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3 Things Worth Thinking About

Tyler Durden's picture




 

Submitted by Lance Roberts via STA Wealth Management,

FOMC Meeting GDP Forecast

One of Fiedler's Forecasting Rules states:

"Always be precise in your forecasts: Economists state their GDP growth projections to the nearest tenth of a percentage point to prove they have a sense of humor."

The Federal Reserve has certainly proved both points; they have been very precise in their forecasts and have consistently overstated economic strength as shown. For example, in January of 2011, the Fed was predicting GDP growth for 2013 at 4.0%. Actual real GDP (inflation adjusted) was just 2.19% for the year only missing estimates by roughly 50%. The estimates, in 2011, for long run economic growth, was 2.7%, which has now fallen to just 2.2%.

Unfortunately, 2014 is not shaping up very well either.  At the beginning of 2013, the estimates for the full year of 2014 averaged 3.2%. With the first quarter of 2014 declining 2.1%, even the sharp rebound in Q2 has left the economy average only roughly 2% growth so far. Of course, since that time, the Fed has continually lowered its estimates for 2014 from that 3.2% growth rate to just 2.05% today.  That doesn't suggest a massively strong rebound through the last two-quarters of the year.

FOMC-Projections-GDP-091814

Importantly, the Fed added a projection for 2017 which is just 2.3% annualized real economic growth.  As shown in the chart inset, economic growth projections by the Federal Reserve are showing a continued slide in economic prosperity in the years ahead.

This view very much aligns with statements I have repeatedly made over the last three years which is that in a consumption based economy excess debt, structural unemployment and stagnant incomes retard economic prosperity. The simple fact is that when it requires roughly $4 of debt to create $1 of "real" economic growth - the engine of growth is broken.

Debt-Dollars-To-Create-GDP-091814

Economic data continues to show signs of sluggishness, despite intermittent pops of activity, and the global economy remains drag on domestic exports. With higher taxes, increased healthcare costs and regulation, the fiscal drag on the economy could be even larger than expected.  

What is very important is the long run outlook of 2.2% economic growth. That rate of growth is not strong enough to achieve the "escape velocity" required to improve the level of incomes and employment to levels that were enjoyed in previous decades. Also, it is important to realize that NOWHERE in these forecasts is the onset of a recession considered. Has there been a recovery in the economy? Of course, but much of it has only been statistical.

 

Missing The Rally

There are two very important misconceptions by the media about investing. The first, is that if an advisor/manager has a conservative or negative view on the market then that means they are sitting in cash and have missed the rally.  That is simply not the case. As I addressed in "Bulls And Bears Are Both Broken Clocks:"

"In the end, it does not matter IF you are 'bullish' or 'bearish.'  The reality is that both 'bulls' and 'bears' are owned by the 'broken clock' syndrome during the full-market cycle. However, what is grossly important in achieving long-term investment success is not necessarily being 'right' during the first half of the cycle, but by not being 'wrong' during the second half."

The chart below shows the complete full market cycles throughout history.

S&P-500-Historical-Bull-Bear-Markets-080414

This conversation between Bill Fleckenstein and Jackie DeAngelis on CNBC brings this issue into focus.

The important point that Bill is trying to make is that even if he has missed some of the gains in the market, the devastation to investors during the completion of the full market cycle will completely eviscerate any potential short-term performance lag. However, this is why media driven advice has always led investors into taking on excessive risk that eventually devastates long-term investment returns.

The second misconception, and much more important to this discussion, is that having a "sell discipline" means that you are a "market timer." This also is a fallacy.

"Market Timing" is when an individual attempts to time market movements and is either "all in" or "all out" of the market.  The reality is that while some investors may be successful in such an endeavor over a short term period, it is unlikely that they will be successful over the long term.  Furthermore, most individual investors have neither the time, discipline, tools or skillset necessary to attempt such an operation.

Moreover, as investors we are SUPPOSED to "buy low and sell high." Without a "sell discipline" how would one accomplish such a task? More importantly, without selling high, how is one supposed to have capital with which to buy low? This does not mean "selling everything" which is what is often believed, but rather trimming back on winners, and disposing of investments that are not working. I like to call this "portfolio management" and am contemplating patenting what is apparently a novel concept. The problem with the majority of investment advice given today is that investors should only "buy and hold." This advice is fine as long as markets are rising, however, as discussed above; it is the completion of the full market cycle that leaves individuals wanting.

As I stated yesterday:

"As you are already aware, I agree with the premise that as long as the markets are in a positive trend, portfolios should remain near full allocations. However, being fully allocated currently does not mean that it should always be the case. This is why I spend so much time pointing out the potential risks that exist. It is never a rising market that hurts us; it is when it stops that does."

 

Are Cash Dividends Per Share A Warning Sign?

One of the ongoing benefits of "cheap money" is that it allows corporations to leverage balance sheets and "manage" profitability through stock buybacks. As discussed just recently, corporate share buybacks are at their highest level since just prior to the last financial crisis.

“Companies are buying their own shares at the briskest clip since the financial crisis, helping fuel a stock rally amid a broad trading slowdown. Corporations bought back $338.3 billion of stock in the first half of the year, the most for any six-month period since 2007, according to research firm Birinyi Associates. Through August, 740 firms have authorized repurchase programs, the most since 2008."

Stock-Buybacks-091614

However, companies are not just borrowing to complete share buybacks but also to issue out dividends. According to the most recent S&P 500 company filings, the level of cash dividends per share has now reached $9.76 which is the highest level on record. It is also the greatest deviation from the long-term trend of dividends per share since the financial crisis (highlighted in blue.)

SP500-Cash-Dividend-PerShare-091814

One thing to note is that cash dividends per share, which are inflated due to the reduction in shares outstanding, should be driven by stronger revenue growth at the topline of the income statement. However, since 2009, sales per share have only increased by 32.37% in total (or 6.5% annually) which does not support dividend per share growth of 63.75% (or 12.7% annually.)

While I am not predicting that the proverbial "wheels are about the come off the cart," this is another in a long list of indications that value in the stock market is no longer present. Of course, this would also suggest this might be, just maybe, a time to start considering "selling high." Of course, such a suggestion is wildly ludicrous and absolutely illogical since it is widely believed that the markets will never go down...ever.

 

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Fri, 09/19/2014 - 11:36 | 5234303 Squid Viscous
Squid Viscous's picture

the housing crisis is contained

- Ben Shalom, 2006

Fri, 09/19/2014 - 11:50 | 5234366 LawsofPhysics
LawsofPhysics's picture

When asked about direct monetization - "we would never do that" - Ben Shalom.

 

execute him already.

Fri, 09/19/2014 - 12:25 | 5234541 Headbanger
Headbanger's picture

Three things to think about...

 

1) It's Friday.

2) Go out shooting..  Again.

3) Scotch!

Fri, 09/19/2014 - 13:20 | 5234810 Comte d'herblay
Comte d'herblay's picture

...and still one of the best avatars on the ZH.

Fri, 09/19/2014 - 11:37 | 5234304 LoneStarHog
LoneStarHog's picture

Down is a four-letter word, and soooooooo yesterday...

Fri, 09/19/2014 - 11:36 | 5234306 ZippyBananaPants
ZippyBananaPants's picture

Jack Ma's head is shaped like a perfect box!

Fri, 09/19/2014 - 11:59 | 5234405 BandGap
BandGap's picture

he looks like The Predator from the movies.

Fri, 09/19/2014 - 15:19 | 5235400 ebworthen
ebworthen's picture

Rich, but one fugly m'fker!

FED is pushing on a string.

Fri, 09/19/2014 - 11:59 | 5234406 Bangalore Equit...
Bangalore Equity Trader's picture

Listen Zuckerburger, no need to "FLAME" on the hedge, afterall you do have your own platform.

Fri, 09/19/2014 - 11:39 | 5234311 Squid Viscous
Squid Viscous's picture

jackie D can suck my cock, and that Grizanti guy is a cheesy whoremonger/coke head...  used to live in the same building on 2nd ave.

Fri, 09/19/2014 - 12:01 | 5234416 Bangalore Equit...
Bangalore Equity Trader's picture

Listen. Ooh la la.

Fri, 09/19/2014 - 11:39 | 5234314 griffey247
griffey247's picture

Markets wont go down before the 2016 election.... Thats a given

Fri, 09/19/2014 - 11:46 | 5234341 American Dreams
American Dreams's picture

I arrowed you down because there is no "market" and there certainly won't be an "election" in 2016

Know your enemy

AD

Fri, 09/19/2014 - 11:46 | 5234350 griffey247
griffey247's picture

Lol good point. I hope you are right. The reset is greatly needed.

Fri, 09/19/2014 - 11:51 | 5234373 gatorengineer
gatorengineer's picture

They will throw in a false flag event to bring them down.  Just a question of timing, and where.....  They will let them down, just when.

Fri, 09/19/2014 - 11:55 | 5234391 griffey247
griffey247's picture

You really think so? I mean why would they.. Democrats are sitting pretty in 2016. They dont need a catastrophic event to get total power anymore..

 

Look at the Amnesty vote yesterday in the senate.. Its ludacris... They were voting for an unconstitutional executive power that shouldn't even be considered anyways. Its going to hurt the country drastically. 

Fri, 09/19/2014 - 12:44 | 5234639 seek
seek's picture

If you're thinking this is a (D) and (R) thing, your thinking is broken.

Fri, 09/19/2014 - 11:43 | 5234328 youngman
youngman's picture

If you are watching the hype of the IPO today....the market is going higher..much higher..how can you stop it...people are just buying paper now....we used to by houses we could not afford and did not have the value we were paying for it....now we are buying stocks that do not have the value we are paying for them....its just momentum...the new hit TV show...the HOT new actor...we are a five second economy...we talk twitter sentences now...we cant write a full sentence....no one cares about 10 years from now..its today..its the next five minutes...that is what is COOL..

Fri, 09/19/2014 - 11:50 | 5234372 griffey247
griffey247's picture

Its so true. Plus 1

 

Thats why I thought about playing the stock game today. Its all hype and money can be made. You have to throw out common sense in order to do so. If you throw metrics and investment principles to the wind, their was money to be made the last 4 years... 

 

Look at FB. You could have gotten at 39 dollars and now its 77 plus.. Is it a bad company, Yes. Is it over valued, Yes. However, it doesnt change the fact that it doubled this year. 

Fri, 09/19/2014 - 11:53 | 5234388 Bell's 2 hearted
Bell's 2 hearted's picture

".the market is going higher..much higher..how can you stop it..."

 

the market is a steamroller

 

...

 

hmmm, is that an Eisenhower? ... or a nickel?

Fri, 09/19/2014 - 11:42 | 5234329 Spungo
Spungo's picture

I love Frankenstein's wicked 80s hair

Fri, 09/19/2014 - 11:51 | 5234370 Bell's 2 hearted
Bell's 2 hearted's picture

hair bands

 

hair funds??

Fri, 09/19/2014 - 12:08 | 5234452 Consuelo
Consuelo's picture

The hair style is a tribute to Michael Landon...

Fri, 09/19/2014 - 12:11 | 5234469 CHX
CHX's picture

Like a Flechtenstein. (little German pun)

Fri, 09/19/2014 - 11:42 | 5234331 Kreditanstalt
Kreditanstalt's picture

What if you don't have anything that you can "sell high"?

And, if everybody DOES, who are they going to sell to?

Fri, 09/19/2014 - 12:08 | 5234447 Bangalore Equit...
Bangalore Equity Trader's picture

Listen. This is not a bad "QUESTION" but a tad rhetorical for this crowd.

Fri, 09/19/2014 - 13:17 | 5234785 Comte d'herblay
Comte d'herblay's picture

The FED is right there to take it off your hands at the high, and hold it there, since there won't be any more sellers if EVERYBODY has sold.

Shit, this stuff is e z.

 

Fri, 09/19/2014 - 14:41 | 5235242 ChartreuseDog
ChartreuseDog's picture

Bingo! When everyone runs for the exits at the same time, the sheeple get trampled. Do you really think that TPTB will graciously issue a warning far enough in advance so we can all "walk, not run, to the nearest exit?"

Fri, 09/19/2014 - 11:46 | 5234345 Bell's 2 hearted
Bell's 2 hearted's picture

 

 

"This view very much aligns with statements I have repeatedly made over the last three years which is that in a consumption based economy excess debt, structural unemployment and stagnant incomes retard economic prosperity."

 

Well, Lance you're the dope who recently said 10yr @4% in 2015 ... talk about a wheels coming off moment.

 

10yr will hit 1% before 4%

Fri, 09/19/2014 - 12:04 | 5234430 A82EBA
A82EBA's picture

He used to say 10yr at 1% before he changed it.

He said LNG was dead at $55, now it's $85

He's consistent on one thing though..sell gold

Fri, 09/19/2014 - 12:43 | 5234630 CRYBABY
CRYBABY's picture

we're in 2014 muppet.....

Fri, 09/19/2014 - 12:05 | 5234433 GooseShtepping Moron
GooseShtepping Moron's picture

The douchebags on CNBC sound like they're out for the blood of anybody who would dare skip this rally, as if that's just not allowed anymore. This is how you know their professionalism has sunk to an all-time low and that the phrase 'jumping the shark" is no mere idle talk.

This sort of situation, where you have young bimbos unduly promoted to positions of power wherein they try to tell competent men with a sense of responsibility and experience what to do, is characteristic of decline no matter at what scale it appears, from the individual household to the small business to the large business to the national level. Jackie "Jezebel" DeAngelis is a whoring prophetess of Baal who does not possess the sense to see that she is on a crash course with reality.

Fri, 09/19/2014 - 12:10 | 5234463 Bangalore Equit...
Bangalore Equity Trader's picture

Listen Moron. I already "GAVE" at the office.

Fri, 09/19/2014 - 12:44 | 5234625 alexcojones
alexcojones's picture

Gold? Silver? Copper? Lead?

Yeah, I know, that's four.

Fri, 09/19/2014 - 13:18 | 5234794 Comte d'herblay
Comte d'herblay's picture

Guys his age with girlishly long hair that they are overly proud of, like him, are not to be believed about anything but shampoo, conditioner and thickener.

 

Fri, 09/19/2014 - 13:25 | 5234844 limacon
limacon's picture

Sad to say , negative interest rates and real tax on negative interest may be the only way to keep bubbles in check .See

https://www.academia.edu/8397398/Potential_Money_and_Bubbles

Fri, 09/19/2014 - 19:03 | 5236208 bid the soldier...
bid the soldiers shoot's picture
. Luke Chapter 2
'And it came to pass in those days following the bursting of the sub-prime bubble, that there went out a decree from Caesar Augustus, that all the money in the world should be plowed into the stock markets.

 

From the largest banks and institutions to the piggy banks of little children, every worker's salary, every CEO's bonus, all unreported income should be thrown forthwith into the stock market, and the 'ask' should be paid.

So did TPTB and TBTF go unto their brokers and pay top dollar for stocks.

And, Lo, the market took wing.

And prefect Ben Shalom of the Fed and governor of Wall Street, said unto the lesser governors, I will print more dollars than there are grains of sand on the shore and stars in the midnight skies and give them to the banks in return for their toxic assets and they will buy stock and the the markets will ascend to the heavens, higher than the Tower of Babel, and this market shall be called the Tower of Ben Shalom. 

And there was a morning and an evening.  The Sixth Year.

Sat, 09/20/2014 - 02:41 | 5237175 Wild Theories
Wild Theories's picture

Please tell me you work in advertising, your creative knack would be truly wasted anywhere else. :)

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