Money Manager David McAlvany to Moneynews: Stocks Can Plummet Up to 40 Percent

Friday, 29 Nov 2013 04:02 PM

By Dan Weil and John Bachman

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Stocks are the beneficiary of heavy speculation and stand vulnerable to a plunge of as much 40 percent, says David McAlvany, CEO of McAlvany Financial Group, a money management firm and precious metals brokerage.

The Standard & Poor's 500 Index has soared more than 170 percent from its March 2009 low. "No one ever went broke taking gains, and that is prudent for any investor in these markets," he told Newsmax TV in an exclusive interview.

"That doesn't mean getting out of the market 100 percent, but it does mean paring back some of the positions that you have in the stock market."

Watch our exclusive video. Story continues below.



Among McAlvany's worries is low stock market volume. Trading activity has dropped 50 percent to 60 percent from about five years ago, he says.

Editor’s Note: 5 Reasons Stocks Will Collapse . . .

In addition, "we have more people speculating in the stock market with someone else's money," McAlvany said. Margin debt hit a record of $401 billion for members of NYSE Euronext in September.

Those borrowings "increase what appears to be an absolutely sure bet in terms of upside in the stock market," McAlvany said.

But, "another way of looking at that is we've got $400 billion of hot money that can come out of the market very quickly, and that's enough to precipitate a major decline," he said.

"We've anticipated 15 to 20 percent as a minimal move lower in the stock market, with as much as 40 percent being there if we begin to take out stop losses and really see a cascade effect in that market."

Another bearish factor is the aggressive insider selling that has occurred amid the stock rally, McAlvany says. There's a conflict between corporate executives selling their personal holdings as quickly as possible and their companies buying back shares, he says.

The buybacks are meant to "boost earnings per share [and] manipulate their numbers essentially to beat Wall Street expectations," McAlvany said. "That delivers them [corporate executives] big, fat bonuses while creating the sense that all is well in the economy and with these companies."

To be sure, stocks can still move higher, McAlvany says. "People are playing the momentum to the upside, but do bear in mind there are only two other years in the last 100 years of stock market history that have been more overvalued" than now, he said.

That was 1929 and 1999, and those stock rallies ended with big crashes. "So if you want to play for the upside, just understand the risks inherent in the project that you're embarking on," McAlvany said.

He recommends that investors boost their cash holdings to one-third of their liquid assets.

"Look at that cash . . . as a prized possession," McAlvany said. "You need to be making that provision now before everyone else is, because the downside is going to shock many people."

He also recommends aggressive buying of precious metals, especially with silver nearly 60 percent off its peak and gold about 30 percent off of its peak. "These are value assets while you've got overvalued assets in the paper market today," McAlvany said.

Editor’s Note: 5 Reasons Stocks Will Collapse . . .


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