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2014, A Bull Year? Of Course...But Maybe...

Tyler Durden's picture





 

Submitted by Lance Roberts of STA Wealth Management,

The comedian Louis CK has a great bit in his act called "Of Course.  But Maybe..." that explores the good and bad thoughts that exist within the human psyche.  I have posted the clip below for your viewing pleasure. > {Disclaimer: I do not endorse or support any views that may be found offensive.  Of course, I do...but maybe...}

It is in this context that I wanted to discuss a recent article by David Goodboy entitled "2014 Promises To Be Another Bullish Year."  

As he opines:

"I love it when the stock market bears crawl out of their caves. The louder they get about an imminent market crash, the more confident I become that it's not going to happen anytime soon."

Of course, 2014 is going to be a good year because of the "Wall Of Worry"

"When everyone is super bullish, that's when it's time to expect a market correction. Even the bears have a name for this phenomenon: climbing the 'wall of worry.' Stocks are said to be climbing the wall of worry when they are acting the opposite of what the bears expect. Certainly, there will be pullbacks and even a few sharp drops in every bull market, but I expect the long-term upward trend will remain in full effect well into 2014."

But Maybe...

Everyone already is super bullish, and a Bob Farrell's Rule #9 states:  "When everyone agrees something else is bound to happen."  The chart below shows the bullish sentiment of professional investors versus the S&P 500. It is important to notice that peaks in bullish sentiment normally coincide with both minor and major corrections in the markets.

Bullish-sentiment-121613

Another way to view bullishness is through the use of "leverage" to increase portfolio returns.  The more "bullish" investors become; the more "risk" they are willing to take on.  A good way to look at this is by viewing the level of margin debt as compared to the level of negative cash balances as shown in the chart below.

Margin-netcreditbalance-121613

Currently, investors all "all in."

Of course, 2014 is going to be another bullish year because of cash inflows:

"The stock market is controlled by buying and selling. These so-called inflows and outflows of capital are what determine stock prices. Investors transferred $12 billion into stock funds in just the final week of November, according to Lipper, the largest increase in five weeks. Funds specializing in U.S. stocks attracted $8.9 billion of these inflows, while non-U.S. stock funds absorbed $3.1 billion."

But Maybe...

The chart below shows the push by individual investors into retail equity mutual funds. It is really a testament to what we already know which is that historically investors tend to do the opposite of what they should – "buy high and sell low."

ICI-EquityFlows-121613

As I discussed in "Third Stage Of A Bull Market" investors tend to go through three distinct psychological stages during the "Bust To Boom" phase:  1) Disbelief, 2) Acceptance, and; 3) Exuberance.  The problem with David's argument is that he is assuming that individual investors have some knowledge about the future of the market and are making a rational investment decisions. However, the reality is that low rates are forcing investors to take on more risk than they realize as they chase returns.  In other words, "everyone is now in the pool."

Of course, 2014 is going to be another bullish year because of the Federal Reserve:

"Think of the Federal Reserve as the wizard behind the curtain. The world's most powerful central bank sets the economic tone by tightening or loosening monetary policy. Its powers include its command of interest rates and an entire host of quantitative tools to spark or slow economic activity. The Fed is showing zero sign of ending its QE program anytime soon and has said its decision to start tapering depends strictly on the economic data...With interest rates near zero, and the Feds unlikely to start tapering until well into 2014, the stock market has no place to go but higher.?"

But Maybe...

I do agree with David's point that the Fed is responsible for artificially inflating asset prices.  As I discussed in "Bernanke/Yellen To Drive Stocks 30% Higher:"

"At the current rate of balance sheet expansion, and assuming that correlations remain, the markets could well rise to 2329 by the end of 2015. This would also mean the Fed's balance sheet would have also expanded beyond $6 Trillion. This would likely imply that the Fed would own more than 50% of the treasury market."

Fed-Balance-Sheet-VS-SP500-121613

The problem, potentially, is that individual investors are, as discussed above, piling into equities under the belief "this time is different." In 1999, it was the "tech boom," followed in 2007 by the "real estate/credit boom." Today, it is the inherent belief that the "Fed's accommodative policy" trumps all other issues.

What we do know is that the Fed has embarked into a dangerous game of "bubble blowing" in the hopes that the bubble can be deflated without impeding the economic recovery that it created. This has never been the case previously and is unlikely to be the case presently.

The majority of the arguments for a continuation of the bull market have given way as interest rates have risen, valuations have climbed and earnings and revenue have slowed. This has left the Federal Reserve's ongoing monetary interventions as a main driver of stock prices. However, that could change with President Obama considering a hawk, the former Bank of Israel chief Stanley Fischer, to become the vice chairman of the Federal Reserve.

When asked in an interview about when the Fed should begin tapering $85 billion in monthly bond buying, Fischer replied that:

"There is an efficient way to do it, which is to start doing it pretty soon and to do it gradually."

Despite Wall Street hopes for ongoing infusions of liquidity in the financial markets; the drumbeat of "tapering" is growing louder.

Of course, 2014 is going to be another bullish year because of corporate earnings:

"...the recent upward move in PMI is indicative of earnings growth soon to follow. This is signaling that we should soon experience an overall improvement in earnings in the first quarter of 2014."

But Maybe...

Since the financial crisis, top line revenue has grown only 1/10th as fast as corporate profitability of which the latter is already at a historical peak. The chart below shows the deviation in corporate earnings from their long term historical trends verses the market.

S&P-500-Earnings-Deviation-111113

I discussed the problem with the current earnings cycle in "Analyzing Earnings As Of Q3 2013" wherein I stated:

"The ongoing deterioration in earnings is something worth watching closely. The recent improvement in the economic reports is likely more ephemeral due to a very sluggish start of the year that has led to a 'restocking' cycle.

 

The sustainability of that uptick in the economic data is crucially important if the economy is indeed turning a corner toward stronger economic growth. However, with the Affordable Care Act about to levy higher taxes on individuals, it is likely that a continuation of a 'struggle' through economy is the most likely outcome.

 

This puts overly optimistic earnings estimates in jeopardy of be lowered further in the coming months ahead as stock buybacks slow and corporate cost cutting becomes less effective."


Could we have another bullish year in 2014?  It is certainly possible as long as the Federal Reserve remains engaged in their ongoing balance sheet expansions. 

But maybe the ongoing inflation of assets, without the underlying improvement in organic, sustainable, economic growth, will eventually lead to the next market bubble and bust. Of course, for anyone that has payed attention, such an outcome would be of little surprise.

The important point is that, as an investor, you need to pay attention to the ever decreasing reward/risk ratio of chasing the financial markets. The "low hanging fruit" has long been harvested and the risk currently far outweighs the potential reward of being aggressively invested. 

I realize that it is not popular, or fun, to rain on David's bullish parade.  However, while he will likely appear to be correct in the short term; the long term outcome will most likely be far less pleasant.

 


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Mon, 12/16/2013 - 18:33 | Link to Comment NotApplicable
NotApplicable's picture

Anyone putting their own wealth at risk in this Ponzi deserves the ass-raping they've got coming.

Mon, 12/16/2013 - 18:36 | Link to Comment LawsofPhysics
LawsofPhysics's picture

Before I answer that, what am I pricing the market in?

Moreover, how does one price anything when there is no longer a mechanism for true price discovery?

fuck it, roll the motherfucking guillotines.

Mon, 12/16/2013 - 19:09 | Link to Comment El Vaquero
El Vaquero's picture

If you donate a few 20' sticks of 2" 1/4 wall square tubing, a trailer hitch, an axle (5 on 4 1/2 lug pattern,) 2" leaf springs, 5-10lbs of 7018 welding rod, a couple of pullies, either some steel cable or some 550 cord, a latching mechanism, some trailer lights, automotive wire and a connector for said lights, and maybe some paint, I could make a very mobile rollable guillotine.  I might need some little rollers so that the blade falls smoothly.

Mon, 12/16/2013 - 19:13 | Link to Comment 25or6to4
25or6to4's picture

Sounds like a neat little Saturday afternoon project you have going there. All I would need is a tree stump and a axe.

Mon, 12/16/2013 - 19:46 | Link to Comment Zero Point
Zero Point's picture

I'd just use the cable and drag em behind the car to the next town.

Maybe put the lights on them though, gotta keep it safe.

Mon, 12/16/2013 - 21:04 | Link to Comment petolo
petolo's picture

I,ll donate the finest Damascus steel blade layered and tempered to last 1% of 300 million heads.

Mon, 12/16/2013 - 18:43 | Link to Comment Goldilocks
Goldilocks's picture

The Federal Reserve: 100 Years of Boom and Bust
http://www.youtube.com/watch?v=bFBkFxKMesQ (55:20)

Mon, 12/16/2013 - 18:44 | Link to Comment bentaxle
bentaxle's picture

2014 a year of moar bull, count on it!

Mon, 12/16/2013 - 18:46 | Link to Comment Son of Captain Nemo
Son of Captain Nemo's picture

Our "Masters" have spoken!

http://www.thedailysheeple.com/schumer-veterans-should-take-a-pay-cut-but-congress-should-not_122013

The beginning of the end folks!...  It's funny.  I keep hearing "Bastille Day" playing in the background everytime this guy opens his mouth!

Mon, 12/16/2013 - 18:49 | Link to Comment Debugas
Debugas's picture

consumables prices rise with wages which stagnate

assets prices rise with money printing and sky is the limit

Mon, 12/16/2013 - 18:51 | Link to Comment falak pema
falak pema's picture

Even ole Europe says; its gonna move up slowly; imagine! 

Up the beanstalk one more time.

Mon, 12/16/2013 - 18:51 | Link to Comment Tanzhosen
Tanzhosen's picture

Zero Hedge has been steadfastly predicting a bear stock market (in real, if not nominal terms) every year since it began 5 years ago, and have been wrong every year.  The article makes some decent observations, but there are always excellent reasons to believe any market is going to be bearish.

One of these years, ZH will be right about the stock market, but it won't be even the slightest bit noteworthy because the overall track record is so bad.

Mon, 12/16/2013 - 19:06 | Link to Comment 25or6to4
25or6to4's picture

All that it's going to take is one or two bad weeks if your 100% vested in the market and your going to be SOL. Then it won't matter how many years ZH was off in their analysis.

Mon, 12/16/2013 - 19:19 | Link to Comment Tanzhosen
Tanzhosen's picture

Agreed, the stock market is inherently risky.  My impression is that ZHers have been scarred by the last two recessions, and have become resentful of the financial news outlets like CNBC.  That resentment is perhaps not misplaced, although the only thing CNBC is guilty of in my opinion is simple incompetence.

But it seems like ZH is supported solely by the sentiment you expressed, that is not based on an objective and reasoned assessment of facts, but simply a desire to confirm the fear that made readers take their chips off the table in the first place.  That's why ZH has been consistently wrong, because they only have one prediction to make, regardless of what happens in the real world.  

ZH is just the other side of CNBC.

Mon, 12/16/2013 - 19:30 | Link to Comment jim249
jim249's picture

You must be a troll from CNBS.

Mon, 12/16/2013 - 19:49 | Link to Comment Tanzhosen
Tanzhosen's picture

Obviously, that's why I say that they are incompetent and not worth watching.  You are a sly one, aren't you.

Mon, 12/16/2013 - 19:24 | Link to Comment El Vaquero
El Vaquero's picture

Here's a question you probably ought to answer for yourself:  Is this an article pointing out that there are risks, or is it an article predicting a bear market?

Mon, 12/16/2013 - 19:51 | Link to Comment Tanzhosen
Tanzhosen's picture

The latter.  It sets up a straw man argument for the bull case, and then devotes 80% of the text and 100% of the charts to the bear case.  Just like every article that ZH has ever posted on the subject, without exception.

Mon, 12/16/2013 - 20:10 | Link to Comment El Vaquero
El Vaquero's picture

No, no, there have plenty of ZH articles discussing the correlation between equities and the Fed balance sheet.  A lot of those are why it would be a bear market without Fed intervention, but then again, there was Fed intervention.  Or maybe you missed all of the "Don't short stocks on these days" articles? 

Mon, 12/16/2013 - 20:21 | Link to Comment Tanzhosen
Tanzhosen's picture

Right, as I said, ZH will never predict a real bull market.  What you are referring to is an increase in stock market solely due to long awaited inflation (for which ZH asserts the fed's balance sheet to be a proxy), which is only an increase in value in nominal terms.  

ZH would never in a million years, for example, predict that the stock market would increase with respect to Gold.  Imagine a commenter on ZH in 2009 saying that a Vanguard 500 Index Fund would increase 43% with respect to Gold, not including dividends, over the next 5 years.  He would have been a laughingstock.  He also would have been right.  You can blame the bogeyman (Cartel, TPTB) for "holding things together longer than anyone thought", but how long does that excuse hold up?  It turns out to be longer than I would have anticipated.

Mon, 12/16/2013 - 20:32 | Link to Comment El Vaquero
El Vaquero's picture

 

As the industry’s first index fund for individual investors, the 500 Index Fund is a low cost way to gain diversified exposure to the U.S. equity market. The fund invests in 500 of the largest U.S. companies, which span many different industries and account for about three-fourths of the U.S. stock market’s value. The key risk for the fund is the volatility that comes with its full exposure to the stock market. Because the 500 Index Fund is broadly diversified within the large-capitalization market, it may be considered a core equity holding in a portfolio.

https://personal.vanguard.com/us/funds/snapshot?FundId=0040&FundIntExt=I...

 

Yeah, that little thing about the correlation between the Fed's balance sheet and the S&P is going to apply broadly to the entire stock market. 

Mon, 12/16/2013 - 20:58 | Link to Comment Tanzhosen
Tanzhosen's picture

Yes, that's why I picked it as an example.

Mon, 12/16/2013 - 21:14 | Link to Comment El Vaquero
El Vaquero's picture

So, lemme get this straight, you picked something from the stock market, which is dominated by algorithms and Fed printing claiming that no commenter would have predicted this back in 2009, and you tie it to gold claiming that it was a real bull market and all that implies, and use that to imply that ZH will never predict a "real" bull market in response to my post about articles, which looks suspiciously like you are trying to make The Tylers look wrong. 

 

Whether or not that was your intent, surreptitiously using gold as a proxy for a "real" bull market makes obvious troll obvious.  

Mon, 12/16/2013 - 21:40 | Link to Comment Tanzhosen
Tanzhosen's picture

I chose gold because ZH itself long pointed to it as the finest indicator of inflation that existed, both extant and potential.  They have obviously had to change their tune in recent years as PMs entered a multi-year bear market, and instead ramp up claims of manipulation.

It's odd that you think I'm having to do anything special to make the Tyler's look wrong.  I don't think I could possibly do that better than they have done themselves.

Mon, 12/16/2013 - 19:40 | Link to Comment Son of Captain Nemo
Son of Captain Nemo's picture

Yes I'm sure you have it right.

I think it will be a bullish market going into 2014.

If Crete, Greece, Ireland, Spain and Italy are the new normal in the EU with austerity measures galore that seem to be working out so well that many of the citizens have had to leave there own Countries to find work elsewhere what could go wrong with new investors flooding the market.  After all the banks are only too willing these days with all the cash they possess to speculate in new potential growth industries and entreprenuers in small business?

And in the backdrop to the wonderful mixed "job creation picture" a potential conflagration in the Middle East by NATO to finish it's fine work of systematic destruction in Syria and then on to bigger horizons in taking on the more capable military of Iran with China and Russia as it's proxies.   And let's not leave out the altercation(s) over those small islands between China and Japan and the missile batteries that Russia just put in place at it's borders with the Ukraine and Poland.  Lest we forget Fukushima and the wonderful PR campaign TEPCO has going to make nuclear energy industry "grow" even larger.  Who doesn't want to invest in commercial nuclear energy after 2011?

I don't know about you, but the DOW and S&P seem to love moar war like we've never seen before in it's history?  I'm old enough to remember that the mere mention of potential actions leading to major conflict use to be a very bad thing for the markets, but those days appear to be gone forever.  Bring us Moar War!!!

It seem like only yesterday that the war on terror got underway and the U.S. Government has done such a marvelous job controlling spending on defense in the last 12 years that realistically we could budget another set of major conflicts for the next 10 easily.  Let's not kid ourselves the USD is still "in charge" and everyone is only too happy to convert their currencies into the only one that matter! Am I right?

As long as the Federal Reserves keeps printing with responsible periods of "taper", and no end in sight to ZIRP, the American and EU economies will continue to thrive, no doubt in anyones mind.

How could anyone not be more optomistic about the future!

Mon, 12/16/2013 - 19:52 | Link to Comment Tanzhosen
Tanzhosen's picture

When did I predict a bull market?  I have no idea what the market is going to do.  Neither does ZH, and in fact since their inception they have demonstrated an almost uncanny ability to be wrong.  That's the point.

Mon, 12/16/2013 - 20:13 | Link to Comment Son of Captain Nemo
Son of Captain Nemo's picture

An important catalyst in determining the health of any strong economy "jobs" and the fairness and equity of the governments that tax them -especially when they are in trouble with setting policy.

My advice is that you leave your "chips off the table" which is how we got into this mess in the first place.

http://www.zerohedge.com/news/2013-12-15/imf-disagrees-zero-hedge?page=2

Tue, 12/17/2013 - 09:15 | Link to Comment andrewp111
andrewp111's picture

When ZH is finally right about the stock market, the downdraft is likely to be horrific. One of the biggest in history. And lots of bulls will be slaughtered. Remember, bubbles always rise fastest before they pop. If the pop is averted in 2014, that year will have to be either a minor correction-consolidation sideways year, or a supercharged bubble vertical rise year.

Mon, 12/16/2013 - 19:00 | Link to Comment 25or6to4
25or6to4's picture

And the band played on.....

Mon, 12/16/2013 - 19:11 | Link to Comment no more banksters
Mon, 12/16/2013 - 20:40 | Link to Comment Son of Captain Nemo
Son of Captain Nemo's picture

Really enjoyed that.

Thx

Mon, 12/16/2013 - 19:13 | Link to Comment jim249
jim249's picture

These same clowns keep waiting with baited breath that the little people will cave in and dump their $'s into the market. As long as the muppets sit on the sidelines, the markets will keep leaking higher. The market won't fall until most are back in.

Mon, 12/16/2013 - 19:47 | Link to Comment Oldwood
Oldwood's picture

I would be happy to see it all burn down except I know that even then there would be you fuckers out there trying to sell a scrap of paper you paid ten cents for a dollar. A prosperous society is a productive society and there isn't a productive fucker out there making a living selling paper. Just another scam man.

Mon, 12/16/2013 - 21:02 | Link to Comment razorthin
razorthin's picture

That 75 degree verticality on the monthly chart tells me that 2014 is the year of the wipe out.

Mon, 12/16/2013 - 22:59 | Link to Comment TheRideNeverEnds
TheRideNeverEnds's picture

disregard that, just means we have another 15 degrees more to ramp as we blast off to the moon and beyond!  

Tue, 12/17/2013 - 08:49 | Link to Comment kenezen
kenezen's picture

It is a bit worrisome that Names like Geithner, Paulson, Einhorn and many other notable hedge funds and banks are running to Bermuda's Re-Insurance kingdoms and creating Subsidiaries for their Funds. Then it becomes public that Google has reportedly hundreds of billions or far more in the same programs. There is certainly an indication that this may be the tip of the proverbial Iceberg!

The question is: Is it still for the transition of taxes from 35% to 5% for these "Offshore Profits" ,Or; is it protection against American and international markets and perhaps dollar and other currency weakness? Why so much over this past two years? Do they know something we don't, or, is it simple efficiency? 

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