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"Not A Time To Chase This Market To A Bubble Peak"
From today's Brunch With Dave
The vagaries of an overvalued market is that good news may no longer be good enough — and viewed as an opportunity to take profits. When this strategy occurs en masse — well, look out. And in extremely overvalued markets, it doesn’t take much. Food for thought — think of the risk involved before chasing the performance of the past year.
Of course, when there is fiscal stimulus of 10% relative to GDP in the U.S., and 3.5% of stimulus globally, together with bank bailouts and government support for housing and autos, then it’s a no-brainer that for a while it is going to feel as if the worst is over and that we are entering a new world of prosperity and tranquility, which is what a 17 reading on the VIX index symbolizes (the same level it was at when the market peaked in October 2007, come to think of it).
Nothing could be further from the truth. We have a situation where banks that are allegedly to-big-to fail have been protected, accounting rules changed in mid-stream, the government buying stock in auto companies and financial service firms, buying automobiles, declaring foreclosure moratoria and loan modifications ,which ensure that the real estate market will not clear and thereby forestall price discovery.
The problem is that all this fiscal largesse, intervention and incursion cannot go on indefinitely because there are limits to what the taxpaying public will support in terms of policy. Trying to get people to buy a home when the homeownership rate is still well above the long run average; trying to spur auto consumption when 20% of the households in the U.S.A. are already a three-car family — these policies aimed at reviving a defunct cycle of over consumption is starting to be viewed as a colossal waste of taxpayer money.
No doubt efforts to support the swelling ranks of the unemployed are going to remain critical, not just as income support but to ensure that they can be retrained too. We are already at the point where a record of nearly 20% of personal income is coming from government transfers — the government will have to make some serious choices about how it is going to allocate its fiscal resources going forward because the appetite for more public debt is beginning to wane. The government cannot fight human nature for ever. In fact, all the Obama team has managed to really buy is time.
But it does look like the fiscal tightening morphs into tightening sometime around mid-year because the mathematics with deficits is that if you go from $1 trillion to $1.4 trillion in a year, you just added some stimulus; just to prevent fiscal withdrawal from economy, the deficit for the next year has to stay at $1.4 trillion just as an example. The problem of course is that even if the deficit were to stay at $1.4 trillion that adds 10 percentage points to a federal debt/GDP ratio that exceeds 100% by 2011. Chart 3 shows where the Office of Budget Management (OMB) sees the government debt/GDP ratio heading in the next decade under the status quo — try 107%. Think of the future tax liability that would impose on workers and investors. And think of how quickly voters would be to support the next round of stimulus if the chart below were presented to them.
To be sure, the question gets asked as to what Mr. Market sees that we don’t see. As we said, in the past, market peaks tend to occur when we have had the classic blowoff phase, which takes the Shiller normalized P/E ratio to a level that is 50% overvalued.
Currently, the market is 27% overvalued on a Shiller basis. So, as expensive as it is, it could easily get even more expensive, which would mean a final test of around 1,300 on the S&P 500. This part of the cycle is best left for day traders or massive risk-takers and not for serious long-term investors. The S&P 500 did not hit its peak until October 2007 and for at least a year, was either in denial or completely oblivious to what was happening to the economy:
- Home prices were already down 7% from their highs
- The ABX indices were imploding
- Financials had already rolled over from their peak (as they have already back on October 14 — now there’s a canary in the coalmine!)
- The credit crunch was already in full force as highlighted by the events surrounding BNP Paribas and those two Bear Stearns hedge funds
- The money market had blown up right in the Fed’s face forcing an unexpected cut in the discount rate, followed by a cut in the funds rate
All the while the equity market was still in the process of making new highs and the bears were too busy having an apoplectic fit to hear the derision from the crowd of bulls as to how wrong they were. That is now history; and not too long from now, today will be too.
In retrospect, the bears were not wrong — the market was irrational. And that is with the benefit of hindsight. Everybody thought John Paulson was wrong too in those years when he was positioned for a housing collapse — but he was right, wasn’t he?
Now is definitely not the time to live in the moment, to start hyperventilating and to begin to chase this market to a bubble peak; now is the time to think about what the economy is going to look like in a post-stimulus world because the only thing we know is that the Fed and the government, at this juncture, intend to start pulling back on their support for the housing market at the very least at the end of March. At that time, we will see what the emperor — the U.S. economy in other words — looks like disrobed. And think of how ugly that picture is likely to be if the Beige Book can, at best, describe the current macro backdrop as being “at a low level economic activity” in view of all the government stimulus out there in support of a boom.
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This bull market doesn't look like it has a lot of leg left. How long before comparisons to 1975-77?
'75-'77, you mean the last lull before the bull of all bulls? um, no.
how about 1720 - 1722 ?
how about 1637 ?
funny thing there, tulips were introduced to europe via turkish merchants (of death).
once a powder-keg, always a powder-keg. that fuse is already lit and burning rather quickly.
'just dance, gonna be ok' & this reflexive bounce of primary degree may very well have ended in an ending diagonal around 6 pm est thursday night.
why anyone could / would put any faith in those who have consistently proven themselves clueless on 11.09.07, on 3.6.09 and to today is just beyond me.
in my oh so humble opinion: get the f out of the pool; now.
Major point....
Govt. always reacts....
And in today's case....
In a POPULIST manner....
Populist = PRINTING $
...........................
What does this mean ? It means that they have no intention
to stop shoveling in NONSUSTAINABILITY COSTS TO THE PUBLIC....
Let's see....
What do you suppose the total added on NONSUSTAINABILITY
costs will add up to by the end of Obama ????
How about an additional $2 to $4 Trillion per year ????
And more if interest rates on monopoly money skyrockets....
How can monopoly money command 0% ????
How can monopoly money command 10% ????
How can monopoly money command 20% ????
.................................................
And one can actually count on it ....
Why ????
The administration wants to tax more from less....
And has no intention of changing tax structure....
............................................
No tax structure change....ie consumption tax only....
Then ....JUST MORE OF THE SAME ....OR WORSE....
BOOK IT....
They will not withdraw stimulus. They will jawbone a lot about it, but they will go down the path Nippon paved for us.
And yes, they will allow some "froth" unload, but nothing massive. QE 2.0, QE 3.0, QE 4.0, whatever it takes. So while I agree you should play long vola now, you should also play short vola later.
This market is not overvalued by 27% but more likely 97%, if you take off-balance shait into account.
And no, whatever implied rates imply they will not raise rates for at least the coming 3 years.
It is really very sad what has happened to the free market in the past 10-15 years.
I love it when some guy who calls himself Orca starts saying that David Rosenberg doesn't know what he's talking about. Yeah, right.
That is a really really stupid comment.
Rosenberg does perfectly know what he is talking about, I am afraid he is just not cynical enough yet.
They can continue upto QE - infinity but someone has to pay the price - and the next question is "...AT WHAT COST?". I don't think BB would be stupid enough not to know that answer to that. He would have to give up midway sometime or other, when the cost of saving becomes more than the cost of annihilation.
The dollar will probably survive QE 2.0, but not 3.0, which will bring hyperinflation. And a new US currency
Uncle Sam paying 20% of personal income. Wow! Money freshly printed.
Big Fed support - EU program already approaching $150 billion, with a back door support in the coming jobs program of 50% going to the EU program.
Meanwhile - food stamp entrants just keep growing. Children at 1-in-4 25%!
What recovery? Where? Crack up boom coming.
+10
The telco oligopoly just handed us free 2010 market
insight. They are going to have a price war. This
will compress their earnings. This will affect the
telco oligopoly P/E's.
Look for this to heat up in fast food. It will
spread to all other consumer driven oligopolies.
Makes a deflationista all warm and fuzzy inside.
Thank you telco oligopoly!
This is an election year. So, the White House, the Democratic Congress, the FED, etc., will do everything to keep their elected offices. I repeat: EVERYTHING!
Consequently, votes buying will not stop in March 2010.
I think that was one of his best notes.
Unrelated, but important nonetheless:
Support Scott Brown to end the super majority!
http://www.brownforussenate.com/
https://www.icontribute.us/scottbrown
Chuck Schumer called him a "tea-bagger" - them's fightin' words. Lets see if he's forced to make an apology for pulling such a dirty tactic. Public officials should never get away with that kind of slur.
On the plus side for Brown is that his opponent keeps making mistakes - with new revelations. Although I think the entire thing is just a silly distraction because elections are meaningless now - just like the stock market.
It is not meaningless if a Brown win can essentially torpedo Cap and Trade, which is the upcoming scam of all scams.
That, and the health care scam they are trying to ram through right now. These pieces of legislation are really just about control - and they want to see how much the braindead American public can stand. This is boiling the frog - if we make it past 2010 elections as a nation I will be in disbelief upon disbelief, which is two negatives, so I will know that we are officially screwed. The only thing that will wake up Americans at this point is rolling blackouts or empty shelves at the supermarket; whichever comes first.
Totally agree. Let's hope for the best and prepare for the worst.
Which in upside-down land means we are hoping for the crash, but preparing for the sick game to go on and on and on and on...
His plan for the economy is simple: an across-the-board tax cut for families and businesses that will increase investment and lead to immediate new job growth. More tax increases will hurt our recovery. That’s why I have taken a no-new-tax pledge. My opponent will raise taxes.
However, without any tax increases, indeed with more tax cuts, the spending reductions required to reduce the debt will be fantastic: massive cuts in Medicare, Medicaid, and defense. Where does he outline these spending measures? Nowhere. Fiscally, he's as fraudulent as Bush.
http://andrewsullivan.theatlantic.com/the_daily_dish/2010/01/scott-brown...
UPDATES:
http://www.zerohedge.com/forum/market-outlook-0
In early 2007 I warned of an impending stockmarket crash.
I confirmed a bottom by April 2009.
In mid 2009 I warned of an impending USD rally.
The uptrend since March 2009 has been a bear market rally contained within a much larger bear cycle that started in 2000.
Dude.
You're still a month early.
Will you please cool your jets?
Damn.
well did you get rich or you just window shopping?
The Fed cannot raise rates for the simple reason of the huge increase to the debt it will cuase.
Think 12.3 tillion times 3.5 %
Or $437.5 billion in interest alone.
Good luck trying to balance any future budget.
The real question is:
How do you borrow more than the entire World's savings every year?
To save money is unamerican
The "entire World's savings" is $3-6T/yr...
No matter hard a private citizen can try, she can't stay ahead of printing press. When will "expensive" be permanently replaced with "inflated"?
the QE hot potato has for now landed in the lap of the chinese. what choice do they have?
why is federal debt to gdp always used ?
why not federal debt to government revenues ?
and what is the interest expense to gov't revenues ?
I own some COP and some MCD - entered via sold puts and hedged with covered calls. If I get called, that's fine. If I don't, I'll sell calls again each cycle. If somehow I get stuck holding them due general market collapse, I'm still 50% cash and can pounce on some bargains. In the meantime, other than trading some WIN and DSX, I'm not jumping into anything. If I miss out, so be it.
Well Rosenberg missed the entire upleg this past year. Why should he be right now?