With unemployment increasing every week, new graduates unable to find jobs, hiring freezes at companies that haven’t been lifted… The market went up in a way that a W not a V will happen. From MotleyFool: 1. Stocks are overpriced. This is the most direct observation of exuberance. At 19 times cyclically adjusted earnings (average inflation-adjusted earnings over the prior 10 years) against a long-term historical average of 16.3, there is simply no getting around the fact that the S&P 500 is overvalued. At a 17% premium, we aren’t in bubble territory yet, but any premium looks inconsistent with an environment of high (and growing) unemployment, spare productive capacity, low wage growth, and lower consumption in favor of saving. 2. Junk has run. Bond markets have rallied to pre-Lehman levels, with the riskiest segment – high-yield (“junk”) bonds – up 49% in the year through September. Junk-bond yields globally are near their 52-week lows (remember that bond prices and yields are inversely related). Is that any cause for concern? When he was asked in an interview last week to name the best trade in the bond markets, Mohamed El-Erian, the CEO of bond giant PIMCO, replied: “The best trade now is to reduce risk, keep your ammunition dry [and] wait for a better time. A lot of people are chasing risk assets at this point for all sorts of reasons, but I think the long-term investor can be patient because the economy is likely to face headwinds in 2010.”
I was looking at a bunch of mutual funds to switch around in my k portfolio today and I was shocked when I looked at the AUM histories of the funds. Without exception, of the 15 funds I looked at, each had a higher Q3 AUM than the 2007 Q4 AUM by a considerable margin. The market drank a case of red bull back in March and is about to suffer the effects of an energy crash; not to the levels we saw in March but at least to lower valuations. Decent corporate earnings have been the result of penny pinching, headcount reduction, and cheap financing. Where’s the growth?
Isn’t there some crap in CFA Level 3 that says people tend to be overly pessimistic in bad times and overly optimistic is good times? Maybe people were just overly pessimistic back in March.
So let me get this straight TheAliMan… are you implying that you should… Be fearful when others are greedy, and greedy when others are fearful!!!
This is a nice little summary I came across (not mine). Seems to indicate that a double-dip is unlikely: ** 10,000 with 11,000 a reasonable chance Overnight the Dow re-took 10,000, almost exactly a year after it fell below this level in early October 2008. The next target for the Dow will be the pre-Lehman level of around 11,000. This level will surely be reached again, the question is whether it be in the near future. On balance, we think it has a good chance of doing so but it is not straightforward In some respects another 10% rise to 11,000 seems a relatively small step in the context of US stockmarkets having already risen 55% from their early March lows and indeed the DJIA rose 1.5% overnight. But it will be tougher than this and a mountain climbing analogy is perhaps useful. The first few thousand points of the Dow’s were brisk and relatively easy. The reason being that back in March, markets were priced for a repeat of a 1930’s style depression. As incoming economic data proved that we were thankfully not on the path to a depression, stockmarkets looked very cheap. So without company’s revenues or profits changing, stockmarkets were able to climb quickly as the cheapness was removed. From here the air is a bit thinner and the climb tougher. According to Bloomberg, the wider S&P500 is now priced at around 21 times its trailing earnings and 18 times forecast earnings. These p/e ratios are fully valued against a long-run average for the p/e of 18 times. So for stockmarkets to rise further we will need to see either a) an expansion in the p/e multiple and/or b) a faster rise in earnings. Both are possible in the near term. An expansion in the p/e multiple, and a move to above fair value, is being encouraged by money being so cheap in the US. USD 3 month libor is at a super low 0.25%, and is already encouraging people to borrow in USD’s and invest in the likes of AUD and commodities. Plenty will now be seeing borrowing at 0.25% and investing in stocks as good bet. Second, more upgrades to earnings forecasts are probably in the offing if companies continue to report as well as Intel and JP Morgan have overnight. The encouraging piece about JP Morgan’s results was that earnings rose not just due to costs cutting, but due to expanding revenues. Along with a fair retail sales report, this is encouraging. On balance, another 1000 points to 11,000 is feasible in the near term. But each step from here will be tougher and will need more fundamental support.
Speaking other shoes that could drop [govt bonds]… There is a real interesting article in the March CFAI Conference Proceedings Quarterly (which I am just now getting around to reading). ---------------------- Gillian Tett “What’s Next for Financial Markets” Q: Do you agree that the shoes that have already dropped pale in significance with those that are hanging by a thread? A: as for the gov bond market issue, I would lay 60/40 odds that gov bond investors will not panic, that they will retain their belief in gov securities and will continue to buy them. ---------------------- Great, so only 40% chance the world will end.
a few points which are very important to clarify from the above posts i read: the market did not price a 1930s style depression. in march, it priced a much higher likelihood of a 1930s depression than it does today. it was never close to 100% priced in, not even near 80%. i’d lean closer to 50/50. 1930s-style depression is easily 90% down as liquidity in all assets evaporate, we were only at 55% down on the S&P and 30% down on houses. doomsday is ~90% down in both. see Japan. because social debt is now enormous and completely un-serviceable without spending cuts or some new tax scheme that somehow taxes more but keeps the economy the same size, the private economy will shink because of these obligations, either through higher taxes or less govt, non-crowding spending, thereby lowering the p/e ratio going forward, making it uncomparable to historic p/e ratios. this said, the fact that it looks overpriced compared to past cycles is scary as, after adjusting for a smaller expected economy/growth, the p/e ratio makes stocks look much much more overpriced. the final thing. the bond market is right 99% of the time. i say batten the hatches and only be on the long-side of the extremely oversold positions in well-capitalized small caps. disclosure: long small cap (materials), short large cap (financials).
PtrainerNY Wrote: ------------------------------------------------------- > With unemployment increasing every week, new > graduates unable to find jobs, hiring freezes at > companies that haven’t been lifted… The market > went up in a way that a W not a V will happen. > > > From MotleyFool: > 1. Stocks are overpriced. This is the most direct > observation of exuberance. At 19 times cyclically > adjusted earnings (average inflation-adjusted > earnings over the prior 10 years) against a > long-term historical average of 16.3, there is > simply no getting around the fact that the S&P 500 > is overvalued. At a 17% premium, we aren’t in > bubble territory yet, but any premium looks > inconsistent with an environment of high (and > growing) unemployment, spare productive capacity, > low wage growth, and lower consumption in favor of > saving. > > 2. Junk has run. Bond markets have rallied to > pre-Lehman levels, with the riskiest segment – > high-yield (“junk”) bonds – up 49% in the year > through September. Junk-bond yields globally are > near their 52-week lows (remember that bond prices > and yields are inversely related). > > Is that any cause for concern? When he was asked > in an interview last week to name the best trade > in the bond markets, Mohamed El-Erian, the CEO of > bond giant PIMCO, replied: “The best trade now is > to reduce risk, keep your ammunition dry wait for > a better time. A lot of people are chasing risk > assets at this point for all sorts of reasons, but > I think the long-term investor can be patient > because the economy is likely to face headwinds in > 2010.” Doesn’t your first point reference trailing earnings, which got hammered? If that is the case, then P/E multiples (which I don’t like using anyway) are artificially inflated due to a low denominator. The more interesting data point, I imagine, would be price-to-forward earnings or EV-to-forward EBITDA. Due to cost-cutting initiatives, etc., I would assume that the forecasted earnings/EBITDA levels exceed trailing, which would cause the multiples to decline to, presumably, more reasonable levels.
next bubble will be china
Matt’s analysis on “social debt is now enormous” makes a lot of sense. There’s some sort of L/T impact, and whatever it is, it is gonna suck. Still skeptical on China, what is the reasoning? Let’s sure hope not, see correlation with “enormous social debt”.