1. The Worst of Times: In hindsight, it was never going to end well when both stocks AND bonds were trading at crazy expensive levels. It is the worse case scenario for traditional passive buy and hold portfolios.
Source: Dr. Timo Teuber
2. Max Pain: Passive buy and hold + stocks and bonds down = portfolio pain. And it is showing up clearly in Google Trends data on searches for "why is 401k down".
3. Extreme Valuation Swinging: We’ve just witnessed an extremely rapid and substantial contraction in P/E multiples (which follows a previous extremely rapid and substantial expansion!). The question many will ask: "is it cheap yet?"
4. Is it Cheap Yet? In terms of levels, even though the US PE10 ratio has come down sharply, it is still some way off the bottoms seen in 2016/18/20. So I would say no, it is not cheap yet: not expensive anymore, but not cheap.
Even the rest of world is still not far off the top of the range of recent his
Global vs US PE10 Valuations: One of the most interesting aspects of the past decade has been the divergence in valuations between the USA and the rest of the world. A big part of the divergence in price/value has been driven by a massive divergence in relative earnings performance, with the US significantly and consistently outperforming the rest of the world in earnings growth…
But while the US has outperformed rest of world in earnings over the past decade, arguably this is already in the price and then some.
US PE10 valuations (i.e. price divided by trailing 10-year average earnings) are about double that of the rest of the world, and the breadth of overvaluation shows that it is a widespread issue (more than 90% of countries are at least 20% cheaper than the US by our calculations). One thing to note on this too is that such valuation gaps can partially close by the expensive one simply “catching down” or correcting further/faster than the other… and that seems to be happening as
The bulls are back. $SPX up nearly 8% in January and nearly 14% off of the December lows. What slowing global growth? What reduced earnings expectations? Trade wars? Who cares. It’ll all sort itself out, all that matters was the Fed caving in spectacular fashion laying the foundation for the big bull case. The central bank 2 step is back: Dovish + dovish = nothing but higher prices. The lows are in, what else can I buy? This pretty much sums up current sentiment.
And so goes the familiar script during emerging bear markets, a general sense of relief that the lows are in and a return of optimism and greed after an aggressive counter rally following an initial scary drop. Long forgotten are the December lows after a torrent consecutive 6 weeks of higher prices.
While indeed a renewed fully dovish Fed may be all that’s needed to keep 2019 bullish (after all this playbook has worked for the past 10 years) there is evidence that this rally may turn out to be a big fat bull trap.
And it’s no
With the SPX up ~8% in just the last month, increasingly nervous investors who still vividly recall the freefall days of December 2018, are wondering what will stop the unrelenting rally according to JPMorgan's Adam Crisafulli who writes this morning that while there are always risks, none of the (known) ones seem particularly threatening at the moment.
Still, according to the JPM strategist, investors should be wary about chasing the SPX above 16x (i.e. above ~2750) but the index is more likely to touch 16.5x (>2800) than it is to hit 15x (<2600) based on everything known right now.
With that modestly bullish bias in mind, Crisafulli lists 14 things that can go wrong and send stocks sliding once more.
- TSYs and the USD fail to ratify the Fed optimism – at some point the TSY curve needs to steepen and the USD has to weaken in order to confirm the dovish takeaways from the recent Fed decision. If TSY yields fall across the board (or even worse, if the curve flattens) and/or the USD sta
U.S. stocks experienced their third straight week of gains, with the S&P 500 Index rising 2.6% and gaining more than 10% since Christmas Day.1 Investors were encouraged by comments from the Federal Reserve indicating a less aggressive policy stance and a sense that trade issues may be improving. Strong outflows from stock funds have also been an important contrarian indicator that investor capitulation had reached a limit. Several market areas were standout performers last week, including industrials, retail sectors, technology and energy, which was helped by a 7.5% climb in oil prices.1 A near -term consolidation is possible, given the strong climb over the last few weeks, but a return to December’s lows seems unlikely.
1. The Fed should remain data dependent, which should be good for stocks. Fed comments in October seemed to indicate it would continue to raise rates and sell off its balance sheet for the foreseeable future. But Fed Chair Jerome Powell walked back those comments in
Saxo Bank thinks a slowdown in credit growth is bad news
IF THERE is a consensus at the moment, it is that the global economy is finally managing a synchronised recovery. The purchasing managers' index for global manufacturing is at its highest level for six years; copper, the metal often seen as the most sensitive to global conditions, is up by a quarter since May.
This call for a significant slowdown coincides with several facts: the ECB’s QE programme will conclude by end-2017 and will at best be scaled down by €10 billion per
Complex systems are all around us.
By one definition, a complex system is any system that features a large number of interacting components (agents, processes, etc.) whose aggregate activity is nonlinear (not derivable from the summations of the activity of individual components) and typically exhibits hierarchical self-organization under selective pressures.
In today’s infographic from Meraglim we use accumulating snow and an impending avalanche as an example of a complex system – but really, such systems can be found everywhere. Weather is another complex system, and ebb and flow of populations is another example.
Markets are Complex Systems
Just like in the avalanche example, where various factors at the top of a mountain (accumulating volumes of snow, weather, temperature, geology, gravity, etc.) make up a complex system that is difficult to predict, markets are similarly complex.
In fact, markets meet all the properties of complex systems, as outlined by scientists:
Well, here it comes—September. It’s widely considered the worst month of the year for equities for good reason since it has historically seen the worst performance. Per Ryan Detrick, Senior Market Strategist, “September is the banana peel month, as some of the largest dips tend to take place during this month. Although the economy is still quite strong, this doesn’t mean some usual September volatility is out of the question—in fact, we’d be surprised it volatility didn’t pick up given how calm things have been this year.”
With the Federal Reserve, Bank of Japan, and the European Central Bank all set to announce interest rate decisions this month, and the S&P 500 Index up on a total return basis nine consecutive months as of the end of July, the stage is set for some fireworks in September.
Here’s some data to consider as September approaches:
• Since 1928, no month sports a lower average return than September, with the S&P 500 down 1.0% on average. February and May are the only other
It’s hard to predict when a stock market crash will occur, so the best defense is to be prepared.
Today’s infographic comes to us from StocksToTrade.com, and it explains what happens when a large enough drop in the market triggers a “circuit breaker”, or a temporary halt in trading.
These temporary halts in trading, or “circuit breakers”, are measures approved by the SEC to calm down markets in the event of extreme volatility. The rules apply to NYSE, Nasdaq, and OTC markets, and were put in place following the events of Black Monday in 1987.
Circuit Breaker Rules
Previously, the Dow Jones Industrial Average (DJIA) was the bellwether for such market interventions.
However, the most recent rules apply to the whole market when a precipitous drop in the S&P 500 occurs:
|Before Feb 2013||After Feb 2013|
|Index Tracked||DJIA||S&P 500|
|Level 1 Threshold||-10%||-7%|
|Level 2 Threshold||-20%||-13%|
|Level 3 Threshold||-30%||-20%|
Upon reaching each of the two first thresholds, a 15-minute ha
We are having a hard time finding high-quality companies at attractive valuations.
For us, this is not an academic frustration. We are constantly looking for new stocks by running stock screens, endlessly reading (blogs, research, magazines, newspapers), looking at holdings of investors we respect, talking to our large network of professional investors, attending conferences, scouring through ideas published on value investor networks, and finally, looking with frustration at our large (and growing) watch list of companies we’d like to buy at a significant margin of safety. The median stock on our watch list has to decline by about 35-40% to be an attractive buy.
But maybe we’re too subjective. Instead of just asking you to take our word for it, in this letter we’ll show you a few charts that not only demonstrate our point but also show the magnitude of the stock market’s overvaluation and, more importantly, put it into historical context.
Each chart examines stock market valuation fro
Past tense; that is. A big move is coming in the S&P 500 and it will take everyone’s breath away. Simply put: The S&P 500 has traded in a multi-year consolidation range with a high of 2134 and a low of 1810. A breakout or breakdown out of this range could result in a measured technical move of the height of the range, i.e. 2134 – 1810 = 324 handles. Consequently a break toward the upside would target 2458 (15% above all time highs) and conversely a breakdown would target 1486 and represent a 30.4% correction off of all time highs.
I’ve outlined the bear arguments in detail in Feeding the Monster, so I won’t bother rehashing them here. However, in analyzing the larger market structures an interesting duality is emerging: A fight for control between the historic precedence of earnings and technicals and a very much divergent development in money supply, one of the key drivers behind stock prices since the financial crisis.
This duality can be summarized in one chart:
Speaking for a bre
First and foremost let me point out that Ray Dalio, founder of investment firm Bridgewater Associates, has joined Twitter so I encourage you to follow him here. Secondly I suggest you grab a cup of coffee or maybe the entire pot as he gradually lays out what he sees ahead for the market. Enjoy!
Big picture, the near term looks good and the longer term looks scary. That is because:
- The economy is now at or near its best, and we see no major economic risks on the horizon for the next year or two,
- There are significant long-term problems (e.g., high debt and non-debt obligations, limited abilities by central banks to stimulate, etc.) that are likely to create a squeeze,
- Social and political conflicts are near their worst for the last number of decades, and
- Conflicts get worse when economies worsen.
So while we have no near-term economic worries for the economy as a whole, we worry about what these conflicts will become like when the economy has its next downturn.
The next few pages g
Iff you're hesitant to make stock purchases at these levels, you're not alone.
Last week I updated the Warren Buffett yardstick, market cap-to-GNP. The only time it was ever higher than it is today was for a few months at the top of the dotcom mania.
However, when you look under the surface of the market-cap-weighted indexes at median valuations they are currently far more extreme than they were back then. As my friend John Hussman puts it, this is now “the most broadly overvalued moment in market history.”
Nothing to see here. Move along pic.twitter.com/ELZojkcElM— Eric Pomboy (@epomboy) March 3, 2017
Another way to look at stock prices is in relation
I found this interesting (the rise) however I have my own reservations because of the possible change in rates and inflation in 2017. When inflation rises, interest rates also normally rise to maintain real rates within an appropriate range. PE ratios need to decline to reflect the increase in the earnings discount rate. Another way to look at it is that equities then face more competition for money from fixed income instruments. The cost of equities must therefore decline to keep or attract investors. Then there is the Rule of 20 to consider. Rule of 20 equals P/E + long term interest rates (average of 10 and 30 yr bond rates). If at or below 20 minus inflation -- the market is a buy. If above 20 minus inflation -- the market is a sell. Today we're at just about 20. I think I'll keep my cautious side up. Keep moving up my alerts and stick to only brief swings. Something tells me it's going to be an interesting year. All focus on the Fed and inflation.
During the past week (
The stock market continues to weaken, as evidenced by these ETF charts. If you zero in on a sector you wish to short, I would bear in mind that ETFs are comprised of market leaders. I would look for names "outside" of the ETF components; consider them leaders and you want the weaklings to short.
The reasons for weakness are numerous.
Consider the election weight (a Trump win would weigh on equities but Clinton weighs on pharma pricing). Then there are flat-to-dropping sales. Of course the USD movement (up will weigh on commodities and large caps with overseas exposure). Then there's those who feel we are already at or above maximum value and they're not buying here. They're hedged, short some and long financials ahead of the Fed rate hike. Then there's that Fed hike itself. High dividend is flushing down the toilet (SDY) in September. Overseas weakness with China not helping boost confidence for demand. And we also have more failure at the OPEC talks with no offer from o
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