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3 Things Worth Thinking About
Submitted by Lance Roberts of STA Wealth Management,
No Bubble Here
Yesterday, I reviewed some the longer term macro trends of the markets noting some deterioration that should give rise to some concern. However, the bullish trends currently remain intact which suggests that portfolios remain more heavily tilted towards equity exposure for the time being.
Shortly after posting my analysis, I received an email of the following chart with a title that simply stated: “I do not know why anyone is talking about bubbles…”
There are a couple of important points to consider:
First, a quick scan of the entire biotech sector gives me 262 companies with a total outstanding share float of 15.8 billion shares. The average daily trading volume of all of these companies combined is just a bit more than 190 million shares a day. Consequently, if a major correction begins and sellers emerge, more than 50% of all shares are owned by institutions, it will take approximately 83 days to clear all of the outstanding shares.
In other words, the “meltdown” in the biotech sector could be extremely large given the current “parabolic” extremes that exist.
Secondly, is the ongoing bullish spin that the current market is in no way similar to (insert previous crash year here.) This is something that I have addressed in the past stating:
“This ‘time IS different’ only from the standpoint that the variables are not exactly the same as they have been previously. Of course, they never are, and the result will be ‘...the same as it ever was.’”
It is true that valuations for the broad markets are not as high as they were in 2000 or 2007, but there is little argument that they are indeed pushing overvalued territory.
What is clear is that the stage is set for a major market reversion that will most likely coincide with the next economic recession. The question that we must answer is “when will it occur and what will be the trigger?” Unfortunately, we will only know those answers in hindsight.
For the majority of investors who have a fairly short time horizon to retirement, it is naïve to think that a “buy and hold” passive approach to portfolio management will serve you well. The risks are clearly rising and simply ignoring those risks will not make the result any less painful.
Everyone Is A Genius In A Fed-Induced Stock Rally
That last point brings me to Michael Sincere’s always brilliant work wherein he states:
“At market tops, it is common to see what I call the “high-five effect” — that is, investors giving high-fives to each other because they are making so much paper money. It is happening now. I am also suspicious when amateurs come out of the woodwork to insult other investors."
Michael’s point is very apropos. When markets go into a relentless rise investors begin to feel “bullet proof” as investment success breeds confidence.
The reality is that strongly rising asset prices, particularly when driven by artificial stimulus, will “hide” investment mistakes in the short term. Poor, or deteriorating, fundamentals, excessive valuations and/or rising credit risk is often ignored as prices rise. Unfortunately, it is only after the damage is done that the realization of those “risks” occurs.
As Michael states:
“Most investors believe the Fed will protect their investments from any and all harm, but that cannot go on forever. When the Fed attempts to extricate itself from the market one day, that is when the music stops, and the blame game begins.”
In the end, it is crucially important to understand that markets run in full cycles (up and down). While the bullish “up” cycle last twice as long as the bearish “down” cycle, the damage to investors is not a result of lagging markets as they rise, but in capturing the inevitable reversion. This is something I discussed 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 markets are indeed in a liquidity-driven up cycle currently. With margin debt near peaks, stock prices in a near vertical rise and “junk bond yields” near record lows, the bullish media continues to suggest there is no reason for concern.
However, as the support of liquidity is being extracted by the Federal Reserve, they are simultaneously getting closer to tightening monetary policy by raising interest rates. Those combined actions have NEVER been good for asset prices over the long term.
Housing Sales Closely Tied To Mortgage Rates
There was quite a bit of “hoopla” yesterday over the rise in new home sales as a sign that “economic recovery” was still intact. However, it is important to remember that people buy “payments” rather than “houses” and as a consequence the direction of interest rates has much to with the demand to buy new or existing homes.
First, let me provide just a brief bit of context about yesterday’s data point on “new home” sales. The headline release of 504,000 new one-family homes sold is a bit misleading as it is an annualized number. In actuality, it was just 41,000 which isn’t nearly as exciting of a number. More importantly, let’s put this number into some context to history.
The number of new homes sold is currently at levels that have historical been near recessionary lows, not six years into the economic recovery. This is particularly disappointing when you consider the billions of dollars thrown at housing through HAMP, HARP and other bailout initiatives.
With that context in place let’s take a look at the recent surge in new home sales with respect to the level of mortgage rates.
As you can see when interest rates have moved up, the demand for “buying” has quickly evaporated for a couple of reasons.
- Psychology – buyers have been trained that abnormally low-interest rates are now the norm so if mortgage rates rise much above 4% they pull back on purchases to await a lower interest rate.
- Ability – as stated above buyers are very sensitive to the level of payment. If rates rise, so do their monthly obligations which impair the ability to “afford” the payment. This is why subprime auto loans are now back to 2006 levels as buyers can only afford cars that are stretched out to more than 70 months.
The recent decline in mortgage rates “sucked” buyers off of the sidelines to purchase a home. However, as I discussed at length in “Bulls Should Hope Rates do not Rise” the impact of the Federal Reserve hiking interest rates could have an exceptionally quick negative impact on economic growth.
The is little argument that the current trends could last longer than reasonably believed, which is why we currently remain invested in the markets. However, it is inevitable that things will change. The problem for most is that by they time they recognize that the underlying dynamics have changed it will be too late to be proactive, only reactive. This is where the real damage occurs as emotional behaviors dominate logical processes.
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4.6% GDP growth! Forward!
... Most of which is due to credit creation ... What no offset? ha
Biotech bubble, Tech bubble 2.0, Student Debt bubble, Healthcare bubble...
Yep, Fed is creating more bubblues then the Bazoka Gum Factory
In other news:
Police: Woman beheaded at Oklahoma workplaceTime to get your concealed license folks. It only gets worse from here...
The suspect was shot by the owner:
Police: Woman beheaded at Oklahoma workplacehttps://news.yahoo.com/police-woman-beheaded-oklahoma-workplace-14445929...
You won't be hearing that in the media.
The Drudge fearmongering headline makes headline-only readers believe it was ISIS.
And juding by the comments, many people skipped the article entirely and jumped right to the comments in such a way.
That was my take too.
http://kfor.com/2014/09/25/reports-police-respond-to-possible-shooting-n...
He was fired for trying to convert them to ISLAM.
He recently converted himself.
They have trouble here.
Koco.com another local station saying the same.
.
Anything longer than a headline tends to be TL:DR and when it all falls apart the sheep will be running in circles screaming "why didn't somebody tell me"...same as it ever was.
those people don't normally go to news sites, they go to Yahoo, or instagram or Facebook... shortattentionspantheater websites
Suspect had been trying to convert coworkers to Islam, the religion of peace. But, hey, muslims don't kill people. in fact, you are more likely to get eaten by a great white, even if you never visit the ocean. I'm sure one of the tinfoil hat brigage on ZH will tell us how this was a CIA zionist false flag.
"However, it is important to remember that people buy “payments” rather than “houses”"
yep ... for our economy to reach full potential ... need 20 yr car loans ... and 500 yr home mortgages ...
Well if the terms go to infinity, so does the interest paid, but that is okay since the payments will go to zero. But what happens if you default?
not all of us. I tell the salesman to stick it when they ask what kind of payment i'm looking for. I tell them I'm more interested in the overall price, i don't need an 84 month loan to "afford" it.
We are a hyperpower and we create our own reality. US stocks can only go up and we can invade every country at our whim while the Nobel Prize Winner can drone women and children and wedding parties without any restraint.
Besides, too many Americans are in antidepressants, illegal drugs or alcohol to really care anyway.
video gaming, fantasy football, texting, facebooking, etc etc ...
“sucked” buyers off
“Most investors believe the Fed will protect their investments from any and all harm, but that cannot go on forever"
in most any given week a couple speeches are made by federal reserve presidents or governors. In the past few years, the slightest of downturns elicits a "FR stands ready to do whatever is necessary" response from hoo ever is "at the plate" ... turning a frowning market into a smiling one
"Whatever is necessary" is the reasoning behind the nuking of Japan. I recommend the next detonation is a certain area of Manhattan, preferably with a neutron enhanced device.
2+2= fuck you Fed
"I am also suspicious when amateurs come out of the woodwork to insult other investors."
Hmmm, Bill Fleckenstein's 'interview' last week with some dimwit TV anchor with big tits.
DavidC
Some CNN douche thinks he so smart, where is his article written in February, 2009 calling a bottom in March?
I guess it's time raise interest rates isn't it? What excuse now?
What is clear is that the stage is set for a major market reversion that will most likely coincide with the next economic recession. The question that we must answer is “when will it occur and what will be the trigger?” Unfortunately, we will only know those answers in hindsight.
So true. And when that "triggered event" takes place hindsight probably won't matter!
market reversion=massive implosion....
dxy kickin' azz and taking no prisoners
“This ‘time IS different’ only from the standpoint that the variables are not exactly the same as they have been previously. Of course, they never are, and the result will be ‘...the same as it ever was.’”
good chuckle for a friday.
I always wondered why people associate the name Lance with gayness. How does a lance resemble a penis?
"However, as the support of liquidity is being extracted by the Federal Reserve, they are simultaneously getting closer to tightening monetary policy by raising interest rates."
Here we go again... The 'fait accompli' of the Fed raising rates (in March, no less) How come even the 'smart' fella's like Lance Roberts, won't talk about the effects on the economy when these rate hikes (supposedly) take place, and how - in a political economy, the Fed cannot afford any appreciable degree of decline in the stock market as a result?
What are the smart investors doing ?
Find out . See http://andreswhy.blogspot.com/2014/09/prodigies-update-i.html
What if instead of worrying about the rates raising, it's more of a question on looking at how rates function? Risk has been severely miscalulated and as risk is properly valued, the spread between the Federal Funds Rate/LIBOR and especially retail side rates could dramatically widen. I can see institutions continue to borrow at low rates along with treasuries remaining low and see the rates severely get pushed up on the retail lending side. There's so many ways to play with credit via payment periods and "fees".
The point: I could see institutional rates remaining low indefinitely while retail lending rates (w/ fees) sky rocket.
"While the bullish “up” cycle last twice as long as the bearish “down” cycle, the damage to investors is not a result of lagging markets as they rise, but in capturing the inevitable reversion."
Reminds me of the old poker strategy... you win by limiting losses not maximizing gains.
Looks 'normal' to me. Whatever normal means now.