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3 Things Worth Thinking About
Submitted by Lance Roberts via STA Wealth Management,
S&P 2300 By May???
Well, it is that time of the year again when analysts all across the country begin to roll out their predictions for the coming year. This is a pretty fruitless exercise considering that the most accurate forecasters are meteorologists, and their predictions are only good for a 3-day view into the future. However, it keeps the media busy reporting them, and you focused on all of those delicious returns you will reap in the coming year. That is if everything goes according to plan.
The latest prognostication topper was from Sam Eisenstadt who was the former research director at Valueline, Inc. His prediction is that the S&P 500 will hit 2,300 by May of 2015. That is an 11% gain over the next six months.
Now, before you scoff at the forecast, his econometric model has a fairly decent historical track record. For example, as Mark Hulbert quoted:
"To appreciate how good his model is, consider what its forecast was six months ago — when the S&P 500 stood at 1,924. At the time, investors were expecting a big summer correction, but Eisenstadt’s model was forecasting that the index would surpass 2,100 by the beginning of December.
As fate would have it, the market has made it 'only' to 2,074. But I don’t think any of Eisenstadt’s followers are complaining. On the contrary, in the messy world of stock market predictions, Eisenstadt’s has to be graded remarkably accurate."
Here is what is important. This move to 2300 would very likely correspond with the 2015 "market melt-up" I discussed very early this year. To wit:
"There is another piece of historical statistical data that supports the idea of a market 'melt up' before the next big correction in 2016 which is the decennial cycle.
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%.
The return of the positive years is also quite amazing with 10 out of the 15 positive 5th years (66%) rising 20% or more. 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.
As you will notice, returns in the 6th and 7th years (2016-17) become substantially worse with a potential of negative return years rising. The chart below shows the win/loss ratio of each year of the decennial cycle."
But here is an important point, already stretched market valuations will become extremely stretched with such an impressive move higher. With earnings growth already decelerating, a substantial move higher in the "P" of the P/E ratio will cause multiples to accelerate sharply. The chart below shows the Shiller P/E ratio extrapolated for such a move in price.
While multiple expansions are good for "bullish investors," it is also a warning sign of a very late-stage bull market. The question is whether you need to be reminded of what happens when "multiple expansions" eventually turn into "contractions?"
Is The Secular Bear Finally Dead?
John Authers, via the Financial Times, asks that very important question:
"Are we in a bull market, or are we still in a secular bear market? It is a profound question, and — at least when it is applied to stocks in the US — it also sounds like a stupid one. US stocks have more than trebled since March 2009. The S&P 500 is at an all-time high, and it has been rising, with only one interruption of any significance, for almost six years. The US labour market has now expanded for a record 50 months in succession, and the latest numbers outstripped the most optimistic projections. If this is not a bull market, what is?"
The entire article is worth reading as he goes through various metrics in his discussion. However, I agree with his current premise that we are currently within a cyclical "bull" market still contained inside of a secular "bear" market.
My reasoning is much more simplistic in nature. As I discussed previously in the "Repeating The Secular Bear Of The 70's:"
"Despite much hope that the current breakout of the markets is the beginning of a new secular 'bull' market - the economic and fundamental variables suggest otherwise. Valuations and sentiment are at very elevated levels (greater than 23x trailing earnings) which is the opposite of what has been seen previously. Interest rates, inflation, wages and savings rates are all at historically low levels which are normally seen at the end of secular bull market periods."
The simple reality is that secular "bull" markets are driven from periods of excessively low valuations, high dividends and extremely negative market sentiment. None of those exist currently.
Another Year Of No CapEx Revival
There has been much hope that at any given moment U.S. companies were going to release their coffers on an unprecedented spending spree. Of course, like the annual migration of Hooded Merganser, these hopes have been dashed on the rocks of economic reality. This coming year is likely to disappoint once again due to the recent collapse in oil prices.
"US private investment spending is usually ~15% of US GDP or $2.8trn now. This investment consists of $1.6trn spent annually on equipment and software, $700bn on non-residential construction and a bit over $500bn on residential. Equipment and software is 35% technology and communications, 25-30% is industrial equipment for energy, utilities and agriculture, 15% is transportation equipment, with remaining 20-25% related to other industries or intangibles. Non-residential construction is 20% oil and gas producing structures and 30% is energy related in total.
We estimate global investment spending is 20% of S&P EPS or 12% from US. The Energy sector is responsible for a third of S&P 500 capex. 35% of S&P EPS from investment and commodity spending, 15-20% US"
As I discussed in "The Market Is Detached From The Real Economy:"
"The analysts estimate that S&P 500 companies will put around $740 billion into capital expenditures next year alone. This is roughly a 6% growth rate in Capex down from 8% in 2014. This decline in capex spending is going to disappoint market bulls who have been anxiously awaiting the revival of massive capex spending as companies ramp up to meet burgeoning consumer demand.
The problem, however, continues to be a lack of demand follow through to justify further increases in capital expenditures. With oil prices falling due to global demand pressures, the resurgence in capex will likely be put on hold for another year as the energy sector makes up roughly one-quarter of the total S&P 500 capex and R&D spending.
The problem for the "economic growth is coming" crowd is that corporations are indeed spending their cash, but not in ways that directly impact economic growth like capex and R&D does.
While none of this analysis suggests that a market crash is imminent, it does imply that we are very late in the current market and economic cycle. A market melt up in 2015 would certainly be exciting, but should be used to sell overly priced assets to what will probably be a dwindling supply of "greater fools."
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sucker born every minute.
btfd suckers.
I don't know about you, but I am putting everything I have into this solid housing market. Anything left over goes into the Dow and the US dollar. I'm set for life.
( BOOOOOM )
Bloomberg says #IMF might upgrade Chinese yuan to be an official reserve currency, including it in special drawing rights SDR basket
https://twitter.com/AxelMerk/status/542855885496676352
WTF?
https://www.tradingview.com/x/0fAH1q1g/
If the Chinese let it, then they are out of their right mind.
I had a much more simple analysis in mind. Autumn of 2016 is right before the next Presidential Election. Hilary Clinton will, most likely, be running against whatever cartoon character the Republicans can put up there. She will need a crisis to win the election; probably a couple of crises stacked on top of each other. A financial meltdown would be one, and a big war would be another. We'd hear all the "2:00 AM Call" and "Never Change Horses in Mid-Stream" crap until we were desensitized to it. Since the only thing levitating the current market is the public money being transfused through the corpse of Wall Street by the Federal Reserve and the US Treasury, that flow could be crimped, cut off, or just threatened at any time, and there's your criisis, fully formed.
hoo knows?
but i'll file this "Lance" with his other calls of 10yr @ 4% in 2015 and USD dollar will weaken (about 300 pips ago on the DXY)
Sales of "Dow Jones 18,000 - Let's Party Motherfuckers" hats have already exceeded my current supply.
"To appreciate how good his model is, consider what its forecast was six months ago — when the S&P 500 stood at 1,924. At the time, investors were expecting a big summer correction"
the same clowns (ZH reported on a survey where 100% of "experts" polled agreed) who thought back in april that interest rates would move higher in 6 months?
correction over QE ending?
blah, only dopes thought that ... buybacks and profits ruled the way ... and both on are on the clock
Cotton candy! More cotton candy!
There's a busload of Millenials that just pulled up, spin that sugar!
Well when the cash comes home for good then it has to go somewhere I suppose.
"what will probably be a dwindling supply of "greater fools.""
That would be refreshing. I remain hopeful but.................
http://www.bloomberg.com/news/2014-12-11/yuan-has-real-shot-at-imf-bless...
Full read
I love the way the front page summary makes note of the fact that "none of the following analysis suggests that a market crash is imminent..."
It is also highly doubtful that your house is on fire.
Further, you should have no reason to believe that your wife and daughter are regularly blowing the next door neighbor.
Back to NLP class, Tylers.
This anticipation kinda feels like when you twist a pack of ketchup to see how many times it takes to bust in your face.
Must be cyclical sunspot activity wrecking havoc on the markets again....
Must be cyclical sunspot activity wrecking havoc on the markets again....
The Dow rallied 40 points and the S&P over 5 points in the few minutes it took to read this article. Fun-dur-mentals, right? Have we all forgotten that central banks are now given discounts to buy equity futures with newly created fiat? Until their buying is either eliminated or disclosed, this rally will not end.
2015 -another fucking year of this shit.
I just wanna get off this stupid ride now. I've seen enough. I hope the Vogons turn up soon.
We're about due for another round of ebola bad news
Last quarter America's GDP came in at a strong 3.5% but the fact that a 10% jump in federal spending, mostly on Pentagon hardware bolstered growth and was very much behind the numbers.
This "pre-election" spending was the biggest increase in federal spending since 2009 when the Obama administration put in place a huge economic stimulus package.
When you mix in an upbeat November number concerning job creation, falling oil prices and ever higher stock market prices and new record highs and many people have the impression we are on a roll.
The American and world economy is in uncharted water and weird crosscurrents are clouding our economic future. The truth is if this market is as over extended and distorted as many people think a crash may occur at any time. The article below delves into some of the many crosscurrents at work that could bring the economy to an abrupt halt.
http://brucewilds.blogspot.com/2014/12/crosscurrents-cloud-future-economic.html