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Prominent Permabull Says Correction Not Over Yet, Expect "Final Capitulation"
Back in January 2012, all was well with the centrally-planned world: Gluskin Sheff's David Rosenberg was staunchly bearish, while his arch-nemesis, Wells Capital's Jim Paulsen, was the opposite. This rivalry culminated with Rosenberg writing an extensive breakdown of his showdown with "bullish strategist" Paulsen at a CFA event (see "David Rosenberg Explains What (If Anything) The Bulls Are Seeing") in which he said that the one thing that he could "identify as market positive" was valuations, to wit: "we do understand that P/E ratios at current low levels do serve up a certain degree of confidence that there is some downside protection to the overall market here."
Fast forward three years, and the world, while still centrally-planned more so than ever now that the BOJ has and the ECB is about to join the massive monetization fray, has been thrown into conventional wisdom turmoil. The reason is that while David Rosenberg infamously flip-flopped from bear to bull (although supposedly he may be contemplating turning bearish again, though who knows after the last 3-day rally) three years ago, none other than permabull Jim Paulsen has come out with a very uncharacteristic and skeptical assessment of the market, in which he does not urge readers of his monthly letter on economic and market perspectives to yet again go all-in and BTFD, but to instead realize that the correction is not yet over and that he expects "a more fearful investment culture suggesting a final capitulation and more importantly, a lower stock market valuation level able to withstand a less hospitable recovery."
First, Paulsen's take on the torrid market rally unleashed by the worst jobs report in years:
Finding a bottom in the stock market may well be a fool’s game, but that does not stop us fools from trying. A strong rally last week accentuated by a surprisingly weak jobs report on Friday allowed the stock market to successfully retest its initial August correction low for the second time. This show of technical strength has buoyed expectations of a coming year end market rally.
While equities may be finding renewed upward momentum in the current quarter, our guess (and it is just that) is the stock market correction is not yet over. In our view, a quick recovery back near all-time highs would leave the stock market with many of the same vulnerabilities that started the correction. Consequently, we would not be surprised if the stock market tests its correction low yet again and perhaps even fails before reaching a final bottom.
Paulsen addresses what he views as the four main challenges for the market:
Despite the weak jobs report last week, the U.S. unemployment rate remains poised to fall below 5 percent within months. Consequently, even modest economic growth can now produce wage and price pressures, mandate higher interest rates, lower both stock and bond valuations and force Wall Street to finally wave goodbye to its great liquidity friend. Simply reviving Chinese economic growth or bottoming commodity prices may not end this stock market swoon. Today’s turbulence is more about correcting market vulnerabilities built up over the past six years, and finding a new foundation that will allow this bull market to resume as the U.S. economy moves toward full employment.
In our view, the stock market faces four major challenges.
First, in recent years investors have become more calm and confident than at any time in this recovery. Undoubtedly, investor confidence has cracked a bit during this correction. Some quantitative measures of investor sentiment now suggest bearishness (a positive for the stock market).
However, while debatable, our current qualitative assessment of investor mindsets is that they remain fairly constructive about the future. Most media stories are not preaching the end of the world and most Wall Street strategists have maintained bullish year end targets. Moreover, financial market action is not consistent with real fear. There has been no huge and sustained rush to the safe haven U.S. treasury, U.S. dollar or gold. Finally, cyclical stock sectors have done as well or better than traditional defensive sectors in the last couple months. Industrials, consumer discretionary and emerging market stocks have been outperforming in the last couple months. Since its start, the premise behind this bull market has been “climbing a perpetual wall of worry”. Today, though, rather than a risk, most seem to perceive the current correction more as a buying opportunity in an ongoing bull market. Once this correction finds its final bottom, we suspect many more investors will likely fear a full-fledged bear market and a heightened risk of recession.
Second, at its recent peak, the trailing price-earnings multiple on the U.S. stock market reached almost 19 times earnings and is still about 17.6 times today. Trading at 19 times earnings in a recovery with a zero interest rate, low and stable inflation and no cost-push pressures is not problematic. However, the stock market is likely to go searching for better valuation support if the normal tensions associated with a recovery nearing full employment begin pressuring the financial markets.
Third, after six years, the U.S. earnings recovery is showing signs of aging. Profit margins are near all time record highs and compared to the last few years, earnings are likely to grow much more slowly during the balance of this recovery. Since profit margins cannot rise much higher, should sales growth remain tepid so will earnings results. Alternatively, should sales growth accelerate, pressures on profit margins are likely to intensify nullifying much of the positive impact of stronger economic growth and keeping earnings performance tepid.
Finally, whether it is this year yet or in 2016, the U.S. is imminently headed toward an interest rate reset. Does the current relatively high price-earnings multiple, an investment community which mostly perceives the correction as a great buying opportunity, a recovery with amazingly weak productivity and an aging corporate earnings cycle represent a good foundation for stocks to withstand a rate hike?
Where does Paulsen see the market heading in the near-term:
Most likely, the contemporary bull market is not over. However, the current correction may prove deeper and longer than most now expect. Should the stock market quickly return to its recent highs, the vulnerabilities that produced this correction will remain challenging.
* * *
Maybe the S&P 500 declines below 1800 before this correction finds a final bottom. A second break below the initial crash low in August would produce widespread fears of recession and calls for the end of this bull market rather than the popular "buy on the dip” mentalities recently evident. Moreover, and perhaps most importantly, near 1800, the S&P 500 would be selling about 15 times trailing earnings (close to its long-term 145 year historical average), which represents a much more sustainable level in an economy facing slower earnings growth, somewhat higher inflation and rising shortterm and long-term interest rates.
Admittedly, there is nothing scientific about 15 times earnings. Perhaps, the stock market will find good support at 16 times or maybe it will need to fall to 14 times? Who knows? It is guesswork at best. However, we think the stock market still faces some vulnerability and until it achieves a better fundamental footing, it is not likely to sustain a meaningful advance.
As a reminder, it was none other than David Tepper who one month ago infamously lowered his own "fair value" P/E multiple from 18x to a range of 14x-16x, noting that under these parameters the S&P 500 would trade between 1680 and 1920 within the next six to twelve months, or 1800 at the mid-point, using a $120 2016E EPS. We wonder if Paulsen was listening...
Finally, Paulsen's summary:
The strong stock market rally during the last few days has pushed the S&P 500 near its highest closing level since the correction began in late August. This has boosted optimism that the recent selloff may be ending. While this could certainly prove to be the case, we remain less sanguine that the vulnerabilities, which initially produced this correction, have yet to be resolved.
Ultimately, we expect a more fearful investment culture suggesting a final capitulation and more importantly, a lower stock market valuation level able to withstand a less hospitable recovery as the economy nears full employment.
So to summarize, among the more prominent recent (perma)bull to bear conversions we have Tepper, Icahn, Gundlach and now, arguably, Paulsen, who may not be "bearish" but who clearly is not a happy buyer here. On the other hand, the bulls are Gartman and Cramer. Trade accordingly
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It will be like when Hitler knew the allies were closing in...mass suicide
I've still not finished laughing about David Cameron fucking a dead pig I can't handle how funny it'll be watching these fuckers squirm.
My favorite laugh is Cramer telling us to buy Bear Stearns @69.00 ,(was over $200.00), and John Stewart calling out on it after he denied it.
Dear John saved the tape and to this day I still watch it to remind me: "That Cramer Knows Nothing". As he said the FED also knows nothing.
Final capitulation??? We haven't even seen fear yet. Where do they get these people?
Just another asshole I'd like to kick in the face and watch him spit teeth.
Some real bullshit getting posted here these days. Devoid of any truth, honesty or meaning.
It's like a Yahoo Finance thread....
amen
Who is there to have fear?
The entire market is made up of banks, funds and HFT trading entitities. There are no real people in the stock market.
Their problem is that there is no one in the market to steal money from. They can only steal it from themeselves. It would be cool to see the corrupt-crony.net go cannibal.
94 million out of work and the market will recover in a less friendly enviroment as we realize full employment.
Where do these people come from. Do they hang upside down during daylight?
It's all for entertainment, to educate the people at home, tuning in;)
I would like to see a Lower Low. This Friday seems important, OCT 9, the 66 day crash cycle.
http://tripstrading.com/2015/10/06/sp500-1987-vs-2011-vs-2015-pattern-of...
The firehose of global CB money printing is going to prevent the mega-crash all the bears are calling for. Not forever, but for a while yet.
And yes, that just means the crash will be that much worse when it finally comes. But if you get wiped out trying to go short in the meantime, what good will that do you?
I'm anticipating The Final Countdown, if present trends continue.
You have to understand, these people aren't really talking about a stock market, they're talking about rackets and casinos. That's a very different thing; one is actual business derived from actual fundamentals, themselves derived from a mostly healthy, well-employed, spending middle class consumer.
The other relies on gambling, Lady Luck, and beating the house--which seldom happens...
It's too bad so many ordinary folks will be hurt when what these guys are taking about goes.
m
Anybody buying into any P/E multiples bullshit deserves to get monkeyhammered.
Final capitulation near 1400 sounds more likely. Market tried for six months to break the highs yet somehow a couple of months is enough to work through the laundry list of reasons it failed to break higher. It's nuts.
Forget the capitulation. What are folks going to do when there's nothing to take it back up? 5 years of 1400-1650 range trades.
"full employment"....LOL on what planet ?
Final nothing my ass.....this shitshow will be defended even until the last mushroom cloud.
Capitulation would mean that a massive rally would follow. I can see how in the world of HFT this would be possible, it simply is not possible for the true economy to rebound.
In the past year I have seen a competitor rise from $55 a share to $138. The stock trades at a 125x multiple in a zero growth environment. The company is trying to crack a new source of business that maxes out at $20 billion. Even if they absorb 100% of this sector, which is impossible, they still would not generate enough revenue to justify their stock price.
The growth target is impossible to meet. Yet the stock still goes up, making it even more impossible to reach the target.
We don't need a correction in Wall Street terms. We need a correction in real world terms.
That means stocks fall to 1/8th where they are and stay there until real organic growth accelerates. We have seen stocks rise 300% with the real economy going absolutely nowhere. The S&P going back to 666 isn't even a correction, only the beginning of a reversion to reality.
The Fed would find another 'last' bullet before S&P comes anywhere near 666.
I agree with your last two posts
Final capitulation? The only thing about to capitulate is corporate buybacks.
Hahahahahahahahaha...I don't even give a flying fuck anymore!
Just another ridiculous assertion by an old worlder predicated on the existance of free markets with human beings trading. well we ain't in Kansas any more Dorthy, and humans are the minority. Capituation doesn't exist in this reality.
Sounds like a PermaBull that got out of the market and missed the bump of the last few days! Now he wants to get back in and is hoping the market comes back down!
Im hearing stories about "capitulations" in sites like this for years
LOL
"...and more importantly, a lower stock market valuation level able to withstand a less hospitable recovery as the economy nears full employment."
We are well past full employment. A new record 94.8 million are not working
Kranzler nails it...
"A Liquidity Crisis Hit The Banking System In September"
TND Guest Contributor: Dave Kranzler |
Something occurred in the banking system in September that required a massive reverse repo operation in order to force the largest ever Treasury collateral injection into the repo market.
Full story: http://thenewsdoctors.com/?p=517186
Full emploment? WTF is this idiot talking about?