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6 Things To Ponder: Bulls, Bears, Valuations & Stupidity
Submitted by Lance Roberts of STA Wealth Management,
With just a tad more than three weeks left in the year it is time to start focusing on what 2014 will likely bring. Of course, what really happens over the next twelve months is likely to be far different than what is currently expected but issuing prognostications, making conjectures and telling fortunes has always kept business brisk on Wall Street.
1) 5 Reasons The Market Will Rally Again In 2014 via MSN Money
Jamie Dlugosch presents his case for another bullish year in the stock market.
The Federal Reserve
Fear In Market
Fund Flows
Compelling Valuations
Stable Geopolitical Climate
2) 6 Things That Could Cause The Market To Drop 20% via 24/7 Wall Street
RBS says stocks could rise 30% next year. A slew of other investment banks and market analysts may not be that optimistic, but there is plenty of talk about the Dow Jones Industrial Average at 20,000 and the Nasdaq at 5,000. It has been a long time since a market correction of 10%, 15% or even 20%. Optimists say there is no catalyst for such a plunge. Pessimists mostly have been shouted down, but probably not with entirely good reason.
There are several factors that could undermine the market's phenomenal run. Most are obvious, but experts have chosen to ignore them.
The most important six are these:
1. The battle over the federal budget and debt ceiling debate
2. Holiday spending could likly be weaker than expected.
3. Energy prices rise.
4. Fourth quarter earnings come in weaker than expected.
5. Markets will correct sooner or later...because they always do.
6. Investors seem to forget that unemployment around 7% is historically high.
The market will correct soon, unexpectedly, and it will be ugly.
3) 7 Reasons To Be Cautious via Pragmatic Capitalist
In a recent piece by Doug Kass at TheStreet.com he highlights some reasons to be cautious about the equity markets. I don't like the concept that "everyone is in the pool", as he mentions, because it implies something like the "cash on the sidelines" fallacy, but I do think his piece is well thought out and worth considering. I've attached his 7 reasons to be cautious:
1. "The median price-to-revenue ratio of the S&P 500 is now at an historic high, eclipsing even the 2000 level.
2. The Shiller P/E is above 25, exceeding all observations prior to the late-1990s' bubble except for three weeks in 1929.
3. Market cap-to-GDP is already past its 2007 peak and is approaching the 2000 extreme. (This ratio is stretched at over two standard deviations above its long-term average.)
4. The implied profit margin in the Shiller P/E (denominator of Shiller P/E divided by S&P 500 revenue) is 18% above the historical norm. On normal profit margins, the Shiller P/E would already be 30.
5. If one examines the data, these raw valuation measures typically have a fraction of the relationship to subsequent S&P 500 total returns as measures that adjust for the cyclicality of profit margins (or are unaffected by those variations), such as Shiller P/E, price-to-revenue, market cap-to-GDP and even price-to-cyclically-adjusted-forward-operating-earnings.
6. Because the deficit of one sector must emerge as the surplus of another, one can show that corporate profits (as a share of GDP) move inversely to the sum of government and private savings, particularly with a four- to six-quarter lag. The record profit margins of recent years are the mirror-image of record deficits in combined government and household savings, which began to normalize about a few quarters ago. The impact on profit margins is almost entirely ahead of us.
7. The impact of 10-year Treasury yields (duration 8.8 years) on an equity market with a 50-year duration (duration in equities mathematically works out to be close to the price-to-dividend ratio) is far smaller than one would assume. Ten-year bonds are too short to impact the discount rate applied to the long tail of cash flows that equities represent. In fact, prior to 1970, and since the late-1990s, bond yields and stock yields have had a negative correlation. The positive correlation between bond yields and equity yields is entirely a reflection of the strong inflation-disinflation cycle from 1970 to about 1998."
Read the whole thing here.
4) What Keeps Me Up At Night by Bill Gross
I have written often that QE does not boost economic growth and that the artificial inflation of assets actually has deflationary effects. The comments by Bill Gross are critically important to this point.
Yet this now near 5-year migration across the global asset plains in search of taller grass and deeper water has had limits, both in price and real growth space. If monetary and fiscal policies cannot produce the real growth that markets are priced for (and they have not), then investors at the margin – astute active investors like PIMCO, Bridgewater and GMO – will begin to prefer the comforts of a less risk-oriented migration. If they cannot smell the distant water or sense a taller strand of Serengeti grass, astute investors might move away from traditional risk such as duration as opposed to towards it. Deep in the bowels of central banks research staffs must lay the unmodelable fear that zero-bound interest rates supporting Dow 16,000 stock prices will slowly lose momentum after the real economy fails to reach orbit, even with zero-bound yields and QE.
5) Proof That Shiller's CAPE Works via Mebane Faber
"I've been publishing CAPE updates for countries quarterly on The Idea Farm, and below I highlight a blurb from our upcoming year end outlook. This chart shows the returns to country ETFs and the 10 cheapest and 10 most expensive markets. Notice why I was so unpopular in Bogota in January when I said they have one of the most expensive markets in the world! Also notice the big outlier in the expensive country bucket (the US). Due to all of the expensive countries declining and the US appreciating, we are now the most expensive in the world."
6) Risk Parity = "Snake Oil In New Bottles" via Zero Hedge
Nearly a year ago, we penned "Return = Cash + Beta + Alpha": in which we performed "An Inside Look At The World's Biggest And Most Successful "Beta" Hedge Fund. The fund in question was Bridgewater, and Bridgewater's performance was immaculate... until the summer when the sudden and dramatic rise in yields as a result of the Bernanke Taper experiment, blew up Bridgewater's returns for 2013 and at last check, at the end of June, was down 8% for the year. As further explained in "Yield Speed Limits" And When Will "Risk Parity" Blow Up Again", an environment in which rates gap suddenly higher (and in the current kneejerk reaction market all moves are purely in the form of gaps as risk reprices from one quantum to another in milliseconds) is the last thing Ray Dalio's strategy wants. Be that as it may, and successful as Dalio's fund may have been until now, tonight James Montier of Jeremy Grantham's GMO takes none other than Bridgewater to task, in a letter in which among other things, he calls risk parity "just old snake oil in new bottles", and sums up his view about the strategy behind Bridgewater in the following equation:
Risk Parity = Wrong Measure of Risk + Leverage + Price Indifference = Bad Idea
and proceeds to skewer it: 'At a fundamental level, risk parity is the antithesis of everything that we at GMO hold dear. "
Just For Fun - Wall Street Stupidity Index via CNN Money
The day Twitter went public not only was profitable in the fiscal sense, but also illuminated a metric that has heretofore been underappreciated by those attempting to comprehend and thereby profit from the laws that guide the market. We will call this potent new tool the Wall Street Stupidity Index.
Have a great weekend.
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There are about 1000 reasons to get out, and only 1 reason to stay in.. thanks, Ben!
Silver seems to have found a base, not having punctured 19 again on the downside.
Sounds to me that everything is par for stupidity at the moment. Retards buy bitcoins, sheep buy stocks at overvaluation (on margin I might add), and the delusional masses watch dancing with stars while eating McDonalds..... thank god for food stamps.
retards ban bitcoin actually. (h/t fonestar.)
US stock "markets" hit their top on 1/14/14. After that, it's going to get really interesting.
maybe if equities start to fall they'll double QE, otherwise the previous QE is for nothing?
Sell when it's so stupid you just shake your head
Strong buy when you hear a zombie knocking on your door.
that would have been like 2 years ago
"fully invested" does not mean 100 percent equities. doing nothing has been the play for pretty much thirty years. Bill Gross is "the man" as he has had to less with less risk than anyone. People who have blindly pulled money out of his management team's risk managed world have simply put the blinders on and given their clientele the monetary equivalent of the "charge of the light brigade." Doug Kaas has been short this thing since day one...I have no clue the where, what, why, how or when there. Not that he won't always be spotted some dough of course. At some point he'll be something other than totally wrong. I think I'm "trading angry" this year and that goes a long way towards explaining poor performance always. Never enough California Dreamin' though.
I'm too stupid to be part of the stupidity index.
#7 - Miley Cyrus received 16.3% of the votes for the TIME Magazine Person of the Year.
Ponder that shit.
Face it, the mandatory exercise periods in the FEMA fun camps will involve twerking.
Well it wasn't the whole 47% ...........
Last year at this time was the first time I couldn't get a feeling for the coming year. It felt hollow, almost blank. Everything related to real business proved this feeling of emptiness correct. Buyers didn't order anything all year, put in a holding pattern.
Without any real data the stock market traded on what it had, free money needing a place to go. Everything went up because there wasn't anything to stop it. Meanwhile inventory levels skyrocketed, because what should have been bought never was. Corporations like Best Buy used the money they would have used to buy inventory to keep on their balance sheet to make it look like profit increased.
2013 was a year of complete bullshit. The year a virtual currency went from under $100 to $1200+. The year the stock market added double digit percentages for no apparent economic reason. An electric car company saw its valuation skyrocket to a point of an impossible task to meet.
Well all I can feel coming in 2014 is pain. I feel businesses desperate to unload inventory. I see jobs continuing to deteriorate. I see a race to replace unskilled workers with automation is the last desperate grab for margin to increase profit to justify stock valuations. I see every attempt at anything fail. The health care complex fails next year. Finally doctors, nurses, and drug companies will feel the pain of the people whose lives they helped destroy.
There is no money left for anything. If there was people wouldn't chase a dream of hitting it rich by buying something called Bitcoin. They would just buy what they want.
It's all just fun-n-games until a Black Swan pokes somebody's eye out.
Stable Geopolitical Climate ?
Did I miss the yellow relic in those predictions? :(