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6 Things To Ponder This Weekend
Submitted by Lance Roberts of STA Wealth Management,
Is there a bubble in the financial markets? This is probably been the most written about issue over the past two weeks. However, as I stated in "Too Much Bubble Talk:"
"That lack of "economic success" will likely mean that the Fed remains engaged in its ongoing QE programs for much longer than currently expected. The real surprise in 2014 could very well be an increase in size and scope of the current quantitative easing programs if interest rates remain elevated, deflationary pressures continue to increase and economic growth stalls. The injection of more liquidity could very well drive asset prices to the irrational extremes of a true market bubble. However, if that occurs, the majority of market analysts and economists will not be talking about a "bubble" in asset prices but why "this time is truly different."
Are we currently witnessing a market bubble? It is entirely possible, but if it is it will be the first market bubble in history to be seen in advance."
That viewpoint was confirmed during Janet Yellen's Senate confirmation hearings when she stated:
YELLEN SAYS ECONOMY, JOBS 'PERFORMING FAR SHORT' OF POTENTIAL
YELLEN: SUPPORTING RECOVERY IS PATH TOWARD MORE NORMAL POLICY
YELLEN SAYS FED DOESN'T SEE BUILDUP OF FINANCIAL RISKS
YELLEN SEES LIMITED EVIDENCE OF 'REACH FOR YIELD'
YELLEN SAYS FED LOOKS OUT FOR ANY POTENTIAL ASSET PRICE BUBBLES
YELLEN DOESN'T SEE 'MISALIGNMENTS' IN ASSET PRICES
Are the markets currently in a bubble or is Janet Yellen correct? This week's edition of things to ponder is a collection of views on this issue so that you can decide for yourself.
1) This Is Your Brain In A Bull Market by John Coumarianos
"As for those metrics like PE10, our psychology invents all sorts of excuses to avoid them. For example, data before 1950 is sketchy, naysayers say, and the average since then is around 18, not 16.5. We’re coming off a terrible recession, and profits must continue to improve off the trough despite the fact that profit margins are at record highs, and show a powerful tendency toward mean reversion. Even typically sober observers like Jack Bogle argue that corporate profit growth will be 5% as far as the eye can see, which combined with a 2% dividend yield, will produce 7% annualized stock market returns or 5% adjusted for inflation. That’s not the historical 6.5%, but it’s not bad.
Another bullish argument: Prices were ridiculously low in 2009, so the runup until now doesn’t necessarily make them expensive. The counter for this argument is that PE10 bottomed at around 13 in early 2009. While below average, 13 is not ridiculously low.
So the problem is these may all be excuses and avoidances of a harsher reality. When prices rise like they have in recent years, the neurons in the primitive, reactive parts of our brains start firing, causing us, however perversely, to buy securities that cost more than double the price they did a few years ago. Higher prices are begetting still higher prices, not for economic reasons, but because of our psychological weaknesses."
2) Bull Today, Bear Tomorrow? by Paul Farrell
"Many optimists see this bull climbing up through 2014, like Merrill Lynch strategist Michael Hartnett and celebrity economist Nouriel Roubini. Some even see this bull roaring till 2017, repeating the incredible assault up the 2002-2008 mountain of worry. But not everyone’s optimistic lately.
Why? 2013 is a turning-point year. Some see today’s bullish columns as contrarian indicators when compared with earlier warning columns from Bill Gross, Gary Shilling, Peter Schiff, Jeffrey Gundlach and other bears. Remember, Gross’ warning that the bond market just ended a 30-year bull run on April 29? Then along came bulls like Hartnett and Roubini.
Now as we near year-end, a new twist. Bears are again growling: Hong Kong permabear Marc Faber and Nomura Securities’ strategist Bob Janjuah are reviving earlier crash warnings from the bears. And investors asking: Am I going crazy? Can I be both a bull and a bear? Bull today? Bear tomorrow?"
3) Citi Warns "Fed Is Kicking The Can Over The Edge Of A Cliff" via Zero Hedge
"It is becoming increasingly obvious that we are seeing the disconnect between financial markets and the real economy grow. It is also increasingly obvious (to Citi's FX Technicals team) that not only is QE not helping this dynamic, it is making things worse. It encourages misallocation of capital out of the real economy, it encourages poor risk management, it increases the danger of financial asset inflation/bubbles, and it emboldens fiscal irresponsibility etc.etc. If the Fed was prepared to draw a line under this experiment now rather than continuing to "kick the can down the road" it would not be painless but it would likely be less painful than what we might see later. Failure to do so will likely see us at the "end of the road" at some time in the future and the 'can' being "kicked over the edge of a cliff." Enough is enough. It is time to recognize reality. It is time to take monetary and fiscal responsibility - 'America is exhausted.....it is time.'"
4) Same Old Speculation In A New Guise by Comstock Partners
"The market continues to rise solely on the perception that the Fed's easy money policy can hold stock prices up indefinitely. We think that this line of thinking will prove to be no more durable than the dot-com bubble that peaked in early 2000 or the housing bubble that topped out in late 2007. In both cases the market gave back a large proportion of the gains made during the bull market, and we believe that will prove to be the case this time as well. When the vast majority of investors faithfully believe in a bubble, momentum takes over and the market goes up because it's going up, ignoring all of the obvious warnings such as high valuations, over bullishness, decreasing earnings momentum and an underperforming economy. When reality suddenly sets in, as it inevitably does, most investors are left holding the bag, hoping that the market doesn't go any lower."
5) 10 Laws Of Stock Market Bubbles by Doug Kass
To my five conditions mentioned earlier, I add five more (several of these quantify the "degree of bubbliness" to complete my 10 laws of bubbles:
- Debt is cheap.
- Debt is plentiful.
- There is the egregious use of debt.
- A new marginal (and sizeable) buyer of an asset class appears.
- After a sustained advance in an asset class's price, the prior four factors lead to new-era thinking that cycles have been eradicated/eliminated and that a long boom in value lies ahead.
- The distance of valuations from earnings is directly proportional to the degree of bubbliness.
- The newer the valuation methodology in vogue the greater the degree of bubbliness.
- Bad valuation methodologies drive out good valuation methodologies.
- When everyone thinks central bankers, money managers, corporate managers, politicians or any other group are the smartest guys in the room, you are in a bubble.
- Rapid growth of a new financial product that is not understood. (e.g., derivatives, what Warren Buffett termed "financial weapons of mass destruction").
6) Get Ready For The Mania Phase by Richard Russell
"We spend our time searching for security and hate it when we get it." — John Steinbeck.
One of the basics of Dow Theory is the thesis of three psychological phases in both bull and bear markets. In a bull market, which we are now in, the first or initial phase is the early accumulation phase. This is the phase where wise and seasoned investors enter the market at or near the bottom, when many stocks are selling at great values after having been battered for months by the preceding bear market. Here many blue-chip stocks are selling "below known value."
The second phase of a bull market is usually the longest and most deceptive, containing many secondary reactions. During the second phase the retail public shows interest in stocks, and enters the market carefully and sporadically.
The third or speculative phase of a bull market is characterized by a wild and wooly and ever-increasing entrance by the retail public. This phase is characterized by hot tips, hype and pure greed."
Closing comment.
The third stage of bull markets, the mania phase, can last longer and go farther that logic would dictate. However, the data suggests that the risk of a more meaningful reversion is rising. However, it is necessary to note that "reversions" do not occur without a catalyst. What will that catalyst be? I have no idea and nor does anyone else. Things that we are already aware of, like the upcoming debt ceiling debate, are already factored into the market.
It is unknown, unexpected and unanticipated events that strike the crucial blow that begins the market rout. Unfortunately, due to the increased impact of high frequency and program trading, reversions are likely to occur faster than most can adequately respond to. This is the danger that exists today.
Are we in the third phase of a bull market? Most who read this article will say "no." However, those were the utterances made at the peak of every previous bull market cycle. The reality is that, as investors, we should consider the possibility, evaluate the risk and manage accordingly.
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Great. Another homework assignment. And my favorite subject- bubbles. Come monday I have a feeling the dog will have eaten my homework on this one.
How about I turn it in early?
When NoDebt's investments have risen so far, so fast that he cares more about their value than his working-job income, you are in a bubble. I have arrived at that point. Shouldn't be too long before they yank the rug out from under my feet again.
NoDebt, I sold stock ETFs and a mutual fund today (each tracked an index). I am not completely out, but I think that selling now is good (at record highs and all).
But, I have been a new Seller of stocks for 20 years...
"Markets can stay irrational longer than you can stay solvent"
If you are short
No worries, then. I'm 6 ft. tall.
Yes but it's still the third phase of the Bull Market; it's a momentum market; greater fools appearing from the woodwork to join the unstoppable upward momentum. Any date between now and next year at this time won't surprise me at all; and furthermore, it's a very unstable market; when it goes, it's going to make a smoking hole in the ground.
once again john hussman has some light to shed here. he notes that the current market resembles the log periodic pattern described by didier sornette. mid january, 2014; s&p 500 1920. the top (best/worst case).
http://www.hussmanfunds.com/wmc/wmc131111.htm
The link does not work.
J.P. Morgan was pretty good at this sort of thing and he taught us our first great lesson; always sell too early.
Old wisdom in the futures market; when you're acting to secure profits/ move faster. When you're acting to put on new positions/ go slower.
> The real surprise in 2014 could very well be ...
... tanks in the streets (in a wholesome, flag waving, let's-give-a-warm-block-party-welcome to the Russian troops kinda way).
" ... tanks in the streets... "
I would tend to think so too.
In fact when he writes : " What will that catalyst be? I have no idea and nor does anyone else. " , I'm tempted to answer that when DHS is ready and there are a sufficient number of drones in the sky , any false flag will do .
The big masquerade will stop . Change of regime, welcome to the new king .
Suspecting Mr. Russell was put at the end for a reason....
I think there's a bubble in bubble talk.
I decided to personally help the bubble along......
I bot 50 shars of NFLX today.
If history is any indicator, an epic crash is eminent.
Hold on, let me buy AAPL
Why does everyone keep saying corp. profits are at record levels? The Q3 earnings were mediocre at best...
Look at what companies do to generate those numbers> stock buybacks, skeleton crew employment levels, non existant CAPEX, ect...
I wont even go into the ultra low earnings estimates that are revised a week or two before quarterly reporting starts. Oh, and lets look at the most important of all indicators, "top line revenue" keeps shrinking...
+ 1
One of many reasons I continue to GOTS (Sinclair).
Talk is cheap.
Opinions are even cheaper!
What will be - will be.
Are you better off? Is your local community better off? How about the county in which you live? Is your State better off? Whats your "gut feeling" on how the country is doing?
When you speak to people, do they voice their concerns? Are we better off? Is the world better off?
Ask these questions of yourself and others. I think you will have your questions answered. We are not better off.
My dog seems pretty happy and the current state of affairs doesn't bother him in the least.
'Better off' is a meaningless term if you can't remember yesterday.
Over the last 100 years, avg bull market = 54 months
currently at 56 months
ONWARD!!!!!
Are we in the third phase of a bull market? Most who read this article will say "no."
Not a bull market. Not a market. It is definitely Bull something though.
Surprisingly, stating DAILY that the Top is upon us results in one or more Authors saying eventually 'Told ya so'.
TOPS are only known in hindsight. NO ONE knows ahead of time when a Top or a Bottom will hit.
ZH articles have been calling almost Daily for a TOP and a CRASH COMING in the last 12 months, and here we are. +30% in the DOW/NAS/SP500 etc.
Trade WITH the Trend! Use Stops! Manage your portfolio responsibly!
Good Trading.
Lance needs to understand that this is no longer a market, it is a policy tool. And the policy tool will continue to rise regardless of economic conditions. It will not fall until TPTB pulls the rug out. When that happens there will be no escaping for anybody.
I concur. The fact that so many people are talking about a bubble and all the "pros" are painfully short confirms the fact that this is not a bubble yet. That combined with my in depth technical, fundamental, macro and historical analysis lead me to a price target and top around 5500 in 2015. This time next year when SPX is trading over 3,000 people will be screaming bubble, but not yet. When we break 5500 the year after and everyone has given up / gone long and is singing the praises of the FED and how this time really was different for real; WHAM!... they will hit em... hard.
However even down 70% from 5500 would barely bring you back into the black from being short at this level even if you managed to hold them till then.
Long story short, we are not even close to capitulation yet. Risk is to the upside, as we breeze through 1800 next Monday take a picture, you will probably never see them that low again.
As far as the "catalyst" goes; I think Shit Happens; and the media pick whatever story they like, which then becomes "the reason". I really believe this.
The question is how long can the upward redistribution last? Answers may vary.
12 months ago ZH was warning of bubbles and immient collapse and us lot who listened have missed out on HUGE gains in 2013. Meanwhile PMs have plunged.
Must remember to do the opposite of what ZH says will happen.
Another thing to ponder is why the Bitcoin price has gone through the roof?
Amazing trajectory. . . . . . any thoughts?
Nothing amazing about it at all, it's just the work of some digital hunt brothers
my friend got me into bitcoin when it was 6 dollars a piece, I actually have about half a dozen stuck in some far corner on the Internet that I will never be able to find again because I don't have the wallet address anymore..do you ever wonder what wiill happen to them? I can't be the only person to have lost bitcoins in this way.
Anyway, Now that the baby boomers are talking about bit coin you know it's no longer cool anymore and is just a huge bubble.
I got in on the twitter IPO and made a killing. Imagine all that money and no revenue. I have been riding the Tsla stock rocket and I am not selling till they are the most value company on the planet. These stocks are only going up...they don't need revenue! Amazon is amazing....stock goes up while they lose money...on massive volume! It is all GOOD! I did trade out of Venezuela a little late...but I think it can reach Zimbabwe heights.
/SARC
The catalyst?
Simple. When sellers outnumber buyers. Daily...then hourly...then minute to minute.
Blame goes to a rogue algo but the sellers keep selling.
The mania phase will kick in when the Dow goes over the "magical" 16000 and S&P breaks 1800.
The mania Phase of a bull market can go on for years, just as it did in the dot com bubble and in the housing bubble just a few years later. Bubbles usually rise the fastest and the most in their last phase, so this is where most of the money is made. But you do want to get out a little early. You can't afford to get out one milisecond late, because once it collapses, there is no getting out at all. With bond, stock, foreign real estate, and shadow banking bubbles collapsing at the same time, the entire global financial system is likely to simply freeze up and stop working. What is the correct timing to get out? That is the 64 trillion dollar question, isn't it?
You also have to diversify out of the financial system when you do get out. Megadollar profits on put options will do you no good if your exchange or your bank fails, and the FDIC only pays you 250K after a long delay.
"Even typically sober observers like Jack Bogle argue that corporate profit growth will be 5% as far as the eye can see, which combined with a 2% dividend yield, will produce 7% annualized stock market returns or 5% adjusted for inflation"
The Russel 2K is up some 30% this year, not 7%.
" The fact that so many people are talking about a bubble and all the "pros" are painfully short confirms the fact that this is not a bubble yet."
Greenspan says the market is not bubbly. He said that twice before, during bubbles.
It is already a bubble. It is obvious just from looking at a chart. If they want to go full Venezuela, sure they can ramp the market up 300% in a year, but it is a bubble right now.
"The third or speculative phase of a bull market is characterized by a wild and wooly and ever-increasing entrance by the retail public. This phase is characterized by hot tips, hype and pure greed."
I was reading about the orchestra leader who did not trust the stock market any more and had instead become a sub-prime lender, for 10-18% returns. Yellen said last week she hadn't seen much evidence of people reaching for yield. Blinders on.