P/E ratio. Jeremy Siegel, the Wharton School professor who has built a career as a stock promoter, is suddenly in vogue again (practically a market top warning by itself). And, of course, there’s James K. Glassman, author of the infamously titled book, Dow 36,000: The New Strategy for Profiting from the Coming Rise in the Stock Market. Publication date: Oct. 1 1999, just before the dot-com bust began. Hysterically, even Glassman is back, trying in an Op-Ed on Bloomberg News to regain credibility. See if you can follow his logic: 4

“We wrote in the introduction [to the book] that ‘it is impossible to predict how long it will take’ to get to 36,000. Then, in the same paragraph, we rashly made a guess anyway: ‘between three and five years.’ Today, the far edge of that time frame is clearly in reach. From its low of 6,547 on March 9, 2009, the Dow has risen 117 percent. Another 117 percent in four years would put it at 31,022, just 16 percentage points shy of the magic number.” That’s right, he’s double counting. The decline in the Dow from above 14,000 down to the recent low doesn’t matter. It’s just part of the inexorable rise of stocks. All the market has to do is double off that low again — somehow. The problem with Dow 36,000, or Dow 100,000 if you like — they’re equally possible — is that it’s like putting a down payment on a house that has a small fire burning in a back bedroom. “Oh, it’s not a very big fire,” you might say. “It might not consume the house. Let’s buy!” A fire is a fire, and it will spread. A collapse in corporate earnings is just part of the multi-bubble aspect of the U.S. economy. It’s not just about stock prices but also about consumer spending and corporate investment. Once interest rates start to go up, people spend less and companies spend less. All of these things are pumped up too high right now. All are currently at peak levels. In the end, you will be paying a premium for companies whose earnings are based on linked bubbles. If you believe, as the stock bulls seem to believe, that those bubble-driven earnings can continue for 10 more years, stocks probably are a buy. We think not.

Global Contagion

The American economy does not operate in a vacuum. It’s global. China is starting to burst. Europe already has burst. Japan fell apart decades ago, never to recover. These events will continue to affect stocks. People look at the bank disaster in Cyprus and cluck their tongues and sigh, “Too bad for them.” Or they feel smugly self-righteous. After all, who cares if some Russian oligarchs get burned by what amounts to poorly regulated offshore banking? They took a risk and got burned. So what? Cyprus matters — a lot. It comes down to


May 2013

a single idea: A European Union member state approved confiscation of up to 60 percent of depositors’ assets above 100,000 euros ($128,000), and the supposed adults in the conversation, the EU, European Central Bank and the International Monetary Fund (IMF), signed off on the deal. It’s being called a tax, but the simple truth is that governments are literally stealing from citizens to save rotten, ill-run banks. It’s organized theft. That’s huge. Savers in Portugal would be well within their rights to immediately withdraw their savings. Spanish savers would likely follow suit. Even the French, a country some argue is going through “Greek-ification” as we speak, would be smart to eye their savings nervously. Now, nobody is safe. The world has changed.

An Earnings Mirage

In the short run, stocks will do whatever they will do, but in the long run rationality holds true. As Warren Buffet’s mentor Ben Graham put it, the stock market in the short run is a voting machine, but in the long run it is a weighing machine. What does that mean? Simply put, that the market tends to be irrational in the short term but, over time, it shakes out the winners and the losers pretty reliably. If you look at the data from FactSet in the chart on this page, the Graham pattern is obvious: For several years now, analysts’ earnings estimate for the coming fourth quarter, provided in March, is two to three times higher than the eventual

result six months on. And even their rosy estimates are falling. Analysts keep “voting” for higher earnings, but market reality is impossible to ignore. What that means is that investors are paying too much for earnings that are falling before they buy in. There will be a rude wake-up call at some point, and it isn’t necessarily years away. In short, 2007 was not an aberration, like the Flash Crash in May 2010 or some other “glitch” that can be easily discounted. It was reality peeking through. The free market told us then that a lot of U.S. banks should have gone under. In a very real sense, much like in Cyprus, Italy, Portugal, Spain and even France, our banks are kaput. We’ve just gotten very good at whistling past the graveyard. We live in a financial irreality, the looking-glass version of things, thanks to massive government spending and borrowing all over the world. The market, meanwhile, has told us quite clearly where prices should be. The only reason we have been able to dismiss that message has been government intervention. When the intervention stops — and the music always stops, eventually — everyone will look back and wonder how it went on for so, so long.

Portfolio Review

We are watching our current positions closely. We were heartened to see the folks at Pimco, the California bond giant and home of bond guru Bill Gross, followed us into TIPS, as did Invesco, the big ETF manager. They cited a “relaxation” Earnings Growth Decline toward inflation by the world’s central 32.7% 35% banks as a signal that inflation-protected 30% bonds are the place to be. 25% Remember, we are likely to see many 18.6% 18.1% 20% of our positions bobble up and down 15.6% 15.4% 15% relative to our entry point for some 11.0% 10% time. It will take a while for the mass of 4.2% 5% investors to truly grasp how much risk 0% they face as inflation gathers. 2010 2011 2012 2013 But TIPS will move sooner than Actual Growth Rate Log. (Actual Growth Rate) Estimated Growth many other bond products since they are Each year in March, analysts estimate earnings growth for the coming fourth quarter. Since 2010, their estimates (dark column) have been wrong by wide sensitive not just to inflation but also to margins compared to the fourth quarter reality, six months later (lighter mere expectations of inflation. column). In 2012, for instance, the gap was huge, nearly four times lower! Worse still, the actual outcomes have steadily declined even as stock market Likewise, our short-term long bond valuation has climbed higher. position in iShares Barclays 7-10 Year SOURCE: FactSet Treasury Bond Fund (IEF) is looking

May 2013

Moneynews.com

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Gold vs. Gold Miners

GLD

GDX

15% 10% 5% Total Return as %

better all the time. If the world’s central banks are less concerned with inflation, or even trying to goose it up a bit, that means more bond sales and more bond buyers will appear in the short run, boosting our investment. Likewise, we are comfortable with our gold buy through the SPDR Gold Trust (GLD) and Sprott Physical Gold Trust (PHYS). We might increase our position in gold soon, but not yet. Another route toward gold exposure also is close to fruition — gold miners. The reason is valuation. Gold miners are getting quite cheap. If you get a chance to buy a gold miner cheaply enough, you are buying less of a company and more a claim on gold they own in the ground but have yet to dig up and process. In effect, it’s a way to increase your gold metal position at up to a major discount — currently a 70 percent discount!

0% -5% -10% -15% -20% -25% -30% -35% 5-Year

3-Year

1-Year

Gold prices have lagged of late, but the performance of gold miners has been worse. Since gold miners often benefit from a rising metal price, the decline may be temporary and could rise dramatically once gold itself takes off. SOURCE: Yahoo! Finance/NYSE data, AIR chart

We’re not there yet, and we may decide instead to increase our position in the gold metal first. But we’ll have a full analysis of gold mining stocks and a recommendation in that area in a coming issue. o

CONSERVATIVE PORTFOLIO Ticker

Portfolio Weighting

Entry Date

Entry Price

Recent Price

Dividend Yield

Div. Paid Since Entry

Total Return

Buy at or Under

Vanguard ST InfProtected

VTIP

10%

8-Feb-13

$50.19

$50.26

0.10%

$0.00

0.14%

at market

Vanguard InfProtected Shs

VIPSX

10%

8-Feb-13

$14.40

$14.54

3.67%

$0.00

0.97%

at market

SPDR Gold Trust

GLD

5%

27-Feb-13

$155.39

$152.16

0.00%

$0.00

-2.08%

at market

Sprott Physical Gold Trust

PHYS

5%

27-Feb-13

$13.61

$13.23

0.00%

$0.00

-2.79%

at market

IEF

15%

21-Mar-13

$106.80

$108.14

2.72%

$0.15

1.40%

at market

RECOMMENDATION

iShs Bclys 7-10 Yr Trsry

AGGRESSIVE PORTFOLIO Ticker

Portfolio Weighting

Entry Date

Entry Price

Recent Price

Dividend Yield

Div. Paid Since Entry

Total Return

Buy at or Under

Vanguard ST InfProtected

VTIP

7%

8-Feb-13

$50.19

$50.26

0.10%

$0.00

0.14%

at market

Vanguard InfProtected Shs

VIPSX

14%

8-Feb-13

$14.40

$14.54

3.67%

$0.00

0.97%

at market

SPDR Gold Trust

GLD

5%

27-Feb-13

$155.39

$152.16

0.00%

$0.00

-2.08%

at market

Sprott Physical Gold Trust

PHYS

5%

27-Feb-13

$13.61

$13.23

0.00%

$0.00

-2.79%

at market

TLT

15%

21-Mar-13

$116.80

$121.88

1.50%

$0.26

4.79%

at market

RECOMMENDATION

iShs Bclys 20+ Yr Trsry

Notes on all portfolios: “The “Total Return” column includes all dividends. Returns calculated based on a purchase of $1,000 of the security on the listed entry date and price.

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Prices as of close April 8, 2013

May 2013

The Fed Changes Its Tune On Bond Exit We expect much higher inflation to arise, but a bump to 5 percent is all it takes. At that point, the bank won’t be creating monetary policy anymore, just printing to keep the government afloat until Congress is forced by inflation to tax, cut spending or both — rather than borrow. Yes, inflation takes a while to get going. But once it’s rolling, it takes off quickly and takes a long time to kill. Buying the bonds with printed dollars, meanwhile, means you’ve given out the money, you’ve spent it. There is an exit, of course. Instead of buying bonds, you sell them. That, however, would make the stock market crash, unemployment would zoom higher and housing would collapse — again. If we had a fire sale in U.S. bonds — and it could happen — taxes would have to go up and asset values would crash overnight. The U.S. economy is like a building on fire and the Fed’s exit strategy is to hunker down under and a chair and hope for the best. o

By David Wiedemer

Billions of USD

Can a Cyprus-like bank debacle happen here in the United States? The short answer is, “Not exactly” ... but we could have a bank debacle just the same. The Federal Reserve already is trying to figure out how on earth it’s going to exit trillions of dollars in stimulus that’s been released via quantitative easing programs. For a long time, the officials at the Fed claimed that it would be able to pull that money back out of the banking system in time. More recently, however, they’ve let the other shoe drop: Now, the talk is all about leaving all those bonds right on the central bank’s books until they expire. That is quite a turnabout, one that few analysts seemed to notice. Nevertheless, the inflation rate will pick up, eventually, and all those trillions in U.S. bonds will lose value sharply. Of course, the Federal Reserve will not sell them then, because that would make matters worse. So, in fact, despite what has been suggested, there’s Maturity Profile of U.S. Debt really no exit strategy at all. $18,000 $16,000 What it all means is that the > = 10 Year $14,000 “quantitative easing” money 7, 10 $12,000 injected into our economy is in $10,000 5, 7 fact locked into the banking system $8,000 3, 5 for good. It effectively can’t be $6,000 2, 3 pulled out. $4,000 1, 2 $2,000 It’s not like these bonds are < 1 Year $0 six-month bills. Many of the bonds 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 are five years or longer, and a good chunk of the balance sheet is 10As the United States has increased borrowing it also has piled on debt at longer maturities. As interest rates rise, the longer-dated debt quickly becomes unsellable. year to 30-year debt. The Federal Reserve will be forced to hold those bonds to expiration and thus be The problem for the Fed is unable to use proceeds of bonds sales to finance future more U.S. debt. that they reach a point of negative SOURCES: Office of Debt Management, fiscal 2012 report capital at 5 percent inflation. David Wiedemer co-authored America’s Bubble Economy and the best-selling followup Aftershock. The chief economist for Absolute Investment Management in Bethesda, Maryland, Wiedemer holds a Ph.D. In economics from the University of Wisconsin-Madison. May 2013

Moneynews.com

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The Aftershock

INVESTOR REPORT © 2013 The Aftershock Investor Report. All Rights Reserved. The Aftershock Investor Report is a monthly publication of Newsmax Media, Inc., and Newsmax.com. It is published for $99 per year and is offered online and in print through Newsmax.com and Moneynews.com. Newsmax and Moneynews are registered trademarks of Newsmax Media, Inc. The Aftershock Investor Report is a trademark of Newsmax Media, Inc. For rights and permissions, contact the publisher at P.O. Box 20989, West Palm Beach, Florida 33416. To contact The Aftershock Investor Report, send e-mail to: [email protected]. Subscription/Customer Service contact (888) 7667542 or [email protected]. Send e-mail address changes to [email protected]. Chief Executive Officer CHRISTOPHER RUDDY Financial Publisher AARON DeHOOG Senior Financial Editor ROBERT WIEDEMER Editor MICHAEL BERG Art/Production Director PHIL ARON

DISCLAIMER: This publication is intended solely for informational purposes and as a source of data and other information for you to evaluate in making investment decisions. We suggest that you consult with your financial adviser or other financial professional before making any investment. The information in this publication is not to be construed, under any circumstances, by implication or otherwise, as an offer to sell or a solicitation to buy, sell, or trade in any commodities, securities, or other financial instruments discussed. Information is obtained from public sources believed to be reliable, but is in no way guaranteed. No guarantee of any kind is implied or possible where projections of future conditions are attempted. In no event should the content of this letter be construed as an express or implied promise, guarantee or implication by or from The Aftershock Investor Report, or any of its officers, directors, employees, affiliates, or other agents that you will profit or that losses can or will be limited in any manner whatsoever. Some recommended trades may (and probably will) involve commodities, securities, or other instruments held by our officers, affiliates, editors, writers, or employees, and investment decisions by such persons may be inconsistent with or even contradictory to the discussion or recommendation in The Aftershock Investor Report. Past results are no indication of future performance. All investments are subject to risk, including the possibility of the complete loss of any money invested. You should consider such risks prior to making any investment decisions. The views in this newsletter are of Robert Wiedemer, David Wiedemer and the Aftershock Investment Team, and not necessarily that of Absolute Investment Management. Copyright © 2013 The Aftershock Investor Report. See a Full Disclaimer as well as a list of stocks that the Senior Financial Editor currently owns by going to theaftershockinvestor.com. 8

Closing Thoughts It’s no fun watching the stock market climb higher every month when you’re not fully invested in it — we get it. On the other hand, it’s absolutely devastating to watch your wealth get demolished in a popping stock market bubble. There’s simply nothing about the economy going forward that suggests to us that stocks are sustainable at current valuations, never mind still higher prices. The important point to remember is that wealth building is sometimes as much about what to buy as what not to buy. Every stock transaction has two sides, the buyer and the seller. Over time, as buyers line up on the same side of the boat, you get that wobbly feeling and — whoosh! — everyone is in the water at once, thrashing about and trying to stay alive. The Federal Reserve can keep the boat balanced for a while longer, probably longer than any of us would believe, but not forever. Our current positions, on the other hand, are plays on that eventuality. You can be comfortable owning the Aftershock portfolio through the turmoil to come. The most discomfort you will feel, in fact, is now, during a time when our recommendations can feel out of step. There’s a difference, however, between being out of step and out of time. When inflation takes hold, the rush into our positions will be fast and furious, almost as fast as the rush to drop rapidly falling equities. As we ride up one side of the teetertotter, we should begin to see great opportunities to pick up stocks that have fallen to valuations worth considering.

Actions to Take Now

If you’re new to the Aftershock Investor Report or haven’t yet bought any of our positions, there is still time to purchase our portfolio at reasonable prices. Market prices will be good enough for now. If they begin to move higher, we will update you on price points we believe are best for long-term positions in each. Sincerely,

Robert Wiedemer

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May 2013