"... signs of risk-taking have increased in some asset classes. Equity valuations of smaller firms as well as social media and biotechnology firms appear to be stretched, with ratios of prices to forward earnings remaining high relative to historical norms. Beyond equities, risk spreads for corporate bonds have narrowed and yields have reached all-time lows. Issuance of speculative-grade corporate bonds and leveraged loans has been very robust, and underwriting standards have loosened. For example, average debt-to-earnings multiples have risen, and the share rated B or below has moved up further for leveraged loans." - Janet Yellen
"Whatever one feels about financials and the wider financial system, credit markets did arguably get a small glimpse of what things will be like when this cycle does actually end as the structurally impaired liquidity that exists in credit caused a small amount of panic yesterday morning before markets recovered in the European afternoon session. Liquidity is really poor in credit these days which doesn't matter when markets are in buy only mode as they have been for many quarters now, but it does matter on the days when you get a negative story."
According to just released data by Murray Devine, the Median Ebitda multiple for buyouts has exploded to nosebleed levels, rising by over one full turn of EBITDA since 2013 alone, and at 11.5x in the first half of 2014 is nearly 2x higher than during the last LBO bubble peak in 2008, when the average company was taken private at a conservative 9.6x EV/EBITDA.
Forget irrational exuberance; ignore exorbitant privilege; dismiss the idea that The Fed's actions are for Main Street not Wall Street... the following image says everything you need to know about "the recovery"...
The distinction between the world's only two types of traders (good vs bad) has been a very vague one. Until now. According to a new study by researchers at Caltech and Virginia Tech that looked at the brain activity and behavior of people trading in experimental markets where price bubbles formed, an early warning signal tips off smart traders when to get out even as the "dumb" ones keep ploughing in and chasing the momentum wave. In such markets, where price far outpaces actual value, it appears that wise traders receive an early warning signal from their brains—a warning that makes them feel uncomfortable and urges them to sell, sell, sell.
Janet Yellen is a chatterbox of numbers, but most of them are “noise”. And that’s her term. Yet here is a profoundly important set of numbers that you haven’t heard boo about from Yellen and her mad money printers. To wit, during the “difficult” economic times since the financial crisis began gathering force in Q1 2008, the S&P 500 companies have distributed $3.8 trillion in stock buybacks and dividends out of just $4 trillion in cumulative net income. That’s right, 95 cents of every dollar they earned - including the huge gains from restructurings, downsizings and job terminations - was flushed right back into the Wall Street casino.
There can be no doubt that computer science knowledge is currently in great demand; however, we do believe that there are some signs that the boom is - so to speak - 'getting out of hand' and is beginning to reflect the effects of the technology echo bubble on Wall Street. The give-away is the size of the demand for computer science studies relative to other fields of study. The last time enrollment in computer science peaked was in the year 2000 – concurrently with the technology mania. This is obviously no coincidence. What is slightly disconcerting is that the current peak in enrollments towers vastly above that previous bubble peak.
It is not too early to ask how the present US business cycle expansion, already more than five years old, will end. The history of the last great US monetary experiment in “quantitative easing” (QE) from 1934-7 suggests that the end could be violent. Autumn 1937 featured one of the largest New York stock market crashes ever accompanied by the descent of the US economy into the notorious Roosevelt Recession. As we noted previously - it's never different this time...
After a brief warning last week that all was not well in the world of the uber-wealthy as a couple of art auctions did not quite go as expected, The Wall Street Journal reports that there is no need to worry... the contemporary art market is on fire. Christie's in New York made auction history Tuesday when it sold $745 million worth of art - topping its $691.6 million landmark sale last November. The bid behind this record-breaking exuberance... All night long, auction regulars found themselves competing with Asian telephone bidders representing mainland Chinese collectors. Whether Tuesday's sale represents a new high point for the art market - or the next step in a developing cycle – remains to be seen... as one excited buyer noted - "The art market is hot across the board - Pop is selling, Ab-Ex is selling, New Wave is selling, it's all selling."
The "Shiller P/E" is much in the news of late, and, as ConvergEx's Nick Colas suggests, with good reason. It shows that U.S. equity valuations are pushing towards crash-worthy levels. This measure of long term earnings power to current price is currently at 25.3x, or close to 2 standard deviations away from its long run median of 15.9x. As Colas concludes, the writing is on the wall and we must all read it. Future returns are likely going to be lower. Competition for investor capital will get even tougher. That’s what the Shiller P/E says, and it is worth listening.
As another week passes by the markets have made no real movement in months. News flow, outside of Yellen's testimony, was also rather slow as first quarter's earnings season begins to come to a close. However, there were a few articles that we read this week that we thought you might find interesting as well... from the dangers of hidden leverage (in the re-burgeoning CDO markets) to the history if bubbles (and their lack of logic) and the demise of the US small business.
This time is different - check; Moral Hazard - check; Easy Money - check; Overblown growth stories - check; No valuation anchor - check; Conspicuous consumption - check; Ponzi finance - check... and, of course, Irrational exuberance: check!
Simply put, there is overwhelming evidence of inflation during the decade long era in which the central bankers have been braying about “deflation”. What is more worrisome, David Stockman presents some startling evidence of the complicity of the government statistical mills in using the inflation that is not seen (i.e. “imputed”) to dilute and obscure the inflation that is seen (i.e. utility bills).
Overnight, four months after our prediction, the FDIC-backed hedge fund not only that, but so much more that even we were shocked, because from a Q1 GDP which Goldman had originally predicted was going to be 3%, the crack team of economists - or is that team of economists on crack - lowered its Q1 GDP to, drumroll, 1%! And that's in the aftermath of the stronger than expected Durable Goods reports. Because it's only logical that good news is bad news. And vice versa.
Market bears take the position that stocks are expensive, citing a variety of indicators and arguing that profit margins should “mean revert” from record highs. On the other side, market bulls dispute the indicators and propose that fat margins are no big deal – they might just remain at record highs indefinitely.
“High margins reflect a long-term structural change, not a short-term cyclical one,” according to one account of a popular position. Or “It’s a mistake to think that margins will revert to a long-term mean just for the sake of reverting to a mean.”
The message seems to be that mean reversion is for losers. This is a new era, or it’s a new economy, or whatever. We're paraphrasing, but the story sounds a lot like the capital letter New Economy of the late 1990s. There’s even a technology angle once again, along with huge confidence in monetary policy and recession-free growth. Above all, there’s a notion that the world might be different. Needless to say, the new, new economy story comes with plenty of red flags.