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Will Fundamentals Ever Matter Again?
Submitted by Lance Roberts of STA Wealth Management,
In this past weekend's newsletter (subscribe free for weekly technical and allocation updates) I discussed an issue that has concerned me for some time. It is an issue that was prevalent in the late 90's as markets surged to new heights. It was an issue that resurfaced again in 2007 as readily available liquidity and leverage made the financial markets the "only game in town." Right now, we see the resurgence of the same notions once again which is simply: "Fundamentals don't matter."
In this past weekend's missive, I noted an article from the Wall Street Journal discussing the closure of another hedge fund. The closure of a hedge fund is not unusual, it was the stated reason of the closure that was most striking. To wit:
"In a May regulatory filing, the firm wrote it believed that "making investment decisions by looking solely at the fundamentals of individual companies is no longer a viable investment philosophy."
Do not misunderstand me. Fundamentals DO matter very much over the "long term." There is ample evidence that future returns are very much linked to valuation at the time of the initial investment. Forbes recently penned an article on this very issue.
"Looking at history, the stock market's returns depend a lot on where equity valuations are when you start the clock.Ned Davis Research has done the math, comparing the actual levels of the S&P 500 Index each month with a 'normal' valuation of the index based on fundamental factors like P/E, dividends, earnings, and cash flows. They identified points when the market was over- or undervalued by at least 20% and they crunched the numbers on performance after each of these points."
"The performance difference is dramatic. On average, one year after a low valuation, the market rose by 19.4%. One year after a high valuation, it dropped by 3.6%. When the market has been fairly valued, it increased 8.0%. Also note the returns one, two, three and five years later. Data through 5-31-2014 shows the market to be 33.240% overvalued."
[Note: Yes, I know, the majority of the "mainstream" analysis focuses on "forward operating earnings" which currently suggests that the markets are fairly valued. However, historical valuation measures are based on "reported trailing earnings," which are "in your pocket earnings," versus "operating earnings" which are essentially "what earnings would have been if reality hadn't happened." Furthermore, analysts are historically about 30% overly optimistic in their estimates, so caution is advised.]
Duration Mismatch
There is also just a good bit of "common sense" involved in this analysis. What is particularly interesting is the "behavioral" aspect of individuals when it comes to investing. Individuals will scour the internet to find the best deal on everything from a pair of shoes to a television. It is a source of "bragging" rights to tell their friends how cheaply they obtained their prize possession. However, when it comes to investing, they disregard "value" altogether believing that something that has gone up 100% is a better buy than something that has declined 20%.
What is truly ironic is that when it comes to buying "crap" we don't really need, people will spend hours researching brands, specifications and pricing. However, when it comes to investing our "hard earned savings," we tend to spend less time researching the underlying investment and more time fantasizing about our future wealth.
This "mentality" leads to what I call a "duration mismatch" in investing. While valuations give us a fairly good assessment about future returns, such analysis is based on time frames of five years or longer. However, for individuals, average holding periods for investments has fallen from eight years in the 1960's to just six months currently.
The point to be made here is simple. The time frame required for fundamental valuation measures to be effective in portfolio management are nullified by short-term investment horizons.
This "duration mismatch" is why I maintain a focus on price momentum and trend analysis. Over shorter duration periods, one month to one year, it is price movement that tells the underlying story. Price is a reflection of current "investor psychology" which can, and often does, detach from the underlying fundamentals.
It is this "detachment" that causes speculative manias in the financial markets whether it is "tulip bulbs" or "dot com" stocks. However, the one thing that all speculative manias have in common is a current belief that "this time is different." Unfortunately, this has never been the case.
Will Fundamentals Ever Matter?
There is growing evidence that we are rapidly entering into the final stage of the current bull market cycle. This is not a "bearish" bit of commentary; it is just "what is." I discussed this idea recently in "Could Stocks Melt Up?"
"However, looking ahead to 2015 is where things get interesting. The decennial pattern is certainly suggesting that we take advantage of any major correction in 2014 to do some buying ahead of 2015.
As shown in the chart above, there is a very high probability (83%) that the 5th year of the decade will be positive with an average historical return of 21.47%. However, 2015 will also likely mark the peak of the cyclical bull market as economic tailwinds fade, and the reality of an excessively stretched valuation and price metrics become a major issue."
With investor exuberance mounting, a high degree of complacency and relatively little volatility, all the ingredients are in place for the markets to push higher in the short term. The rising "panic" for individuals to get into the market is an "emotional bias" that has nothing to do with underlying fundamentals or valuation measures.
Will investing based on fundamentals eventually find favor once again with investors? Maybe, but I am not sure. The problem is that market participants no longer view the financial markets as a place to invest savings over the "long term" to ensure future purchasing power parity. Today, they view the markets as a place to "create" wealth to offset the lack of savings. This mentality has changed the market dynamic from investing to gambling.
The issue for portfolio managers is in trying to justify valuations to support an investment thesis. This is a particular problem for portfolio managers who potentially suffer "career risk" for not being invested in the right stocks as markets rise. Since individuals make investment decisions based on recent performance, a manager who lags his benchmark for very long is likely to be unemployed. However, this eventually creates a "valuation justification trap," that leads to rather nasty reversions when reality collides with theory. Of course, the manager is then blamed for "not having seen it coming."
This is not a new concept. It is one that has played out repeatedly in history. As legendary investor Seth Klarman of Baupost Capital recently wrote:
"A skeptic would have to be blind not to see bubbles inflating in junk bond issuance, credit quality, and yields, not to mention the nosebleed stock market valuations of fashionable companies like Netflix and Tesla. The overall picture is one of growing risk and inadequate potential return almost everywhere one looks. There is a growing gap between the financial markets and the real economy.
Not surprisingly, lessons learned in 2008 were only learned temporarily. These are the inevitable cycles of greed and fear, of peaks and troughs."
This "time IS different," but only from the standpoint that the current variables are not the same as they were previously. Unfortunately, it will be the "same as it ever was" as it is realized how "overvalued" the markets were and that only "dumb money" bought stocks there. Fundamentals will matter, but only after the fact.
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Only once the supply lines break in earnest.
same as it ever was....
Daddy, will you please tell me that story about fundamentals again tonight?
Some day, in a different set of markets.
did fundamentals ever matter?
Of course and they still do. As a fundamental force of nature, gravity always wins.
This is the very same kind of articles seen right before the crash in 1929.
We'll either laugh or cry about how stupid it really is in just a few months from now.
That last graph. Seems like I remember a time when if you bought a stock and then sold it within a certain time, by law you had to wait for 6 months or something like that before you could buy it again....is that just an old fundamentalist dream? Early 1980's.
Exactly - "fundamentals" is just the economic term for the physical laws of thermodynamics. The laws of nature bat last and they always win.
The Only Thing We Learn form History is that We Will Repeat Ittm
Farcically!
Fundamentals only matter in the real world.
pods
"Well, a long, long time ago, when things were denominated in dollars, and ..."
Q: Will Fundamentals Ever Matter Again?A: Yes, but when they do, it won't be in dollars.
Just BTFD.
Yes they will. Remember patience is a virtue, but BTFD is just a virtu.
Uhhhmmmmm.... NO!
Valuations will matter when the whole corrupt system comes crashing down and actual people, rather than HFT algos, start making informed investment decisions. So, in the near term the answer is no; valuations don't mean shit (look up yesterday's story about the billion dollar company with zero revenue).
IMO, these markets will remain rigged until they are gone. Their owners will not surrender control and will not stop rigging.
When I was young, I did all my small investments based totally on how I judged the economic fundamentals here in the USA. I had some roaring good luck with that in the 90's right up to 2008. I dodged the crisis and came out whole, no losses. Since then, I kept trading fundamentals, but this was a huge mistake, because the world had changed, the Federal Reserve had performed a coup d'etat over markets. Manipulation of various sorts became the norm. Don't fight the fed was the only way to profit. My mistake costed me riding the boom. I am not alone I assume?
Early on after the initial collapse (which I did well on the downside until they started banning shorting) my first instinct was to remain conservative so I missed the initial ramp up. But after identifying the fact that the "market" had become a policy tool and would be supported no matter what, I have more than made up for missing out on the initial ramp. Thanks to the fed and the free currency my stacks are higher than they would have been otherwise, and I have some nice new additions to my gun collection.
Ooooh. What did ya get?
I concur. Once the FED became the pilot instead of the navigator, fundamentals went out the window. They won't be back until the whole thing crashes and the pilot is taken out on a stretcher.
Real fundamentals matter.
Food, water, lead, copper, land, silver and gold.
Community, morals, personal accountability.
The rest is smoke and mirrors.
Fundamentals still matter. Just not the same fundamentals as in the past.
If EVERYBODY could understand the fundamentals, the smartest-n-savviest wouldn't win. Fundamentally, it's about understanding what the game fundamentally is.
So I can see that you're fundamentally from the Department of Redundancy Department fundamentally.
Fundamentally.
Gotta get this 'fundamentality' shit straight.
Yeah, fundamentally.
Fundamentals valued in the private currency of the Central Bank?
Spot the dichotomy.
Seemed clear 15 years ago:
Bush: ‘I’ve Abandoned Free Market Principles To Save The Free Market System’
Only when Wall Street runs out of buyers. They'll tke it down when it becomes ridiculously overpriced. More so than now.
BTFATH or BTFD
Ever? Yes, of course. Maybe not real soon, but a few years maybe.
And of course that holding period chart is totally bogus. Now that everyone has Internet access to virtually free transactions, there is a lot more in-and-out. However, I assume that most core holdings and dividend plays still involve multi-year durations.
Let's just call it:
Fundamentally Bullshit
@
Fundamentals will matter, but only after the fact.
I've found in life that most due diligence is done post mortem.
.
LOL. werd
Well...everyone agrees economics is all made up...so why not an irrational exuberance? My problem is that I actually believe in the numbers...which says to me "when I'm irrational I'm really irrational."
So what I do know is that the small caps have had no faith in the recovery thesis "and presto we have a negative print for GDP."
The question therefore is then "is that in the rear view mirror or is this just an inflationary mirage?"
mental.
I'd rather be two years too early than two minutes too late. When this fucker goes, it's going to happen in mintues, not days or weeks.
Does anyone know if Seth Klarman's letter, quoted above, was ever published in full form somewhere on the web? I've only seen pieces.
"Will Fundamentals Ever Matter Again?"
Only if those who are utilizing these techniques realize that these fundamentals are no longer associated, at all, with economics, but entirely related to understanding how the minds of narcissistic psychopaths work. It will be the new method for following financial trends, taught in institutions all over the world, in the first half of the 21st century. Well, at least until neofeudalism takes over.Fundamentals don’t matter, understanding what’s driving the market forward is all that matters. Look at IBM. Revenue is down nearly 7% since 2011, who has exposure to nearly 90% of the S&P, however, eps is up approx. 14%. This has resulted in an approx. gain of 24% for holders of IBM since Jan 1 2011 thru 2013. If you sold at the high of 208, hit mid-year 2013, you would have had a 42% gain. A 42% gain on 18 months of revenue declines? if you find fundementals explaining this, please let me know.
The primary driver here are share buy backs and of course cost cutting (jobs). IBM has reduced the outstanding shares by 10% over that same time period resluting in the eps gains. Fundamentals don’t matter. Those on the inside will decide when the parties over…fundamentals have not mattered for some time.
fundamentals is so 20th century
Now that the tinsel curtain has been ripped off, by those who installed it, who now sing : we WERE transparent in doing God's capitalistic work, BUT its time to change the tune and say : The devil has invaded the state and we must put that curtain back, not to hide the reality from "we the people" who elect us, but to put our statist house in order invaded by those "statists" of FDR's ilk.
We have to rid the state of all those who hate our free markets, you know the one and only TRUE pursuit of happiness, if you be one of "the happy few!"
Will fundamentals ever matter?
The only fundamental that really counts in history is the fundamental that allows conquest and then retainment of POWER.
Simple, if you can TELL the prey from its shadow.
Don't chase shadows like the purity of free markets; leave that to the Shamans--paid surrogates of power--- and bakers and makers of apple strudel economics.
Get with it : Chase the true prey and go for the Power matrix.
No. Markets are computer programs that are run by the FED. Infinite money at one end and indexes at the other. Their primary function is political bribery.
One factor to consider: It’s harder for the ptb to boost the equities market now because incomes have stagnated. This cycle would have been completed sooner but for that fact. Distribution has to occur from the top players to the small investor for the market to advance to a blow-off top.
Although the small individual investor is not a large % of total market cap, the marginal effects are potentially important. As the author alludes to, wage-earners (and particularly wage-earners whose perceived ‘wealth’ is in their paychecks) tend to confuse investing with chasing momentum. That explains the ‘paradox’ of how investors (at least those with a salary) treat stocks different (or the same?) from other purchases. When their porfolios are doing well, they confer ‘bragging rights’ (just as making an astute purchase on a consumer item will do) and when they are not doing well, they can be conveniently forgotten because the investors’ incomes are perceived to make up for any losses and so their lifestyles are not changed as a result. So the component of small investors who have paychecks (most of them), thus facing stagnant income growth, they have been unavailable to fuel the usual momo frenzy during the current cycle.
Fundamentals will matter again someday as more boomers retire and begin to perceive their wealth more in terms of retirement funds instead of their salaries or degraded pensions. This is the opinion of one such investor on the leading edge of the boomer generation anyway. Thank you for reading.
Yes, and there will be weaping and wailing.
Yes, and there will be weaping and wailing.
Weeping. Maybe a little weaping too.
The real fundamentals are profoundly paradoxical, because the only connection between human laws and natural laws is the ability to back up lies with violence. Those real fundamentals are entangled convolutions, because the history of successful warfare based on deceits became the basis for successful finance based on frauds, and therefore, those real fundamentals are getting wound up tighter and tighter, inside of tangled knots of being able to enforce frauds.
The traditional notions about "fundamentals" were based upon being able to presume that the sovereign power, that backed up the rule of law, that applied to the markets, was sane and stable. However, that was never actually the case. Those traditional notions about "fundamentals" were only relatively valid for some of the people, some of the time, that the sovereign powers would relatively respect. However, that deal between those people, and the uses of the sovereign powers, is more and more being broken, which is why those traditional notions about "fundamentals" are no longer working.
What were the real fundamentals about the European invasion of the North America? Obviously, those were genocide of the original populations, followed by assimilation of the survivors. I.e., those real fundamentals that actually made America were robbery, backed by murder. Similarly, what were the real fundamentals governing large portions of the American economic systems at their beginning. Obviously, in large part those were slavery. I.e., those real fundamentals were still robbery, backed by murder.
The traditional notions about what the economic fundamentals are supposed to be were never actually the true fundamentals, except for some people, some of the time, who were living inside of a relatively sane and stable sovereign power, that maintained a rule of law which allowed the illusions of "free market capitalism" to flourish within that specially protected world. Within that specially protected world, for those privileged to be living inside of it, the overall systems of organized lies operating robberies were mitigated. However, those true fundamentals never went away, but were only somewhat submerged from view, (especially for those who did not want to look.)
What is happening now is that the basic realities that the world actually operated according to the principles and methods of organized crime are simply becoming more blatant. Lots of people who used to be inside the systems of the sovereign powers, that thought they were part of "the club" are now discovering that they no longer are. Basically, "the club" is due to the ways that organized crime gangs define and treat their members, as contrasted to how they define and treat those who are not their members. For a while, a larger number of middle class Americans were able to feel like that were in "the club." Their traditional notions regarding the idealized economic fundamentals were based on that view. However, events like those on 9/11/2001 provided the most spectacular symbol of the ways that the people who used to think that they were inside of "the club" were no longer. Instead, they too could be mass murdered with impunity by the ruling classes, carrying out the larger agenda of the ruling classes.
In my opinion, so-called middle class Americans who used to think that they were in "the club," because they had rights and freedoms that would be respected by the sovereign power, are now discovering that "their" sovereign power (the government of the USA) is not sane and not stable. Actually, the unstable insanity of the sovereign powers is revealing what the true fundamentals always actually were. The real fundamentals were always organized lies operating robberies. However, for a while the American system reached better dynamic equilibria of those factors, so that the privileged people living inside of that system could operate through its rule of law, in which there was some degree of "free market capitalism" that actually existed. In that context, they could indulge in the illusions that there were some "fundamentals" that were not based on the methods of organized crime.
Of course, that was a delightful delusion, which was only possible for those who deliberately ignored what was actually being done all around the world, and throughout history, in order that they, at home, then, could believe in those ideals about economic fundamentals, which require there to be a sane and stable sovereign power, that enforces the rule of law. Paradoxically, it was because too many Americans believed too much in the ideas that the "fundamentals" were phenomena inside of a sane and stable sovereign power, enforcing a corresponding rule of law, that they gradually allowed the methods of organized crime to capture more and more control over those sovereign powers, so that the ability to be dishonest and back that up with violence gradually captured more and more complete control over the American systems.
America, as well as all the rest of the world, actually operates according to the real fundamentals, which are the ways that general energy systems manifest through human beings as expressions of the principles and methods of organized crime. All private property was always claims backed by coercions. All money was always measurement backed by murder. However, for a while, some of the privileged American people could live inside of better dynamic equilibria of those realities, which therefore enabled them to believe in traditional notions of what the economic fundamentals were.
Therefore, it was a trick question asked in this article: "Will Fundamentals Ever Matter Again?" Of course, the real fundamentals always matter! However, those real fundamentals were that human civilizations are energy systems which are best described as operating according to the methods of organized crime. Those were always the true fundamentals about the American realities. It was always a delusion to believe that there was an absolutely sane and stable sovereign power, enforcing a rule of law, within which there could operate "free market capitalism."
While that may have relatively existed to a greater degree, for more of the American people who were privileged enough to be respected by the established systems, everything they were actually doing was made and maintained by the history of warfare based on deceits, and finance based on frauds. However, for a while, some of the middle classes were able to believe in the bullshit about their government, and their society, being exceptional, and that they were members of that exceptional club.
Now, more and more Americans are discovering that the real fundamentals are organized crime, in which the best organized criminals control the government, whose powers are being used in ways that are more and more obviously unstable and insane, because the American realities have now become almost 99% based on legalized lies backed by legalized violence. Indeed, a true perspective on the real fundamentals are that those were always 100% based on organized lies, operating robberies. However, for those privileged people, who were treated as being inside "the club" regarding the use of those sovereign powers, it then appeared to them that they could believe in the traditional notions of the fundamentals being based upon "free market capitalism" operating within the rule of law.
Actually, that was never the case, as was always painfully obvious to anybody else who was not in "the club." What tends to be happening now is that lots and lots more people who thought they were in "the club" are being rudely awakened to the ways that they are no longer in "the club." As I said, 9/11 was the most spectacular symbol of the ways that the ruling classes could mass murder thousands of people who thought they were in "the club," and get away with it, demonstrating thereby that those murdered were not in "the club" anymore!
This entire article above is typical in taking for granted the wrong frame of reference, by presuming what the "fundamentals" are, when those traditional notions about what the fundamentals should be were NEVER the case. Instead, I have outlined some of the highlights above in my comment regarding what the actual fundamentals are: that human systems are manifestations of general energy systems, and that when one does a radical examination of that, the true fundamentals turn out to be that the economic systems were always operated as organized crimes.
To return to some semblance of the traditional notions of what the fundamentals should be would require a better theoretical understanding that those were only dynamic equilibria between the different systems of organized lies, operating robberies, which extended to include more people into "the club." However, the real fundamentals were always systems of organized lies, operating robberies, since human systems were always manifestations of general energy systems, which necessarily converge with the methods of organized crime. Unless, enough Americans understood enough about the deeper true fundamentals, then they would never be able to actually get back to any better dynamic equilibria between the different systems of organized lies operating robberies.
At the present time, it is painfully obvious that we are headed in the opposite direct at an exponentially accelerating rate. The debt slavery systems have generated numbers which have become debt insanities. Since the debt controls were always backed by the death controls, the runaway trajectory towards debt insanities is set to provoke death insanities. In that context, we are never going back to the false notions, regarding what the fundamental should be, because those were never actually the realities of the true fundamentals. The only theoretically possible ways that Americans could recover some of the better dynamic equilibria that used to appear to exist is IF enough of them understood what the real fundamentals always actually were.
Right now, the biggest gangsters are the banksters, who have almost totally captured control over the American government. They have been doing that more and more, over the course of several generations, at an exponentially accelerating rate, as they were able to take control of the American monetary systems, and transform those into debt slavery systems, which drove themselves towards the creation of debt insanities. Actually, what that reveals are the ways that the real fundamentals always operated, which was apparent to all other "Americans" who were never in "the club," such as the natives or the blacks, etc. ... What is different now is that, as 9/11 demonstrated, even white, upper-middle class Americans are no longer in "the club."
In that context, in my view, articles like this are relatively superficial, although still correct on their own level. Such articles skim across taking their frame of reference for granted, while the issues they raise actually take profound paradigm shifts to be able to better address. Meanwhile, the drive of the established systems towards unsustainable debt insanities are driving everything else as well. To understand how the debt slavery systems ever got going in the first place takes changing the basic frame of reference that one uses.
There has never been a totally sane and stable sovereign power, and there never could be. The rise and fall of the ability to rob, and to kill to back up that robbery, can go through periods of relatively sane and stable dynamic equilibria, and it should be the object of politics to try to make and maintain those better dynamic equilibria. However, it is blatantly obvious now that we are entering into phases of social storms blowing through, were extreme disequilibria may rebalance themselves, by going outside of the systems that were mistakenly presumed to be there, due to basic mistakes regarding presuming what the "fundamentals" were.
If I don't read 10ks or 10Qs before buying stocks, I'm def not reading this. So I'll just assume your hypothesis and experiment are fatally flawed.
Indeed, you are snarky!
It will always be fundamental that you must buy momentum
the vertical axis should be in minutes and seconds
To say the market is rigged is an understatement. After over 30 years of trading commodities I will flat out state without any reservations that lies and manipulation run rampant. If you think anyone is looking out for the small independent trader you are wrong. An unholy alliance of the Federal Reserve, the government, and the too big to fail has left the rest of us in a precarious position.
For the big boys, its insider information and computer trading, this includes computing patterns that exploit where stops are placed, this improves their ability to wash the weak out of their positions. The bottom-line is that the higher the market goes the more vulnerable it becomes to a major collapse and sudden downward move. More on this subject in the article below.
http://brucewilds.blogspot.com/2013/07/markets-more-lies-and-munipulatio...
The short answer is: NO