It's Just Getting Stupid!

Tyler Durden's picture

As Cantor's Peter Cecchini notes today

"when things are this senseless, a reversion to sensibility will occur again at some point."

His view is to be long vol and as the disconnect between the economic cycle and stocks continues to grow, we present three mind-numbing charts of the exuberant hopefulness that is now priced in (oh yeah, aside from AAPL actually selling some iPhones in pre-order). Whether it is earnings hockey-sticks, global growth ramps, or fiscal cliff resolutions, it seems the market can only see the silver-lining. We temper that extreme bullish view with the fact that all the monetary policy good news has to be out now - for Ben hath made it so with QEternity.

These three factors - weak economic growth, powerful monetary policy and elevated public policy uncertainty - remain the critical drivers of performance and with weakening data, the market is all the more dependent on central bank life support - and following the rally through the Fed signalling period to 1460, much of the monetary policy related rally seems to be priced in, with the market already discounting considerable data improvement. With already high oil, gasoline and food prices, the Fed’s balance sheet expansion risks driving down the dollar, boosting commodities and dampening consumption and thus growth.  

As this chart comparing P/E multiples to the ISM New Orders index, we need to see some serious unicorn-conjuring for these valuations to be sustained...

 

One tool often utilized to assess the attractiveness of equities relative to other assets is the equity risk premium (ERP), also known as the Fed model or the difference between the forward earnings yield and the yield on the 10 year U.S. Treasury. We have argued, based in part on the prior period of extreme financial repression in the U.S. following WWII, that a sustained contraction in the ERP and expansion of the PE multiple was unlikely until the Fed began the policy normalization process. Integrating inflation and a ratio of stock to bond market volatility paints a far less compelling picture for equity market valuation. We are at least 3 years from any normalization of Fed policy (according to them) and thus...

the following chart (or real rates vs P/E multiples) suggests current valuations are unsustainable at best, or down-right crash-worthy as you simply can't fight the cash-flow forever...

 

 

The reach for yield and safety has led investors to push into mega caps - defensive ingredients including lower betas, lower earnings volatility, and lower P/E multiples as well as higher dividend yields. This has pushed the relative median P/E of the mega caps notably above smaller (and higher beta) stocks - as the somewhat odd beta-defying rally of the last few weeks took hold...

Our point here is that 1) the spread between LTM and NTM PE is gaping (something that we saw in the run-up to the peak in 2008), and 2) that the mega-caps which dominate the indices (which everyone watches including Ben) are 'over-valued' rightly or wrongly relative to less-defensive stocks... leaving plenty of room for rotational risk-off as well as reality disconnects

 

 

On balance, Barclays are less bullish than they were at this time in either of the last 2 years. Investors seem to mis-remember history; monetary policy was not the only driver of the rallies following QE2 and Operation Twist. In the signalling period prior to QE2’s launch, and in the immediate aftermath of its commencement, both the economic and public policy outlooks were improving.

[They] remain relatively cautious given a weaker economic outlook and no clear trend in the polls to provide confidence that the U.S. can avoid the potential massive tax hike scheduled for January 1, 2013

Source: Barclays

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Precious's picture

"Stupid is as stupid does."  - Forrest Gump

JPM Hater001's picture

I got about 80% of that but the pictures helped.

dexter bland's picture

"Investors seem to mis-remember history; monetary policy was not the only driver of the rallies following QE2 and Operation Twist"

No in fact monetary policy may have had little effect. How can we disentangle it from the trillions of fiscal stimulus, direct cash bailouts, recapitalizations etc that happened globally. Even then QE events don't line up so well on charts of the SPX to make it look like the direct cause of a rally.

Another thing investors are mis-remembering is that back in 2009 China launched a $4 trillion construnction led stimulus and that caused commodity prices to rocket on the back of a hige demand boost. This time the Chinese have repeatedly said they are NOT going to launch such a stimulus, and commodity demand is falling away, but commodities went powering ahead anyway, somehow confusing Fed MBS buying with something that may actually increase demand.

These are Pavlovian responses by investors. But they have been fed by too many people ringing different bells, they have become confused about what each one means.

Shevva's picture

My bank manager called me stupid when I told him my new finance model.

I bought a monkey from a local zoo and a dart board, I print out what the experts say and put them on the dart board, hand the monkey a load of darts and run.

B0b my M0nkey has informed me that Apple will not be able to fill all it's orders, although this will only go on for a couple of days, to show that every man and his monkey wants an iPhony.

fonzannoon's picture

This belongs on seeking alpha where someone argues whether the market is "slightly overvalued" and then get stoned by Jeremy Siegel wannabees.

 

vast-dom's picture

We don't need no stinkin PE when we got QE and ZIRP!

trebuchet's picture

market is overvalued, its priced in QEnfinity for the moment.

Long run trend tends to front run economic fundamentals according to this:

 

http://seekingalpha.com/article/864161-deconstructing-market-expectations

Ineverslice's picture

From Here to QEternity.

(cue up that obvious pic on the beach with uknow who's face adobe'd in)

lolmao500's picture

Nothing is stupid if it's bullish! /right?

In other news...

U.S. believes Japan-U.S. security treaty covers disputed isles - Japan foreign minister

http://uk.reuters.com/article/2012/09/17/uk-china-japan-treaty-idUKBRE88...

Aka, YOU GONNA DIE FOR THOSE SMALL ROCKS IN THE MIDDLE OF THE OCEAN BOY!

And what is China doing RIGHT NOW??? Ah yes, sending 1000 ships to the islands.

http://i.imgur.com/TytQB.jpg

So Japan will have to make a choice in the coming hours/days... sink those ships and start a war with China (which will involve the US by treaty) or look like pussies and let China take over... which will lead to warmongers taking power in Japan after the next election within days/weeks of that happening. Either way, war is probably gonna happen if China does this.

Bobbyrib's picture

China-Japan=Not.My.Problem.

Dr. Engali's picture

Why didn't I see any of that on NBC , CBS , CNN, or Faux news? Surely they would be all over that.

lolmao500's picture

You're funny. They are probably not reporting on it because they want the first report to be : OMG!! CHINA HAS ATTACKED OUR PRECIOUS ALLY JAPAN WITHOUT PROVOCATION!! WE MUST GO TO WAR TO STOP THOSE BLOOD THIRSTY COMMUNISTS!!! And the majority of the sheeple will buy it.

Bollixed's picture

They're not reporting it because that is an uber-photoshopped image.

malikai's picture

Not sure if it's shopped. But even if it is, has that ever stopped them in the past?

I think not.

James-Morrison's picture

Photoshopping images is the equivalent to the Fed printing money.
Making up something that doesn't exist and pretending it is real.

Counting Sheeple's picture

And our debt to China will be written off as reparations. Win win

Bogdog's picture

Oh SNAP!

Now, that's an effing good plan.

frenzic's picture

The US won't play ball for obvious reasons. Not yet.

donsluck's picture

It's simple. Japan sells to China. End of story. Japan has no military and is weakened politically by Fukushima et al. No US support for little rocks.

lolmao500's picture

The current Japanese PM does that and the warmonger candidate will win the next election (which can happen at anytime due to parliamentary system) and you'll have war within weeks anyways.

spinone's picture

1000 fishing boats.  Not too scary.

lolmao500's picture

The Chinese netizens are calling this THE ANTS THAT TAKE DOWN THE ELEPHANT...

There's also 6 Chinese warships standing by with them.

What is Japan gonna do when they swarm the islands? Sink them or let them pass and take over? Either way, they are fucked.

Totentänzerlied's picture

Why doesn't each nation send an all-volunteer 'expeditionary force' of committed jingoist citizens to fight it out mano-a-mano on the useless rocks themselves, broadcast live on to the entire world? Ad revenue alone would be better than the return these fucking islands will ever produce for either country.

lolmao500's picture

They should do that.

Take an island and put every warmonger on there and they can fight it out.

EvlTheCat's picture

That formation is an attack sub commanders dream.  I guess we know what the protesters did after they were done rioting.

lolmao500's picture

Ya well, start sinking civilian fishing boats and see what happens (nukes coming at you).

EvlTheCat's picture

I guess that would scare me if I didn't already live under the thumb of psychopathic bureaucrats, sociopathic financiers and their roid popping attack pigs.  The finality of a nuclear bomb makes more sense to me than the complete and utter chaos of human behaviour.

lolmao500's picture

Totally agree with ya there... thing is, where I live, I probably won't be nuked and I'll have to live in a post-nuclear war world and I don't want that. But eh at least it will make nice fireworks.

EvlTheCat's picture

Just make sure you have an extra pair of glasses and lots of 60's dystopian science fiction and you will be fine.

lolmao500's picture

Well it has begun.

AFP reports Japanese coast guard in contact with Chinese patrol boat near disputed islands, warning it to leave.

singsing's picture

I wonder what happens when the 2 largest foreign holders (by far) of US Treasuries go to war with one another?  Might have to sell a few of those suckers to fund the war effort.  I'm sure some impartial third party will step in to mediate peace.

lolmao500's picture

If war OR EVEN A SKIRMISH breaks out, the world economy is probably gonna go kabooooooooom.

trebuchet's picture

This is major scare moment!!! Yikes!!    Both cultures don't want to lose face.  

This could get to deer in headlights moment very fast.

Well fear got me, I'm booking profits, nice ride up while it lasted.   If i'm wrong, plenty more opps later.  

- Spain cant agree on bailout 6%+ yield, October cash call coming

 - EU probs bubbling up with banking delays, Greece still pulling troika's chain

 - Banking supervision delays

- Chinese ships in Japanese waters   - dent to trade already there for good many months. Skirmish? not good

 - Iran in Syria, Russia still got their fingers up their jacksie

- Netenyahu imminently in Iran

- Banks arent going to rush to write new MBs and flip to Fed, will probably channel money elsewhere

- Miners slipping with over supply, Trannies not recovering

 - China monetary policy not working

 - China economic policy unfunded

- China private sector fraudelent

 -----------------------------------------------------------------------

Have i missed anything of new devs since QEternity?

 

Bogdog's picture

- poor people won't vote for Romney. Hate when that happens.

chump666's picture

They are getting itchy, f*cking Obama calling for restraint...he is going to ok Israel end year to drop bombs on Iran.

Chinese/Japan stand off: http://www.abc.net.au/news/2012-09-18/japanese-ship-warned-near-disputed...

Go Tribe's picture

Let's see, the Chinese are muslim, right? (I wish those Japs would stop making so many bad movies).

GeorgeHayduke's picture

I am reminded of that whole Falkland Island flap a few decades back. Only this time it could get really ugly.

trebuchet's picture

is that pic really about chinese ships headed for those islands? what ships/boats? 

Bernankenstein's picture

Pretty clear from the photo  that China is on their way to capture all the fresh fish in Japan’s waters and thus put an end to the stranglehold Japan has on the sushi  industry. Probably a good time to buy stock in some Fugu companies.

Dr. Engali's picture

Getting stupid? This market has been fucking retarded for four years.

adr's picture

There is no credibility anymore and nobody even cars to look for accurate accounting. Apple says they have 2 million pre-orders for the iPhone5 and everyone goes bezerk with euphoria for Apple.

Nobody will ever to call Apple out on the number. Apple could have said they got 40 million pre-orders and the media would have still ate it up, never questioning the most valuable company in the world.

Apple wouldn't even need to ship a single iPhone5, just say they sold 50 million and the media will buy the story. Even if nobody ever saw one on sale, or ever saw someone using one, they would still believe Apple sold the product they say they did. Apple could just enter the supposed profit in the books and get away with it. There would never be an audit, there would never be a question asked. The Market will just take Apple's word for it. If AAPL dropped 20% the ponzi would end.

Lulu Lemon claims they sold more product than they did last year, even with inventories held increasing, and sales slowing. Did they? Who cares, they said they did and the stock went up.

Lying, cheating, stealing, just common practice now. Only the rising market matters. As long as you are a good criminal you can stay in the game, only those that steal from the other criminals will be taken down.