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The Song Remains The Same
Submitted by Jim Quinn via The Burning Platform blog,
I love reading quotes from Hussman in 2000 and 2007. The air is getting pretty thin up here. A stock market driven by Google, Apple, Netflix and a few other tech darlings with no earnings does not make a market. Time is running out for the bulls. The same morons on CNBC ridiculed and scorned his facts then and they scorn and ridicule him now. Do I trust Jim Cramer and Steve Liesman or John Hussman? Guess.
“The Nifty Fifty appeared to rise up from the ocean; it was as though all of the U.S. but Nebraska had sunk into the sea. The two-tier market really consisted of one tier and a lot of rubble down below. What held the Nifty Fifty up? The same thing that held up tulip-bulb prices long ago in Holland – popular delusions and the madness of crowds. The delusion was that these companies were so good that it didn’t matter what you paid for them; their inexorable growth would bail you out.”
Forbes Magazine during the 50% market collapse of 1973-74
Last week was a rather exasperating exercise in two-tiered markets; a type of divergence between the broad market and a handful of glamourous “concept” stocks that has often marked the wildest and most joyous points of reckless abandon in the market cycle, at least for speculators not tethered by traditional measures of value or historical experience. I’ll spare the list of names, which should be obvious to investors by their confetti.
Near the end of speculative runs, the market’s most glamourous concept stocks often carry significant market capitalizations, and therefore drive movements in the capitalization-weighted indices without broad participation from the rank-and-file. In the short-term, that can be uncomfortable for hedged-equity strategies that are long a broad portfolio of value-oriented stocks and hedged with an offsetting short position in the major indices. Even if the cap-weighted indices outperform the portfolio of individual stocks by a few percent, that difference shows up as a loss of a few percent in the overall hedged position. It’s easier to be patient when one recognizes that these episodes are temporary, and typically represent a significant red flag for the equity market.
A progressive internal deterioration of the market has been increasingly evident in recent months, and became severe last week. For example, the chart below compares the S&P 500 Index to the same 500 component stocks, but weighted equally rather than by market capitalization. While the difference may not seem significant, it also implies that even an equally-weighted portfolio of S&P 500 stocks, hedged with the S&P 500 index itself, would have lost several percent since mid-April.
The same observation holds for the Nasdaq index. The chart below is from analyst Cam Hui, showing the Nasdaq 100 Index along with the ratio of the equal-weighted index to the float-weighted index. What’s going on is that a handful of very, very large cap stocks account for an increasing share of the net gain, while the rank-and-file have been largely stagnant or in retreat.
Other measures of market participation have been equally problematic. The chart below compares the S&P 500 Index (upper red bars, left scale) with the percentage of stocks trading above their 100-day moving average (lower black bars, right scale). Fewer than half of all U.S. stocks remain above their 100-day moving averages, and only about half are above their 200-day averages.
As I’ve emphasized nearly every week since mid-2014 (when we completed the awkward transition from our pre-2009 methods to our present methods of classifying market return/risk profiles – see A Better Lesson Than “This Time is Different” and Voting Machine, Weighing Machine for the full narrative), the central lesson of market cycles across history, and even the most recent full cycle since 2007, is that the behavior of market internals is central to distinguishing an overvalued market that collapses from an overvalued market that continues to advance. Importantly, market outcomes in response to Federal Reserve easing are also dependent on the behavior of market internals. When market internals have deteriorated following extreme overvalued, overbought, overbullish conditions, even Federal Reserve easing has not reliably supported the stock market.
We’re certainly open to the possibility that the market could recruit more favorable uniformity, and thereby signal a more robust willingness of investors to speculate. That wouldn’t make valuations any less obscene, but it would defer our immediate concerns about severe market losses. Still, the central feature to watch in that regard is market behavior across a wide range of individual securities, industries, sectors, and security types – not simply central bank behavior.
As a reminder of how all this works, it may be helpful to recall how this same situation (which we’ve previously described in real-time with the same concerns) has played out historically. Recall that our measures of market internals shifted negative in October 2000, following what was until that point a reserved but still constructive stance. Once that period of persistent overvalued, overbought, overbullish conditions was joined by a breakdown in market internals, all bets were off, even bets that might rely on the Federal Reserve.
See, as the 2000-2002 bear market was just starting, the Federal Reserve under Alan Greenspan immediately shifted to fresh monetary easing, cutting the Federal funds rate and the Discount rate on January 3, 2001. That move did encourage a short-term market bounce, but the subsequent lesson investors should have learned (and the same one I reviewed in detail last week in relation to the 2007-2009 collapse) is also the lesson that investors are likely to experience over the completion of the present cycle: Once extreme overvalued, overbought, overbullish conditions are joined by a deterioration in market internals, even easier Fed policy does not provide reliable support for the stock market. As I wrote on January 8, 2001:
“Investors haven’t learned their lesson. Despite the brutalization of New Economy stocks over the past year, ignorance and greed obey no master. Following the Fed move, investors went straight for the glamour tech stocks, dumping utilities, pharmaceuticals, consumer staples, hospital stocks, insurance stocks – anything that smacked of safety or value. Investors are behaving like an ex-con, whose first impulse after getting out of the joint is to knock over the nearest liquor store… the immediate response of investors to interest rate cuts was to create a two-tiered market. And unfortunately, it’s exactly that failing ‘trend uniformity’ that places this advance in danger. Historically, sound market rallies are marked by uniform action across a wide range of sectors.”
“To illustrate the probable epilogue to the current bubble, we’ve calculated price targets for some of the glamour techs, based on current revenues per share, multiplied by the median price/revenue ratio over the bull market period 1991-1999.
Cisco Systems: $18 ¾, 52-week high: $82
Sun Microsystems: $4 ½, 52-week high: $64
EMC: $10, 52-week high: $105
Oracle: $6 7/8, 52-week high: $46
Get used to those itty-bitty prices. That’s what happens when companies keep splitting their stock during a bubble.”
Alan Abelson kindly featured those comments in Barron’s Magazine, followed that Monday morning by a round of dismissive remarks by several CNBC anchors. No matter – those projections turned out to be optimistic. As it happened, the 2002 lows for these “four horsemen of the internet” took Cisco to $8.60, Sun to $2.42, EMC to $3.83, and Oracle to $7.32. We forget that the most popular large-cap speculative leaders at the 2000 peak lost 92% of their value over the completion of the cycle. It feels better to forget.
Despite extreme losses in the glamour stocks that comprised the prevailing “concept” in prior episodes of speculative overvaluation, the character of those stocks has often varied. In the advance leading to the 1929 peak, the darlings included AT&T, Bethlehem Steel, General Electric, Montgomery Ward, National Cash Register, and Radio Corporation of America – companies that embraced the expanding world of department stores, communication, and industry. Those stocks would lose an average of 93% of their value by 1932.
In the late-1960’s, the glamour stocks were instead focused on rapid growth; “-onics” and “tronics” stocks, as well as conglomerates that grew mainly through acquisitions. In 1972, the focus turned back to blue chips – the “one decision” Nifty Fifty stocks that investors believed could be held forever because of their promising growth. Many of these stocks did indeed turn out to enjoy tremendous earnings and revenue growth over the following decades, but that didn’t prevent deep losses in the interim. The names included household names like Du Pont, Eastman Kodak, Exxon, Ford Motor, General Electric, General Motors, Goodyear, IBM, McDonalds, Mobil, Motorola, PepsiCo, Philip Morris, Polaroid, Sears, Sony, and Westinghouse. The fact that these were major companies didn’t prevent this list from losing over 65% of its value in the 1973-74 collapse (even though corporate earnings grew by nearly 70% over the same period):
Today, the focus is squarely on companies that have enjoyed striking “network effects” – where users are drawn to a given company largely because other uses are already there. While these network effects have generated enormous revenues, today’s glamour stocks also trade at earnings and price/revenue multiples that have historically been reserved for companies at a much earlier point in their growth trajectories, not for mature companies with already overwhelming market share.
As was the case during the tech bubble and the housing bubble, disagreement is what makes markets, and we respect that others have different views. From a historical standpoint, however, when the equity market has joined persistent overvalued, overbought, overbullish extremes with deteriorating market internals, with a cherry on top featuring two-tiered speculation in glamour stocks and heavy new issuance of stock by companies that predominantly have no earnings, we find it difficult to find any precedent that hasn’t worked out quite badly. We’re open to an improvement in market internals that might defer our concerns, but the financial markets simply have never enjoyed hypervalued speculative advances without those speculative gains being completely transitory over the completion of the market cycle.
In short, recent market action has featured a two-tiered market in large-capitalization glamour stocks that we’ve seen before at speculative extremes throughout history. This is uncomfortable for hedged-equity in the short-run, because the glamour stocks drive gains in the major indices that aren’t sufficiently matched by gains in broadly constructed stock portfolios – particularly those following value-conscious strategies. It’s helpful to recognize that action for what it is, and for what – historically – has typically followed. None of that means that the discomfort won’t continue for a while longer, but history teaches that it’s an awful idea to try to “play” the mature phase of a speculative trend, especially once market internals have already given way.
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The banksters have been 100% successful for about 8 years now. Limitless debt and loose credit has given consumers the means to buy anything and everything and sent stocks soaring. Will it all fall apart one day? Maybe in 10 or 20 years. Can bears hold out that long? The Fed will do a couple of tiny 25bps hikes late this year to give them room to cut again, and stocks will soar as they announce only good times ahead. There is not the slightest concern of a sell-off with the Fed backstopping the markets. Why would anyone sell on bad news when it just means more intervention is coming? Trillions of dollars in debt is meaningless, as nobody even cares. They don't care about their personal debts and even less about government debt. "Growth" will make it all be okay. More immigrants means new consumers and we party on as they will borrow money and buy more cars and I-Toys.
This debt-driven party will go on until it can’t…then we will become Greece.
"then we will become Greece."
Except there won't be anyone to bail us out.
It will be the self bailout program. When the day comes, still a ways to go IMO, I hope you are prepared.
When I was young and mowed grass, I filled the tank and sniffed the vapor.
40 yrs later, it the NYSE that's has my job.
China will bail us in. They'll forcefully take a 10% cut of every asset (phys and fin) in the US after they invade in 2022.
Is Greece being bailed out? I thought they were being conned into collateralizing their real assets, to be taken when they default.
*See Trucker Glock above.
Led Zeppelin - "The Song Remains the Same":
https://www.youtube.com/watch?v=q06sSvJ_Osk
(link opens in new window/tab)
If everyone at the table is contently eating a plate of dog shit
And you know completely that it IS dog shit and try to tell them but they don't stop
When does it begin to no longer matter that it is dog shit?
When you are convinced to start eating it too.
Follows the death of the very last soul.
If they are doing their final shakeout attempts in PMs, they are probably getting ready to step back from stocks. But that is a lot of postulation.
have to give a lot of credit to JOHN HUSSMAN.
His logic is always well connected, with a lot of supporting data. To be sure, John Hussman has been "wrong" (not incorrect, but super conservative) in the last few years. But this hasn't been a Free Market since 2008. And there were interventions well before that point. The Central Banks and their gophers can only defy gravity for so long. I wish Hussman was the Chairman of the FOMC - the USA might have a chance to get back on its feet again!
Gold is collapsing. Oil is collapsing. Natural Gas is collapsing. Iron Ore is collapsing. Copper is collapsing. Silver is collapsing. The Baltic Freight Index is collapsing.
So basically, the markets are looking ahead and anticipating economic collapse. And somehow, financial asset cheerleaders see the ongoing global deflationary collapse as “bullish.”
What am I missing ??
Lower input costs (raw materials, labor, fuel, etc.) lead to increased profitability for many manufacturing, supply and retail companies. I know that sounds counter-intuitive, but it's economics 101, FFS.
If - and this is a big if - the idea is to crush the miners, oil producers (already well underway), and farmers to an under-the-thumb, Big Brother style economy in support of companies like PepsiCo, Alcoa, United Technologies, WalMart, the lower costs (at least here in "Merica) should translate into increased disposable income and, ergo, higher profits, i.e., ramped valuations and higher stock prices.
Yeah, as the costs of doing business go lower, the price of admission to the big boyz club gets higher and the ponzi carousel of stocks spins higher.
Naturally, this is no consolation to the holders of PMs, i.e., real money, but, their investments are long-term and should never be measured in fiat, but rather in weights.
Slower should be better for the near-term, as in, if you're in 20 feet of water near shoals, you would be advised to reduce the speed of your vessel, lest you dash and crash.
I could be wrong, but I'm betting on new all-time highs on the major indices by mid-September, and possibly sooner.
Was it Vince Lombardi - who said, "the best offense is a good defense" - who also said, "never short a dull market?"
AAPL will hit one trillion dollars in market cap before the music will stop - that is around $175 a share
We can't complete the bubble until we get at least one trillion dollar company.
Of course, the stress riser theory...Why not???
I went over to look at his fund results. As far as I can see, none of them did worth a dam.
In fact, it is very rare for any fund to keep pace with the un-meddled-with market.
In fact, if a fund , newsletter , guru or analyst ever did so, the money would all gravitate to that entity and the casino would have to close.
In fact, if anyone ever figured out how to do that he would never tell you.
And yet we hang on their words anyway. It's no different from loving the tooth fairy, father christmas, jesus or mohammed, obama, bush-n or clinton-n.
Yea yea, meanwhile back in reality.... The market can't buy a down tick. In fact we are doing the opposite of crashing, we are exploding higher breaking records for how fast we are surging higher and how persistent the rally. Up what, seven percent in as many days?
we are making new highs day after day and tomorrow when Apple gaps up 10-20% on news that although sales were bad they anticipate an iPhone on every wrist come Christmas don't be surprised.
What we have is total financial machination with freshly printed debt to back up the illusion of sound market fundamentals that are really based on financial sleight of hand and the eveitable event horizon of total banker domination of the world under the present system. How long this can go on depends on how long the other real economy can struggle to survive with the abuses it is taking from the financialization and comodification of everything seen. When the Main Street Economy can no longer sustain a proper living standard for its denizens the world of financialization will be made to listen if the people can pin point the root cause of their plight and begin shooting bankers and their entourage on the street they so smugly dispise. I'm older so I'll be gone by then....have fun all you kids.
I like this article, and think investors (which I'm not) should definitely seriously consider his content. But I want to mention a couple side issues.
First, as everyone here knows, increasingly "there are no markets, only manipulations". Therefore, to compare ANY ratio, chart or measure to the past is increasingly problematic.
When manipulation gets to a certain point, completely unique and even "impossible" conditions arise... and can continue longer than possible. This has already started to happen in various ways, and will continue to happen in ever more ways as manipulation and central planning becomes more pervasive.
In this regard, remember that one of the central agendas and techniques of central planners is to concentrate power... both economic and otherwise. Which means, to further the fascist system they've created, their goal is to shift as much economic power into as few huge corporations as possible.
Therefore, in the long run, one would expect the few "official darlings" to dominate the rest of the market, which is greatly disadvantaged by lack of favors and support from the predators-that-be. And that is precisely what the charts in this article show.
HOWEVER... having said this... I do not believe this justifies the divergence in the charts at this time, unless the in-the-know insider predators-that-be are starting to be far forward-looking already. That is a very real possibility, but I have no way to guess whether this explains the divergence at this early date. It "feels" early to me, which is why I tend to believe this time the interpretation in the article is more likely correct than the alternative I just mentioned.
I guess my larger message is this. Going forward the smartest folks who still want to play non-markets will be those who best understand and predict NON-market forces and trends and events that never happened before (because the markets were actually markets to a significant degree).