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I’d Rather Get a Poke in the Eye with a Sharp Stick Than Buy Equities
At a PE multiple of 20 times earnings, US equities (SPX) are at the top of a seven year valuation range. Emerging markets are even worse, with countries like China and Taiwan sporting positively bubblicious multiples.
There is no doubt that corporate managements panicked at the beginning of 2009 and chopped overheads at an unprecedented rate, leading to the eye popping, jaw dropping 700,000 monthly nonfarm payroll losses we witnessed. With the economy snapping back faster than any of them expected, they accidently created the widest profit margins in history.
Don’t expect lightening to strike twice in the same place. Those margins can only shrink from here, either through the long delayed rehiring of workers that bumps up costs, or because of a subpar recovery or double dip recession that slashes revenues. Equities are a lose-lose trade here, threatening more downside than upside. My former mentor, Barton Biggs, taught me to always leave the last ten percent of a move for the next guy, which I always considered sound advice.
Unfortunately, with interest rates at zero, and $9 trillion sitting in short dated instruments, some models value equities at infinity, and many traders seem hell bent on taking stocks there. So as expensive as equities are here, they may be about to surf a New Year tidal wave of liquidity to even greater heights. During their eighties stock market bubble, the Japanese loved to quote a favorite local expression: “When the fools are dancing, the greater fools are watching.” That was the decade when we took the multiple on Japanese stocks from 10 up to 100. The same may apply now to American equity investors.
I think this next boost could well be setting up one of the great shorting opportunities of the decade, which could start tomorrow, next week, next month, or by summer at the latest. The risk/reward of a long equity position here is terrible. I am particularly keeping in my crosshairs sighted on anything with a poor balance sheet, especially in financials, REIT’s, housing, and retailers. The bell ringer that the top is in will be a failed Treasury auction that triggers frightening, simultaneous sell offs in stocks, bonds, and the dollar. With the volume of government debt offerings increasing at an ever accelerating rate, it’s only a matter of time before this happens. Just as last year delivered a “V” market, this year could bring us the inverted “V”, or a Greek Lambda, “?”.
If some bully is holding you by your ankles outside a high floor window, threatening to let go if you don’t buy equities, only pick the emerging market variety (EEM) where forecast GDP growth rates are the highest. Think the BRIC’s, Brazil (EWZ), Russia (RSX), India (PIN), and China (FXI), with South Korea (EWY), Taiwan (EWT), and Indonesia (IDX) thrown in for a more sophisticated flavor. I prefer my portfolio with a generous soy sauce and ginger flavor, with a little kimchee thrown in for spice, a nice Russian pavlova for desert, all washed down with some strong Brazilian Arabica coffee.
But keep an itchy trigger finger on your mouse, because when the turn comes, there will be no place to hide. And make sure you increasingly add downside protection in the form of cheap puts, or some simple stop losses as we grind our way up towards our appointment with destiny. Also be sure to beat the rush by booking long vacations at that house in the Hamptons, the lakefront property at Tahoe, or the mega yacht in the Mediterranean, early.
For more iconoclastic and out of consensus analysis please visit me at www.madhedgefundtrader.com .
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With the economy snapping back faster than any of them expected, they accidently created the widest profit margins in history.
...
really.. what are you smoking bro???
personal income taxes down 20 pct y/y.. corp taxes down
50 pct y/y.. unemployment benefits up 200 pct y/y
gov deficit 400 bln last 3month...
good luck
alex
ps
sources
cbo.gov
daily/montly treasury statemetns
Don't know if it fits on this tread.Anyway.
Just before close today all of the big site showed the SP500 down 8.5 % -> Marketwatch, CNN, Yahoo etc.
If the only buyers are the Fed, the prop desks, the
hedge funds, and the high frequency traders, I don't
want any. Guess why? No depth and no real liquidity...
all sharks and gunslingers.
+1. The sheep walked into the restaurant and got suspicious when all he saw was wolves.
Have to admit this scam has had
legs though. If they didn't ramp it
every day like the pigs that they are,
you would be hard pressed to recognize
it as a fraud.
Cyan Lite,
Regarding your comments about the Feds et al keeping an arsenal of back-up strategies, I presume that you're referring to the equally bright people in 1930 USA and 1990s Japan had? So presumably we can expect the same results?
What happens if this time 'it' really IS different?
DavidC
Anyway, Timmy and Barry now need you to buy Treasuries
not stocks, SO YOU WILL BUY TREASURIES, mark my words
(After the bankers load up at the yearly lows)
Most of you riding this rally don't know what you're doing
anyway, so if the government doesn't take it away from
you, you'll just end up pissing your gains away anyway,
just like you did the last time.
Anony... #190095:
My problem didn't occur in my personally managed taxable account but in IRAs. Brandis- had to leave them. Alliance Bernstein, after some adjustments stayed with them but even even during the "recovery I am doing better than they are. I am not a pro; just a retired engineer with an old copy of one of the Ben Graham editions who likes charts.
The question is, how many of the "professionals" are just faking their homework.
As Nathan Martin put it this morning in his Morning Update (an exceptional read, by the way, especially the McHugh take on the phenomena of “up” Mondays): “For those who believe all the Chinese and financial market ‘miracles,’ false statistics and outright lies, I say go take a gander at the miles of parked cargo ships, at the plummeting price of ship lease rates, at plummeting credit statistics, at plummeting sales tax receipts, and then I say….”
And, oh yes, Nate’s remarks are mandatory on the Obama Administration’s hopes to annuitize 401k’s and IRA’s by creating MANDATORY “R Bonds,” forcing retirement savings into DEBT “to finance their wild and out-of-control deficit spending…while interest rates are at ZERO.”
And not to overlook, some good comments from Nate on today’s Bloomberg story that “no U.S. industry has faster profit growth than banks and brokers,” and that “analysts say earnings at financial companies rose 120 percent in the fourth quarter, accounting for all of the income increase in the Standard & Poor’s 500 Index, and will triple by 2011, climbing four times as fast as the market…”
http://economicedge.blogspot.com/
JR - Dont be foolish.
UPS just raised guidance and FDX looks strong as well.
According to you... they must be frauds?
If there is no economic activity, how come UPS and FDX are doing well? How come every restaurant I go to is full?
I don't know why your restaurants are full. There's no doubt that your experience of what is going on is different from others, and I can't fault you for having a different experience. I don't think we said there is no economic activity, just activity that is far lower than the official statistics and reports seem to be reporting. My read of all of the available data says "trouble ahead, trouble behind." By all means, be bullish and buy stocks.
So why is it that state sales tax receipts continue to fall?
Someone is misrepresenting the data somewhere - and it isn't sales tax receipts.
Pavlova is from New Zealand
http://en.wikipedia.org/wiki/Pavlova_(food)
but feel free to buy NZ or Australian equities as their currencies will hold up better than US confetti
Well, I say stocks are worth something. We're going to
be running a 2 or 3% GDP now forever, so first one discounts
the multiples back to what they were in the 30's and 40's.
Say 8-10 P/E or lower for LACK of growth. Then you want
a dividend yield of about 4%, again due to LACK of growth
prospects. Put it all together and if they can hold stocks
at S&P 500 or 600, they're not a great deal, but they're
not a bad deal. Up here in Nosebleedville 1150, they're as
much as 100% overpriced and only for idiots with no sense
of history.
Biggs just said equities=lunacy.
Isn't Barton Biggs bullish on equities now? Anybody who follows me knows that I am about as bearish as it comes now. I am nowhere near a permabear either, but their is no fundamental or macro argument to justify buying most US equities unless you are a trader, and even then you had better have your eyes open.
Those are were net short over the last two years would have beat those who were net long by a margin of nearly two to one, and practically none of the problems that brought this recession and related market crash to the forefront has been rectified save the lack of liquidity and government as lender of last resort. It appears that those with short term memories seem to forget the not so recent past.
Are long-term zero interest rates and open monetization with an extra helping of covert wealth transfers, legitimate tools of a central bank? Do economies ever emerge sound or regain soundness, once this line is crossed?
Treasuries will NEVER fail. But they already have, when monetization is considered.
Pay the debt off, default upon it (or devalue it), or borrow more to service further outlays, principal, and interest.
Which do we choose? Of course, borrow more.
So continue to buy into a system that refuse to recognize the problem and continues to dig in deeper.
A child can see it.
I know the madhedgefundtrader is a real person because I met him. Straight up guy. 6’4”, looks like he’s made out of steel I beams, an ex marine pilot with the attitutude that goes with that. I started following him in March when his site went live and I’ve made 450% trading futures around his ideas. I paid off my mortgage, and bought a new truck and trailer with the cash. This is when my friends were losing their houses in foreclosures and going bankrupt to skip on their debts. He got FCX at $25, gold at $800, BIDU at $130, silver at $10, and copper at $1.50. That’s all it took. He changed my life. All his posts from the last two years are up on his website for free. Check it out. I don’t care who he is. I don’t care if he has sex with small animals. If he can show me how to make this kind of cash, I’m a follower.
Uh, I call -- BULLSHIT!
I just read 3 very bearish posts from March/April on the stock market and another bullish post in April on NatGas.
Classic.
I know the madhedgefundtrader is a real person because I met him. Straight up guy. 6’4”, looks like he’s made out of steel I beams, an ex marine pilot with the attitutude that goes with that. I started following him in March when his site went live and I’ve made 450% trading futures around his ideas. I paid off my mortgage, and bought a new truck and trailer with the cash. This is when my friends were losing their houses in foreclosures and going bankrupt to skip on their debts. He got FCX at $25, gold at $800, BIDU at $130, silver at $10, and copper at $1.50. That’s all it took. He changed my life. All his posts from the last two years are up on his website for free. Check it out. I don’t care who he is. I don’t care if he has sex with small animals. If he can show me how to make this kind of cash, I’m a follower.
We have a lottery winner!
Congratulations, you are one of the lucky few to have garnered a net debit from the wealth transfer arbitrarily decided by your corrupt gov't and incompetent central bank.
Enjoy your newfound wealth. It will be much easier to relish good fortune now that your neighbors and fellow citizens are being starved out.
You may be one of the few to remain in the middle class.
Buy a serf today! Or dig his grave tomorrow. Life is cheap in the USSA. So much misallocated money, so much surfeit cheap labour.
Mad,
I agree completely. This rally has been the equivalent of picking up nickels in front of a steamroller. The problem is that neither fundamental nor technical analyses have been helpful. But your point about a failed Treasury auction is right on the numbers. I'm not sure it will be a failed auction because I believe they've got them lined up ahead of time, but running out of money to buy Treasuries is the right place to look. Ultimately, we can't continue running a deficit of 10% to 20% of GDP indefinitely. Until that time, I'm afraid we'll get more of the same kind of market action.
The idea is to get GDP to grow, and thus the percentage will get lower. Kind of like how everybody is focusing on the "P" in the P/E. That just means "E" (Earnings) have to get bigger to bring the ratio down.
Don't be so bearish and buy into the crap that everybody here spews to you. No, Gold is not going to $25,000 and no, we're not going to have a failed auction.
Get a grip everybody...
Steer into the vortex. We have several 60%+ equity ramp/drops within a year or two to go.
http://www.the-privateer.com/chart/dow-long.html
CL,
Thanks for the refresher in simple math but you may want to apply your expertise to explaining how the US can run a deficit in the neighborhood of 4-5% of global GDP indefinitely? How can GDP grow without bank lending? Without consumer borrowing? I may need to get a grip sometimes but I think you need to open your eyes to reality...
It happens the same way it's been happening the past 30-40 years. Don't understimate our Central Bank's ability to devalue our currency until the ratios get back into correct proportion.
Books can be cooked. I guarantee you in the next 2-3 years we'll start to hear things from Washington about how the deficit is suddenly decreasing, and then maybe around election time we'll even have a surplus. Government spending is a component of the GDP calculation, and it's been growing ever since the recession started, with no real chance that it'll slow down in the next 5 years. All they have to do is just buy enough time so debt can be paid down and people get the urge to spend with wreckless abandon again.
CL,
There are limits to what you suggest. It worked for 40 years but it's a finite strategy and I'm fully confident we're at the end of that strategy's life cycle. Ultimately, it takes real profit to service debt - more importantly, real cash flow and that cash flow is absent. You can't fake cash flow.
Debt in the consumer sector can be defaulted on. For the commercial sector (corporate bonds, etc.), it can be refinanced ad infinitum by yield-chasing funds (borrowed cheaply from the Fed). As for public sector debt, cash flow can be printed and/or refinanced by having the Fed POMO taking the VIX to 80 every time somebody seriously questions the ability of the U.S. Government to service its own debt. Trust me, the government knows that if they truly allowed a real recovery to take place, their debt would be harder to finance since people would want higher yields. Thus, we'll just float along until the next election in a 'disinflationary' phase so we can sell more Treasuries.
Seriously, there are some very smart people working for the government who have all of these bases covered. Just like how the Pentagon works on 'contingency' operations to invade another country, the Fed/Treasury has plans on-the-shelf to do whatever it takes to keep civil order through our monetary system. I would highly advise against betting against them.
i was on board with you CL - unitl you referenced the Pentagon. Sounds like you should pray that Treasury/Fed has better contingency plans than the Pentagon did/does in Iraq/Afghanistan, etc. Mission Accomplished.
CL,
You're talking about fantasy - can't be done. The government needs recovery to provide tax revenue. Without growth, there is no surplus to go into bond funds or stock funds. In short, you haven't given your thesis enough consideration.
i too would not recommmend shorting anything here, due to the zimbabwe stock market possibility, which is basically another way of aying what some other people said above. nothing matters anymore in this frankenstein market but liquidity/currency issues.
While I do agree with you, what index is your 20x earnings PE based on? The S&P as of the end of November 2009 I see has a confirmed PE of 87 with yields in the 3% range. That is an insane spread and one that should make it clear what we are in for in 2010. This is a similar spread in place just before every major downturn in the last 80 years. Doing index finger exercises as a write this. One more, just one more, just one more now...
Let the bulls have a 20 multiple based on
the forward estimates. Historically, it's
still outrageous barring the dotcom years...
The market's never been able to sustain
a multiple in the 20's. Never.
So what's the S&P worth in a low GDP
environment of 2-3% with very high
crowding-out government debt?
Maybe a P/E of 10 based on forward
estimates. No one in their
right mind pays up for no growth...
that's why the insiders are still selling.
If you want to bet on AAPL or GOOG, that's
another thing. Move over to the slow lane
with Japan.
What would someone say about buying call options on the VIX if it gets ~10?
buy as much as they will let you have.
ALL IN.
Wall Street equities are utter filth and one should be ashamed owning them.
Invest locally in venture startups (only good ones) where the results are local and the capital remains where you can touch.
Deny the beast that is nothing but a common thief (just because it's larger doesn't mean it's less likely to steal from the masses).
Where's my bailout!?
Pavlova is Australian...
Melba you moron.
Peach Melba was invented by Escoffier (a French chef at the Savoy in London) in honour of Dame Nellie (an Australian).
Pavlova was, as far as can be discerned, invented by a New Zealander after Anna Pavlova's tour of Australia and New Zealand - there is apparently some debate as to whether the inventor was actually Australian, but it is ABSOLUTELY an Australian dessert.
What is it with Yanks - calling folks 'moron' regardless of whether they have a blind fucking clue as to what they're talking about?
Ordinarily I would not have bothered, but you're a douche - and an anonymous one at that.
Cheerio
GT
Never underestimate the replacement value of equities within an inflationary spiral - worked in '78-'79, working again in 2010.
Agree with you MadHedge. Shorting all rips from here on out.
This is not only the shorting opportunity of the decade, but may become the best shorting opportunity in history.
I see so many people who reckon energy stocks and gold miners are a good 'hedge' that I wonder about those too...
If the political panderer, " which ever way the wind blows Paul Krugman" opened up, "a throw shit at the wall till something sticks" marketing sweatshop. Madhedgefundtrader is what the product would be.
You are mad. Not buy equities?
What's your option? Cash under the mattress? Hide under the bed? Buy B-O-N-D-S, corporate or otherwise?? Sorry, but it really IS true: "While the music is playing, we all have to get up and dance..."
That said, you can do it gingerly and smartly. Stick to longer-term staying power commodities, select energy stocks, gold miners, agriculture, tech innovations with a future, oil, natural gas. You don't have to go for those wimpy REITs, banks, financials, insurers, teen retailers and pizza chains...
Try to think outside the "all equities are overbought" box: P/E ratios, EPS, debt loads, cash-on-hand have all never meant LESS. "Forecasting growth" is irrelevant to me and other participants: this is Harrah's; this is the Lisboa in Macau and we ARE in a casino. Seriously. But it is a casino in which the prudent, perspicacious, nimble and savvy CAN win.
Don't kid yourself that there is "investment" going on. Some are gambling, others just trying to maintain the purchasing power of their money, some are adventurous.
The music is still playing and the alternative can only be long years of beggarization in cash or fixed income. And...next week I myself may be ready to short this market, or at least PART of it...
Say hi to your home room teacher for me
Option #1. Buy Swiss Cheese. I hear their currency is as good as their cheese.
top of a 7 year range huh. earnings valuations huh. where is operating or book / sales. let alone roc %. dividend yield ? what are those metrics looking like? top of a "7" year range, or ??
"That said, you can do it gingerly and smartly. "
You made me laugh. Thank you. Keep telling yourself that.
Did it...! Sold $48K worth of WPRT, EGO and ECA after six days for $677 profit. Rinse and repeat.