With the "Great Greek Tragedy" now behind the markets, for the time being, all eyes have turned towards the Nasdaq's triumphant march back to 5000. (The graphics department at CNBC have been working overtime on banners and bugs for when it happens....watch for them.)
However, as I penned earlier this week in "The Run For Nasdaq All-Time Highs":
"The chart below shows the Nasdaq Composite index in both nominal and inflation-adjusted terms using the CPI index as the proxy for the inflation adjustment."
"As shown, the nominal peak of the Nasdaq Composite occurred in early 2000 at 5132.52. As of yesterday's close of 4960.97, the Nasdaq sits within striking distance of that nominal high.
However, in order for the Nasdaq to enter into the 'real all-time high club' it would currently require an additional gain of 2149.52 points or an additional 43.3% gain from current levels. While that seems like a rather lofty goal, it would only require the top 20 stocks in the composite index to just a little more than double in value from current levels."
The near vertical push in the Nasdaq is eerily reminiscent of the run in the late 90's. While makeup and valuations may be different today, the "risk" remains that prices cannot remain elevated indefinitely. More importantly, the greater the deviation in price from its long-term moving averages the great the eventual reversion will be. That is just an investment reality. But as I concluded:
"...at the moment, the perceived 'risk' by investors is 'missing the run' rather than the potential destruction of capital if something goes wrong. This is the opposite of what 'risk' management and effective 'risk' controls are about in portfolio management. While this is always the case in late stage bull-markets as exuberance overtakes logic, it is also why investors are damaged so badly during the ensuing mean reversion process.
It is always important to remember that for every bull market there will eventually be a bear. It is the nature of the markets and the reality of full-market cycles."
For now, it is all about the hopes of a cyclical upturn in the Eurozone economy supported by the ECB's QE program starting next month. Market participants have been bidding up stocks globally in anticipation that the ECB's program will pick up where the Fed left off, and the flood of liquidity will find its way back into asset prices. For now, the bullish bias clearly has the leading edge for now.
This week's reading list is a compilation of various articles that I did not get a chance to read this week that may provide some clues as to what happens next. As always, I try and provide a balanced reading list of perspectives. Whether you agree with a view or not is irrelevant. What is important is to consider both sides of every argument equally to eliminate confirmation bias.
So, grab a cup of your favorite beverage and enjoy that we finally seem to be getting a break from this winter's cold.
1) Do Eerie Parallels Presage A New Crisis by Stayajit Das via Financial Times
"Mark Twain reputedly stated that history does not repeat but it rhymed. In an eerie parallel to 1997-98, falling commodity — especially oil — prices, a rising US dollar and potential increases in US interest rates may presage a new financial crisis.
Weak growth, high debt levels, disinflation or deflation, policy driven destructive competitive devaluations, inflated financial risk taking and mispricing compounds the problems. The impending crisis may develop as follows."
But Also Read: James Bullard Says Its Time To Start Raising Rates via CNBC
2) Get Your Rally Caps On! by Michael Kahn via Barron's
"One and all, big and small: The stock market is at new highs and in the absence of a crushing increase in interest rates by the Federal Reserve, there is little in the way to stop it.
To be sure, there are a few problems such as the questionable performance of some typical bull market leading sectors like financials in particular. But with the proxy for the 'average stock' -- the New York Stock Exchange Composite Index – hitting new highs and market breadth still quite positive, it's hard to fight the tape."
"Tuesday, the NYSE Composite finally edged above the resistance zone in place since July of last year. While relatively low volume continues to confound chart watchers, momentum is still strong and all measures of the trend, from simple moving averages to complex directional movement indexes, are positive."
But Also Read: The Countdown To The 2016 Market Crash Begins by Paul Farrell via MarketWatch
3) Can Stocks Rise In Spite Of Weak Earnings by S. Krisiloff via Tumbler
"According to Factset, S&P earnings growth for the calendar year 2015 is now expected to be just 2.9% (vs. 8.2% expected growth on Jan 1). Still, most people seem to believe that the S&P 500 will have a decent year. How frequently does it happen that earnings growth is weak but performance is strong?
Since 1900 earnings have grown by less than 5% in 53 years. The S&P 500 has still managed to rise in 33 of those years. Below is a list of all those 33 years.
It's not a bad record for the S&P 500 to have risen 33 out of these 53 years (especially considering that earnings growth was negative in 45/53 years), and on average it has risen by a lot. But when you factor in the starting conditions in most of the years that the S&P rose, they were much different than they are today."
But Also Read: Equity Valuations, Recessions and Stock Market Declines by Doug Short via Advisor Perspectives
4) Crispin Odey Warns This Is The Best Shorting Opportunity Since 2007 via ZeroHedge
"We have seen though some strange things, with economics 101 turned on its head. We've seen that falling prices produce more supply, as the biggest producers see that they can take market share and use the opportunity by reducing average costs through excess production. We've seen that in the oil, minerals and iron ore industries. We have also seen in the last couple of years that as bond yields fall, governments are able to issue more debt.
But this time round the problem we have as well is that politics will start to rear its head and we are left to deal with politicians who are increasingly critical of the capitalist system's ability to allocate capital and provide for society.
For me the shorting opportunity looks as great as it was in 07/09, if only because people are still looking at what is happening and believe that each event is an individual, isolated event. Whether it's the oil price fall or the Swiss franc move, they're seen as exceptions....
This down cycle is likely to be remembered in a hundred years, when we hope it won't be rated for 'How good it looks for its age!'. Sadly this down cycle will cause a great deal of damage, precisely because it will happen despite the efforts of the central banks to thwart it."
But Also Read: Stay Out Of The Extremes by Cullen Roche via Pragmatic Capitalism
5) The Death Of Active Fund Managers by Justin Fox via Bloomberg View
"Managers say they haven’t changed, the market has. The easy money climate of near-zero interest rates engineered by the Federal Reserve has artificially inflated prices of lower-quality U.S. stocks, they say, punishing those who focus on businesses with the best fundamentals.
With all the unskilled investors departing, pros will be left to square off against only other pros. The lack of retail punters and their harvestable mistakes cuts off one of the most reliable historical sources of alpha for sharp-eyed managers.
The result is an arms race, in which active managers put more and more resources into beating their peers but find that their relative position hasn’t improved at all. Some strategies will work for a while -- such as, for the past few years, activist investing, which is like active investing only much, much more active. But only for a while."
Read Also: The Active Fund Model Is Not Fit For Purpose by John Authers via Financial Times
Bonus Read: The Risks To The Bull Thesis Are Global by Jeff Snider via Alhambra Partners
Chart Of The Day: We Are At The Stage Where I Doubt My On Sanity by Albert Edwards via Business Insider
"Greed, for lack of a better word, is good. Greed is right. Greed works. Greed clarifies and cuts through to the essence of the evolutionary spirit." - Gordon Gecko, WallStreet
Have A Great Weekend