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Valuation Primer From Rosie
Must read primer penned by David Rosenberg of Gluskin-Sheff. We are gratified that Rosie agrees with our contention that this is the (unjustifiably) fastest and the third largest P/E multiple expansion in recorded history.
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The consumer will shortly be facing additional headwinds. Loss of unemployment benefits, crap and trade tax, possibly tougher credit, retirement. This xmas may surprise the bears to the upside but the long term outlook is bleak, imo.
The market is also well into the moist accomodative environment the fed and treasury can muster. They are all waiting for that herd of bagholders to come riding over the horizon, and they just won't be coming.
An additional thought -
Earnings have been less and less connected to cash flows over the years because of accounting rules changes and obfuscations. So whether a P/E multiple is high or low is seldom a real barometer of valuation. Most serious money managers look at cash flows rather than earnings.
It would be interesting to see this analysis done with that metric in mind.
P/E ratios, or P/BV for that matter, just seem like noise in this market.
Agreed.
It seems to me that as time goes by the only real valuation that remains important to the fed and some others is the capacity of whatever "asset" be they equities, bonds, future income streams, whatever to be converted into greater amounts of leverage. In a world seemingly dominated by a race to the fx bottom there are fewer and fewer bag holders willing to ride the artificially generated wave because of the perception that valuations and risk in a world of rough equivalence has become more problematical. I see this playing out as more and more market participants quest for stability in total asset valuations and "real" return rather than simply chasing the relative return trade in the current dynamic you reference.
I'm too lazy to find it now, but even back in analyst training one professor mentioned a study/studies that show over time net income is actually a better predictor of performance (etc) than cash flows.
the plan all along has been to keep pushing it higher until ma and pa capitulate and then drop it.
The Kettles is busted, got to pot, and won't be buying equities ever again.
Tru dat.
Greed is an extremely strong emotion. When ma and pa kettle see a huge party going on all around them, despite their desire not to get burned again like they have been repeatedly in the past, the pull of making money is sometime irresistible.
People are beginning to disbelieve their own senses, their own eyes and ears and even what their trusted friends and family are telling them. They know things are bad and getting worse. But they are beginning to step into denial and are beginning to allow themselves to be seduced by the allure of making money when everyone else seems to be doing so as well.
This is the ultimate form of (official) manipulation and it's accepted as perfectly OK to do so by the powers that be. It's done all the time in our culture in the form of a constant barrage of advertising.
I'm feeling this now, though I resisting. The problem is the buy and hold strategy that we've all been indoctrinated with. If your strategy is to buy and hold for 30 years, and you see this rally, you think "I held during the crash, is this the part where I'm supposed to make up 60%? If I sit this out and it's legit, I'm holding during the wrong parts.
This logic prevails even if the investor is wise enough to think this is a bubble. Most economically rational actually people want to participate in a bubble and try to time just the right moment to get out (though that last part isn't rational).
The old stand by; "Don't believe what you see, believe what you are being told" rears its head. The fact that the Madison Avenue theorems and those that perpetuate them have begun to resort to the "if you don't do this you are unpatriotic" just provides further example of their position. That and the current vacancy rates along the golden mile in Manhattan.
Cheers
MK,
So true regarding the "unpatriotic" weapon of mass distraction, which ultimately causes all the destruction.
The really sad part is that the average American has been living so long in the American myth echo chamber that they are simply emotionally incapable of changing their world view to factor in a little thing called reality. You are simply being unpatriotic if you don't shut your eyes, cover your ears, speak no evil and march blindly towards the next cliff.
Insanity by any definition. On the other hand, it is the majority who ultimately determines who is sane and insane and we are clearly in the minority. I expect people will be thrown in jail (or more likely the insane asylum) for speaking the truth in the next few years as this continues to unravel.
This is an excellent point made by Rosie and by Buzzsaw99. But the only Mas and Pas with wealth to invest are close to being or already are retired. The 2000-2002 market shocked them out of being permabulls, then the 2007-2008 crash convinced them that return of their money was more important than return on their money.
Who knows what short-term swings black-box-to-black-box trading will bring? But in the longer term, if interest rates on "safer" investments rise to a range that drive Boomers to lock in for several years, you won't see Ma and Pa back in the market until the Boomers die and pass on the wealth to the younger generation.
They want to keep this thing inflated so that Ma & Pa don't pull out.
Let's face it, very few in this country have liquid savings readily available - but a fair majority have retirement plans that provide the cash institutional investors need.
When Ma & Pa decide the risk is too great (or, if they have a clue and have made a fair amount of their losses back) they will exit and the market will tumble again - but this time for good as the generations behind the boomers have less invested in the market and less hope that it will provide them with any future.
We are on the slope down - there is no way to keep this thing up long-term.
Lets play a game: When will Rosie capitulate?
I choose January 2010.
Let's play a game: when will you give a reason as to why Rosie should capitulate?
I choose NEVER.
What are you? The class clown? Never is not an option. Choose a date or do not play my game.
Reason: If I were an analyst and was full-on bearish during a 60% bull run I'd hide my head in the sand and keep my mouth shut for the next 5 years if not forever.
Capitulate god damn you!!
Unfortunately Rosie's sober reasonable fact filled intelligent and thoughtful look at the market is the equivalent of you standing in the middle of the room filled with spring break revelers at 2 AM and telling them the party's over.
Good luck with that.
It always looks best at the top and worst at the bottom. And at most tops, circular logic is always employed to justify the unjustifiable.
Speaking sanely to the insane and expecting the insane to recognize their insanity is by definition an insane act.
But I must give credit to Rosie for speaking the truth to those who don't wish to hear it. He is not a very popular person right now and regardless of how "right" you are, it never feels good to be disliked.
"Speaking sanely to the insane and expecting the insane to recognize their insanity is by definition an insane act."
Thanks for outing my dating life to the InterWebs, CD.
LOL
Hey, I do it all the time and still expect them to understand. Which, of course, speaks volumes about me.
The older I get, the more I wonder if there is wisdom in the phrases "Ignorance is bliss" and the classic "What you don't know can't hurt you."
Of course, ignorance isn't blissful at all but for most, very stressful. Just ask the millions that watched their 401(k)'s become 201(k)'s last year, which are now 301(k)'s.
As far as the last phrase, I'll tell that to the family of the person who steps into the street and directly in front of the bus they didn't know was coming.
Imagine how John Paulson felt in 2007.
What is Glusken Sheff's year end target for the S&P ?
Let's see, weak dividends, high debt, shaky LT outlook, lower revenue. Everyone is gambling on capital appreciation, yeah, that'll end well.
There is a reason I put more weight on Rosie's view. Unlike the long-only mutual funders, he actually presents the logic behind his argument. Maybe he's wrong (I agree with him), but it at least makes more sense than "stocks for the long run" or "dollar cost average because stocks always go up". Careful, that hasn't worked over the last 20 years in Japan.
The sparks keep flying from the printing presses. That money has to go somewhere.
Fear based rally. I have to get onboard or my 2 and 20 will be zippo!
Ma and Pa that have pulled out - ain't comin' back.
Ma and Pa that never pulled out - are doing so now.
If intent was to bring 'em back - it ain't so.
This continues to get thinner and thinner with excuses for a new bull extension.
This is now an accident waiting to happen if Ben does not take back some of his lighter fluid.
This has not been a ma and pa rally. Daneric's rant this last night nailed it. There is a fundamental, secular change in social mood that has taken place across the country. Politicians, NYC investment advisers and others who are INSULATED from the masses simply do not see it, but the fact that they don't see it doesn't mean that it is not taking place. It is and there's nothing that will stop it.
In this context, the rally makes perfect sense. The way it also ends is painfully obvious. There has been a massive, secular change in social mood. It took 30 years for this to happen. It's not going to change back overnight.
This has not been a ma and pa rally. Daneric's rant this last night nailed it. There is a fundamental, secular change in social mood that has taken place across the country. Politicians, NYC investment advisers and others who are INSULATED from the masses simply do not see it, but the fact that they don't see it doesn't mean that it is not taking place. It is and there's nothing that will stop it.
In this context, the rally makes perfect sense. The way it also ends is painfully obvious. There has been a massive, secular change in social mood. It took 30 years for this to happen. It's not going to change back overnight.
Even in this artifically pumped market, the one "tell" is volume.
Up days = lower volume
Down days = higher volume. Sometime much higher volume.
The market is speaking.
yes, it tells me there are not real sellers but plenty of buyers.
Where else is money to be invested? Treasury and Certificates of Deposit returns are zilch, and any money manager with half a brain is avoiding real estate. The truth is that until something of substance breaks, equity markets will give the investor the best return.
I see more and more individuals moving into metals. Their goal is not to get a good return (though that's always nice), but to maintain. That's reality these days for most individuals.
Oh really. You see see more and more individuals moving into metals. Fascinating.
I see more and more idiots buying gold at this level.
That's the whole point of a Lost Decade or Lost Generation or whatever it ends up being--you don't get ANY real returns ANYWHERE over time. Save and try to protect against capital losses....and if you are stuck in a 'honey trap' because of a corporate match 401(x) plan, it's pretty much a given that there's a target on your back.
Those money market funds (if they let you in, many are now closed) are the best of a very, very bad lot of choices for Ma & Pa.
If only you could buy a simple corporate bond and hold it to maturity in a 401(xyz) fund. Alas, they only let you buy "bond funds" that carry both crappy return and high risk. What a syndicate.
I see more and more people not even utilizing employer matched 401k's because they know they are throwing their money away. I stopped using them long ago - now I manage my own future.
The Fed and economists rely on models and data. They always blow the human factor. A big shift has happened in social mood - because everyone has seen how corrupt the financial system is.
Our fractional reserve banking system (Ponzi) relies on an ever growing economy and growing credit.
This shift is social mood has broken the system. The FED is too myopic to see the obvious.
Fractional reserve banking system + historic credit bubble + negative shift in social mood (towards saving and avoiding risk) = Deflationary spiral and meltdown!!!!!
A too big to fail bond fund etf would be sweet, but the fascists hold those bond tightly.
all good points but on an objective basis should a guy who has been consistently calling the market wrong for the last 6 months be getting so much air time on here ?
Quite right - do as I did and become a direct subscriber.
+1
I agree with Rosenberg and read his daily comments, but I will admit that my returns since June have suffered...
If the game were to end today, you would be down. Are you planning on pulling out of this game any time soon? Is the game ending today?
I'm not talking about being in or out of the market today or tomorrow. I'm talking about stopping completely (or changing drastically) your investment activity today?
I suppose that would depend upon whose judgment and analysis you choose to trust more. The markets, Rosie's or someone else's. Besides, since when is the the job of anyone here to screen various news, analysis and data points to present only whatever happens to the the "winning" perspective currently?
Well somebody does the screening, and I would argue that they screen for whatever happens to NOT being the winning perspective. You are demonstrating your own bias with your post.
I have no problem with his views but this site seems to almost idolise him for being consistently wrong. Do you not find that strange ? Do you not find it odd that others are vilified for being right ?
I think I've commented on this about 100 times here: do people really trade off of what they read on a blog?
Or, do they read, try to understand what is taking place, and use it to their benefit?
Everyone knows the market is being pumped, the economy sucks and the whole system is corrupt. That doesn't mean you keep smashing your financial head against the wall until it breaks open and all your money falls out.
To me, guys like Rosie keep me grounded and help to remind me that I better be light on my feet no matter what happens on a daily basis.
"do people really trade off of what they read on a blog?"
I do. I take the conventional wisdom from Team Tyler and do the opposite. Mega profits!
Love the Moniker
Just keep watching CNBC if you feel that way, please.
They will tell you to buy, buy, buy. If you would
like to hear a reasonable, well thought-out analysis
why you should be careful, then read the above.
So tired of this "well, he hasn't been bullish, so
why should I listen?"
i would hazard a guess that following his advice has not been that lucrative this year
I think Miles has provided the appropriate response. You're on your own out there.
His advice has been lucrative enough for me... I still have everything I started with... and that is better than the majority of people that I know... this rally is based on greed... and I think the 'ma and pa kettles' have learned their lesson... it will take another generation before anyone falls again for the Charlie Brown and Lucy football kickoff...
this post means nothing. If Lucrative enough for you is not losing money you should do something else. The majority of people you know bears no relevance to anything.
I have no problem with Rosenberg or his views but the fact is they are not useful because they have been wrong. His advice has not been lucrative, you sound like an idiot saying that it has been "lucrative enough"
He has encouraged people not to participate in one of the largest stock market rallies ever.....if your job is calling the stockmarket that is BAD advice.
Aus_punter...
why doesn't this guy get more air time to warn people?
He's an economist and the equities market has little to do with the economy.
He and ZH have been uber-bearish since March 09 missing the entire rally. Or more correctly put, encouraging others to short a 60% bull run since 03/09 while they were for the most part long.
I say that the people who ignored theses perma-bears should thank the media for not allowing them to "warn" us.
Thank you CNBC! Our equity exposure was spot on because of you. Now we are flat and waiting for October 12th.
Think about it. If you were a 5 start General on the battle field during major conflicts then shipped off to the Army base in Hohenfels, Germany(worst base know to most enlisted). Approving stock transfer orders to supply the front line troops.
And you're still f'ing-up the supply chain.
Poor Rosie. I feel sorry for him.
he became more of a economist, his ideas have very little relation to the real time market
I love Rosie, but it's a bull market folks. Get over it.
It's a nice rationale for missing a huge rally. I love Rosie. He was right on the way down but wrong on the way up. It's a bull market until proven otherwise.
Where else to invest?
ten year CDs at 4.5%, and paying off my 5.8% mortgage is real money, with known outcomes.
- pa kettle
Ross Healy tracks bv for many stocks and makes investment(?) decisions thereon.
Nial Ferguson (ascent of money) outlines the onset of the east india trading company, and how investors reaped upwards of 16% dividends on OWNERSHIP! of shares.
Rosie is trying to hold on to historic norms, and kudos there.....can we get back to those days?
40muleteam borax
There are some facts in play here.
1) Many assorted items in the world of money right now have no precedent. The 60% in 6 months with no job gain. The 3.5T of created money, plus the various stimuli overseas. Oil depletion. All of it bespeaks things that have never happened before.
2) One does then have to challenge an article that points some of these out as being never seen before and then that relies on historical precedents of P/E to declare things overvalued. If it's a new world, it's a new world.
3) Money isn't real. Let's remember that it's an entirely artificial construct. There was a time when none existed. There is no real reason to believe that it has to obey any natural laws, because none govern it.
4) This website talks a great deal about the SPY machine gun and all sorts of manipulation methods. I have not seen anyone suggest that P/E, earnings, interest rates, or anything else are inputs to those algorithms. They dominate trading. Why should valuation be relevant? Thinking that it is presumes that money physical and natural existence. It doesn't.
Question: How many economists does it take to screw in a light bulb?
Answer: All of them. However, first they will have to agree on the definitions of the terms "how", "many", "economists", "does", "it", "take", "to", "screw", "in", "a", "light", and "bulb".
Guys, the market is up 60% in 6 months. This has never happened before. This is not an extension of the end points of a distribution curve. This is a declaration of a new distribution curve for a new process.
It's not "the market" anymore. It's something else. It doesn't care about earnings, unemployment, interest rates, technical analysis, the dollar, or anything else. The computers can buy or sell as they please and they need not pay attention to any of those things.
No, they don't have to. No, humans don't control them, and no, I do not say that in the Skynet perspective. I say that in the algorithmic perspective -- where the algorithms do not include any of those items above as parameters. They are forcing the markets up. Why would humans control them? That would be fixing something not broken.
Forget the market. It no longer exists. You can make money there, and then lose it all in one circuit breaker event -- and do not think there will be any warning. Someone will just trip over a power cord and that will trigger sell algorithms in microseconds. Power cord tripping does not show up in squiggly lines on a chart.
How am I supposed to reconcile peices like this from respected economists with crap like this:
http://www.bloomberg.com/apps/news?pid=20601087&sid=ac5wYKj9iPgQ
US Equities are at all time low valuations due to worthless USD???
vs
Valuations are at the highest they've ever been
Well WTF is it???