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Guest Post: What's Priced Into the Market Uptrend?
Submitted by Charles Hugh Smith from Of Two Minds
What's Priced Into the Market Uptrend?
Is the operative phrase here "priced to perfection"?
With everything from stocks and bonds to 'roo bellies rising as one trade, it may be a good time to ask: what's priced into the market's uptrend? We say "bad news is priced in" when negative news is well-known and the market has absorbed that information via the repricing process.
When the market has absorbed all the "good news," then we say the market is "priced to perfection:" that is, the market has not just priced in good news, it has priced in the expectation of further good news.
Markets that are priced to perfection are fiendishly sensitive to unexpected bad news that disrupts the expectation of continuing positive news.
So what have global markets priced into this uptrend across virtually all markets? Just as a partial list, we might include:
1. The Eurozone's sovereign debt/banking crisis has either been resolved or lowered to a simmer that won't damage global financial markets.
2. The austerity resulting from the extend-and-pretend fixes to the Eurozone's crushing debt and insolvent banking system will do no more than dent the Eurozone's major economies in 2012.
3. The U.S. economy has dodged recession and is growing slowly but surely.
4. All the primary metrics of that growth such as employment, GDP and retail sales are all rising smartly and will certainly continue on that rising trendline.
5. The bursting China's real estate bubble has had essentially zero effect on its growth as measured by GDP.
6. The slowdown in China's largest export market, the Eurozone, will have a marginal effect on China's overall growth rate.
7. The developing economies will continue expanding faster than the developed economies, and this rapid growth will continue pushing commodity demand and prices higher.
8. Geopolitical conflicts that might impact the supply of oil have all been priced into the price of oil.
9. Political developments in Europe will not disrupt global financial markets.
10. Global central banks (i.e. the ECB and the Federal Reserve) have effectively restabilized the global financial system via ample liquidity and massive expansions of money supply and balance sheets.
11. Volatility has been banished by this central bank-backstopped stability.
12. The strong yen will have negligible effects on the global economy or on Japan's growth and stability.
This is just a partial list of all the "good things" that are priced into global markets. If all of these good things are well-known and already priced in, then we have to ask what other good news could possibly turn up to drive prices even higher? If "positive surprises" are priced in, then how can positive surprises drive prices higher?
Put another way: if everyone who could buy in has already bought in to ride the "good news" wave on expectations of more good news to come, then where is the new money coming from to drive prices even higher?
If markets are indeed priced to perfection, then the second line of inquiry is: what happens if expectations of enduring stability and good news are dashed by "unexpected" bad news? Could volatility suddenly return from banishment? Could prices suddenly decline as the market reprices in risks that have been dismissed as non-factors?
Bulls have been claiming that the "good news" is a powerful trend that will only continue showering us with positive reports of ever-rising GDP, sales, revenues and profits. If that story is called into question, then how does a market priced to perfection reprice this doubt and risk?
How does a market priced to perfection reprice a "black swan" financial event, that is, a low-probability event that comes to pass despite the low odds? What if the official suppression of risk over the past 4 months has greatly increased the pressure in the global financial system and thus the odds of a Black Swan appearing "unexpectedly"?
These are questions to ponder in the weeks and months ahead. Time will tell if this is indeed a market priced to perfection or a market that has barely begun its march higher.
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Substitute Earnings growth for INLFATION and you pretty much have the trade.
Exactly, markets know that earnings will deteriorate to shit levels but they don't care since there are no good alternatives and they can't just put all their money in Gold.
Investors are desperate to save their assses from the coming debacle, thats why they want to get rid of cash and dump it into anything that might hold any value in the future.
Is zero participation from the retail investor priced in?
Amazing the kind of shit that is said and published these days:
http://www.bloomberg.com/news/2012-01-27/europe-financial-crisis-is-at-beginning-of-the-end-nomura-holdings-says.html
call me an idoit, but why not China? The RMB? That's where the wealth is going ..has gone. They got a high speed rail network.. they're going to put a man on the moon..probably mars at some point.
In my judgement, the West is debt based basket case and the East ..espeically China, is the place to park funds.
And why are Chinese millionaires getting their money and their kids out of China?
And why Americans keep their money in Switzerland, Luxembourg and so on? Diversification? And why half of those rich American actors and businessman are living in Europe?
Huh?
But I read everyday how the US economic system is so beneficial to the wealthy?
Although there are a littany plus one reasons besides all the incredibly obvious ones,
one good one-
single child policy that they have since removed,
not only has led to a generation of incredibly difficult to deal with selfish Chinese,
but it is future socio economic suicide as one child will be forced to support multiple parents in retirement.
Is the new price of oil (when Iran passes a new resolution) after they block supplies to EU ahead of the July 1 deadline priced into the market yet ?
Will the Brent jump or WTI as well ?
Their parliament meets over the weekend to discuss immediate blockage !!
Who say stock market must be up a lot when there is high inflation?
Stock market can crush down back to the low level same as where a decade ago while inflation is up 2, 3, 4, 5 times.... of a decade level.
Want an example? China.
Chinese stock market is back down to the low level as 10 years ago.but inflation is leashed like a wild horse and is very very high. Price of everything is much much higher than 10 years ago. 2002.
Look like the U.S is heading towards the same way too. Corporations and Service sectors are all jacking up prices and rent tremendously so business are making kills in profit... for the CEOs perhaps. Not necessary for the late coming stock holders. If you bought the stock in cheap long time ago, you are doing well.
On the other hand, unlike China, in the U.S wages are down or no change. This is almost like semi- hyperinflation.
I love the fact no-one answered this. Easily the most over-assumed price action going forward. I can't at this point remember where I read it, but there was an aggressive call for the Dow and Gold to cross at 5000.
pretty close to parity in 1980. http://home.earthlink.net/~intelligentbear/com-dow-au.htm
p.s. i see where they drew lines through the highs. what about the lows? things that make you go hmmm?
What's not priced in is $1,000,000,000,000 in mortgage purchases. Over perhaps 1 year. And we know from looking at hyperinflationary episodes in the past that the equity markets explode higher before the endgame ensues. It is not about inflation yet though, but rather the change in the rate of growth of the money supply (It is really the second derivative that matters most here.). Hyperinflation is a long way off.
China has been curbing the growth rate (if not outright reducing its organic money supply) over the recent past and "succeeded" in reducing inflation (if you believe their numbers) from 6.5% to 4.6%. They are now re-ramping growth. As is Brazil. And Europe (post Trichet), which just added 1/2 Trillion Euros to the banking system, whether or not you believe it is in their economy yet. And Japan? Just entered deflation...what news do you expect from them? The fact is that the spigot is on full fire hose blast from every corner of the world, and there is no way that a lot (if not at least some) of that money reaches the US market as the only wearable shirt (for now) in the hamper. Add to this the FACT that QE3 of $1 T in mortgage purchases is on the way. The Fed has us conditioned now to expect that QE means higher markets--equity and commodity--so the reaction is and will become even more, EXPLOSIVE.
The Fed gave us the Jackson Hole speech already. The new inflation and (soft) unemployment targets will demand that they act. It is out of their hands...inflation, (as they measure it) is too low...and at the same time, unemployment is too high. QE3 is a foregone conclusion, and it will be HUGE. QE2 was the test run, and the Bernank was practically gloating when he asserted that the commodity price effects were"transitory" as evidenced by the price behavior in the markets. They did the 600 billion test, now they have license to print $1T every time the "inflation" rate drops below 1.5% Bank on it. And buy silver and gold and Equities...and the Russell.
GET LONG.
the growth of the money supply has seemed quite impotent in the real economy in the last few years. qe2 was largely reversed in the equity markets last year. money velocity seems to decline as supply rises.
when you think you have the key to the market, it changes the lock.
Only thing that isn't priced in that keeps this going up is the QE3 in the US and LTRO2 in the EU are possible at ANY time so front run it because anything negative may be just the thing Central banks need as an excuse to release the memo...
Global thermonuclear war is priced in. The politicians, the central bankers, the money managers all fear billions more redemptions, more mattress stuffing. So, they lie, spin and BS at every opportunity to paint a beautiful fanciful recovery picture.
Hopium is free. Reality is expensive.
Even NPR and Pacifica are guilty of soft peddling the farcical state of the economy. Of course funding cut shots across NPR's & PBS's bows might have something to do with it. If you depart from the narative, you will be ruined.
Obama's speech at the University of Michigan today was probably priced in with him saying jobs 25 times (ZH has rubbed off on me)
one of the biggest regret i have this semester is not shouting Ron Paul sometime during his 30min speech for which- he was 15min late- had to wait in a line overnight in (-6) degress (celcius) - had to stand in queue for 2hrs to enter coz I really wanted to see how many people would realize the pointless nature of the proposed welfare schemes
oh well hes a great speaker
but, as they say in the circus, a real bad actor.
when you call him a monster you insult john wayne gacy.
with sp above 1300 there will be NO (QE) MONEY! Any attempt to frontrun this "event" will simply prevent it from happening! But what do I know..i'm just a little guy! The big guys "know" and yet they still are so dumb at the same time!
Oh there will be QE money. Just no formal announcement. They will have to QE through other channels. They have no choice. Everybody in the world is broke, other than 1% of the people. Who is going to buy 1.2 trillion dollars of new deficit spending?
Aliens are priced in.
Obamacare not being worth getting angry about - priced in.
Channel stuffing - priced in.
Everything we know we don't know - priced in
EVERYTHING is priced in...
The problem with "pricing" isn't PRICE... It's redemption...
Bullish for Black Swans.
obsence of money is priced in... there is nothing to worry about anymore.
You are on to something there. Ten million dollar salaries and billions in profits tend to make money rather meaningless.
I agree, any QE will be stealth, not headlines. And in spite of the above reasons why we are fully priced I still do NOT short this market and have not for eons. For me, just not worth it. Do not like fighting inmates of the asylum.
Like what I got.
you're right, no reason to short or go long! when the internet is unplugged, what are ya gonna do?
Hmmmmmm .......
"... fighting inmates of the asylum" - NOT priced in
You may be on to something here
It's Weimar Republic/Zimbabwe economics priced in, this isn't that complicated.....
These are all reasonable questions...but there is a fly in the ointment: The stock market has fuck all to do with the economy. If anything, it is a reflection of the economic health of the top 1%-5% of the food chain. For people living in the real world, the stock market and it's machinations don't mean diddly shit. It serves only as a reminder that the plight of the average person is merely something to be mocked by an endless bombardment of meaningless statistics and platitudes.
Excellent point Mohammed as the union pension funds are amongst the largest owners of US stocks.
Is the fact that they are paying lint on savings priced in?
A Ron Paul win is not priced in.
I still think there is a small chance in this managed global world that the elitists may decide that they need people to really fear freedom and to dictate the election of Ron Paul so that we can taste how terrible freedom is.
... and then they come to the rescue with a global emperor and social slavery in 2016 or 2020.
The bankers hold ever so much more power than any president, including the PoTUS.
anything can happen at a brokered convention
thats a conspiracy overdose man
even ZHers might not believe this shit is plausible but if it does happen this comment would be a self-fulfulling phrofecy.
The bankers can do nothing to the US President, if the President refuses to be blackmailed by them. If the ToTUS had any balls, he would have sent in the FBI from the first day he took office, it's not as if there is not enough evidence of fraud against them. Bankers have zero power, the problem is that the political scene is populated by spineless sold out shills.
we are all mortal. while a ron paul win is probably not priced in, his assassination (or "cold") and that of his vice-president, with the subsequent selection of president boehner, is certainly priced in.
still i go to early vote for dr. paul tomorrow in the florida primary. and i'm taking another such voter along.
The only thing priced into the markets is the economy hitting a wall and the ensuing massive money printing from all sides. And if you doubt that look at the BDI.
The first 3 are rather large assumptions, yes?
A bond market sell off isn't priced in.
So in other words if you walk onto a used car parking lot and buy a nice shiny used car and drive it off the lot and the engine blows up you are similarly buying a lemon buy putting money into the universes biggest black hole......WallStreet.
Sorry spellcheck is off again and i got fat fingers. lol.
More "Greece is fine" rumors hitting the wires now...hence the Dollar nose dive:
"Greek government official says aiming for debt swap deal by Sunday evening"
When have we heard that before?
This is the kind of bullshit rumor that has been moving the markets for weeks now...no facts, no nothig but rumors.
CVX took it in the chute, down 3%. Gosh, I wonder if USA gas demand at a level of 10 years ago and glutted inventory and a mild East Coast winter had anything to do with it. Gas at the pump still defies the forces of gravity, as expected.
http://www.reuters.com/article/2012/01/27/us-chevron-idUSTRE80Q11C20120127
Put a price on revolution....
Price is no object. Just put it on my tab.
Meredith Whitney found curled up in the fetal position sucking her thumb.
Blackrock Muni-Bond ETF's printing lifetime highs today: BNJ, BQH, BKN, etc.
New Jersey, New York, and California going totally parabolic.
Armageddon is priced in now nothing can stop this idiot tsunami
this was such a mundane analysis, after the graph bit (which was cool)
this guy is just repeating that there will be more and more good news until there is bad news- this is the stock market jackass
he also makes the mistake of assuming a long run, in the long run of course we wil have consistent good runs then something eventually happens and the trend changes its a self-repeating cycle
Psychopathic Economy 101 writes today regarding the Global Risks in Terms of Likelihood chart issued at Davos:
Look at this chart from Zero Hedge and tell me what is wrong with these clowns at Davos :
http://www.psychopathiceconomics.com/DavosEconomicForum/
Marge Brennan's ample cleavege are not priced in. wow.
If a ship is sinking and everybody runs to the port side, the starboard side goes up. Same with this market. World coming to an end? Bet the ranch.......long. Feels wrong, but must be right.
with very little market participation the crime conglomerates can move the market in any direction they want. I am short the russell and yet it defies gravity in the wake of dismal gdp and weaker consumer sentiment. The only thing i can attribute it to is a weaker dollar. But is that al their is left? Just look at the dollar and go long or short? Very nerve racking indeed
Have faith in your Russell short ....the Squid guaranteed earlier in the week to go LONG on the Russell, so have no fear, GS is on it...
Closing of Straights of Vermuth, Bank Holiday, Social Unrest, USTs Failed Bond Offering, Re-election of Hopey Clown, Bombing of Iran, Ascent of AU to $4500, Nationalisation of BAC, explosion of Diablo Canyon Nuclear Reactor, $180 bbl Oil, China Bubbles Exploding, EURO unraveling, Loss of Sovereign Currency, Euro-Banks Collapse, Cancellation of Amercan Idol, Souplines, FEMA Camps, Martial Law, ALL PRICED IN TYLER, Go long, buy and hold! Margin those Bonds-especially safe now. Jap Postal Bonds very attractive now. Long puts on EURO and Dollar. Go for it. . Make money while you sleep! Green shoots everywhere. Book spring vacation to Greece, Egypt while rates are down. Ha-happy days are here again.
Hopem, 100% also priced in. Get a gun.
None of the above.
Market participants have priced in the expectation and/or reality of continued devaluation of the monetary unit.
A little 'roo meat never hurt no one, Mate;)
listening to the ever pompous Dennis Gartman on CNBC at the moment spinning how fortunate he was to sell gold in 2011, but how he's now pulling the trigger and getting back 'long of gold'
he's always been long of pomposity
Just tell me what Nancy Pelosi is buying. Everything else is noise.
When TSHTF there's usually a gold price "correction"...
:) / :(
Can't figure out if I like the prospect of another correction..
Am so bullish on more "Expected" Good news!
Just kidding...
when does it ever go the other way?
http://covert.mypressonline.com