Nope, No Bubble Here

Tyler Durden's picture

We've discussed margin debt records, record terms for auto-loans, the jump in earnings-less-IPOs, the massive surge in junk-debt-issuance, and the spike in penny-stock speculation - which we are told by Janet Yellen are no indication of a bubble in US equities. Given her perspective then we are sure the following two charts will doubly-confirm the lack of any exuberant activity...


While the surge in earnings-less-IPOs has been noted, the IPO market itself has seen a massive increase in issuance in January and February compared to historical patterns...

h/t @StockJockey

The question - why IPO now if you are confident that this market is a secular bull? Why not wait and issue your equity at a higher price (lower cost) at a future date and gain from all the growth and optimism? Unless insiders doubt...


And then there's this... The US stock-market is the most over-valued since 2002... (as Bloomberg's Rich Yamarone notes)

In 1968 James Tobin created a financial Stock Market Most Overvalued Since 2002 ratio (‘q’) comparing the total value of the prices of stocks with the cost of replacing the underlying assets of those same stocks (corporate net worth). The theory is that when the stock market trades at a discount to the replacement cost of its assets, the market is inexpensive, orcheaper to buy than build. Conversely, when the market trades at a premium to its replacement cost it is considered expensive. This implies that it is cheaper to build than buy. When the ratio is at 1.0, the stock market is valued the same as the asset’s value.

Using the Federal Reserve’s Flow of Funds report, it is possible to create a crude, back-of-the envelope estimate of Tobin’s ‘q.’ During the fourth quarter of 2013 — the most recent available data — the ratio of nonfarm nonfinancial corporate business equities to business net worth (market value) was 1.0663 – higher than the third quarter estimate of 0.99932 and the first reading above 1.0 since the second quarter of 2002.

This suggests that the stock market is overvalued with respect to the value of the assets in those firms. Since 1946, the average quarterly estimate of our Tobin’s ‘q’ version is about 0.71.


But apart from that (and China and Ukraine and Turkey and Europe deflation) BTFATH in the US...

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TruthInSunshine's picture

China's Premiere just fired an ominous warning (buckle up, bulls) -

And so it begins; the "Economic Depression" that so many naive investors had thought Bernanke & his equally incompetent and/or malicious central reserve fractional fiat bankers saved us from gets an official renewal shot across the bow in the form of this warning:

Phillip Inman economics correspondent
The Guardian, Thursday 13 March 2014 16.29 EDT

"China's Li Keqiang warns investors to prepare for wave of bankruptcies"

- "World's second largest economy is facing 'serious challenges' and many companies with high debts are being forced to the wall"

knukles's picture

Well, yeah, but it's all contained to China which has nothing to do with US stock prices.
 -faceplant.... where's Dennis Kneale when you need him?

TruthInSunshine's picture

It's a good thing American and other multi-national firms don't do massive business in China, haven't invested TENS OF TRILLIONS in factories, plants & R&D facilities there over the last 19ish years, and that these firms and their shareholders have hedged accordingly.


RSloane's picture

It bothers me that so little attention is being given this issue. This has the potential to be catastrophic but its being presented like an afterthought - oh by the way sort of thing.

TruthInSunshine's picture

It should be Front & Center. China's Premiere, who DOES speak on behalf of the entire Chinese Government, including the NOT-independent PBoC, just said no bailouts, Chinese version of TARP, TALF, etc.

NoDebt's picture

The one that knocks you out is the one you never see coming.  Not that everyone is blind-sided, but most are.

RSloane's picture

Agreed, it should be front and center but its not. Nobody even knows what the realistic parameters are for reprocussions, and if they do know, they aren't saying. This could be huge for the US economy yet information on it is just dribbling out.

22winmag's picture

Bad link or story "pulled"?


You know... "pulled" like WTC7 was "pulled.

Cacete de Ouro's picture

A suitably poopy IPO happened in London this week for 'Pets At Home'. Like WTF?

Private equity owner KKR was trying to lose it's dog. But dogs have a great knack of finding their way back home again. Let's wait and see.

The banks are really scraping the barrel with these IPOs; Poundland, Pets at Home, and Merlin Entertainments (owner of Madame Tussaud's and Legoland).

El Hosel's picture

The CNBC talking heads all talking about the "surprise selling" today... I guess they were not surprised to see "the market" go up 10,000 dow points on hot air. 

Spungo's picture

I'm making a new porno series called Going Public. We get people to start fucking in supermarkets and film the reaction of everyone.

TruthInSunshine's picture

No, no, no - "Going Public" is the All Forced Sodomy (Anal Rape), All The Time."

AUD's picture

List it on the stock exchange, it'll few one of the few companies that actually makes a profit, and is not just a way of scamming idiots who think they'll 'get rich' quick.

Atomizer's picture

It may be better to run charts from 2008 to present. M1 could be a good comparison. Obama's video on supporting over time further supports debasing currency to drive the cost of goods upward and declare GDP targets. Santa Claus will give you a raise, unfortunately the price of goods increase is built into your hoo,hoo wage raise. They pretend to increase your purchasing power lifestyle, it is actually to meet a GDP target. You are no richer than your last minium pay hike.

venturen's picture

just as long as the campgain dollar keep coming...wall street could murder people in the street. 

Never One Roach's picture

'no one saw this coming....'

polo007's picture

According to The International Monetary Fund (IMF):

In theory, there are many reasons why asset price movements could be associated with the business cycle. First, asset prices affect households’ net wealth and their ability to borrow, which can have important effects on households’ consumption plans. Second, according to standard Tobin’s q-theory, investment should move in the same direction as q, which is the ratio of the market value of capital to its replacement cost. Therefore investment should be high when asset prices—which are directly associated with the market value of capital—are high, and vice versa. Third, asset price changes can affect firms’ balance sheets, hurting or helping their collateral and creditworthiness and thus increasing or decreasing their willingness and ability to invest. Asset price movements may also affect banks’ balance sheets, inducing them to adjust their capital and lending activities. These effects can be amplified through financial markets when there are differences in the information available to borrowers and lenders and borrowers are limited in their ability to commit to repayment.­

Last, according to the basic asset-pricing equation in finance, an asset price should equal the discounted value of its current and expected future returns. In the case of equities, dividends are the relevant returns; for houses, it is rent. To the extent that returns move together or ahead of economic conditions, asset prices should be useful in forecasting economic activity. Movements in the discount rate (that is applied to the stream of future returns to derive present value) accentuate this relationship if they reflect investors’ search for yield—during economic expansions investors take on more risk, lowering the discount rate and bidding up the price of unchanged dividend or rent flows, while in economic contractions they do just the opposite.

In other words, there is an inherent asymmetry in the predictive power of equity prices. When stock prices fall sharply, watch out! When they rise, the chances of a recession do not change much. The predictive power of asset prices also changes when the other real-time variables are flashing red—the orange line is everywhere higher than the green line. If a term spread inversion and falling house prices accompany a large equity price drop, the model indicates that a recession is very likely in the offing.

Real asset price corrections are useful predictors of new recessions. In particular, large corrections in real equity prices are associated with significant increases in the chance that a recession will start in the following quarter. If at the same time, house prices collapse and the term spread becomes negative, the chance of a recession increases markedly. The message is clear: policymakers should be mindful of sharp asset price drops—especially if the declines are accompanied by narrowing term spreads. These developments are likely to signal trouble in the very near future.