by ilene - September 8th, 2010 11:31 am
Courtesy of Doug Short
The email included the annotated chart below with the following comment:
"While Doug Short, who does excellent work, may be reluctant to draw any conclusions from the down sloping all-data linear best-fit line, with the addition of the currently much more negatively sloped midline (line arrows) of the high-low volatility envelope, we’re prepared to claim that the sharply deteriorating growth rate combination pattern clearly shows the U.S. economy is still in the grip of an an ultimately deflationary economic Supercycle Bear Market Period Winter, which we quantify both fundamentally and technically and forecasted more than 12 years ago. Track record and explanatory documentation are available on request from Bob Bronson."
Bob, thanks for the kind words. Yes, I’m somewhat reluctant to make a double-dip recession forecast. However, I do see it as a distinct possibility. I’ll be tracking this index over the next several months, and I’ll occasionally revisit your visual forecast to see how the numbers compare.
by ilene - August 18th, 2010 4:49 pm
Courtesy of Mish
Josh Lipton writing for Minyanville is asking the question Are Stocks a Screaming Buy Relative to Bonds?
Dr. Ed Yardeni of Yardeni Research takes one side of the debate and says "stocks are cheap" according to a model, now dubbed the “Fed’s Stock Valuation Model”.
I am quoted in the article, taking a different view of course, but I want to add to the thoughts I expressed in the article.
First a few snips from Lipton’s article …
Certainly, by employing some basic measures to compare the relative value of stocks and bonds, equities appear attractive. Dr. Ed Yardeni of Yardeni Research made the case this morning that stocks seem cheap and bonds seem expensive according to a simple model that compares the market’s earnings yield to the US Treasury bond yield.
Yardeni first started studying this model after seeing it mentioned in the Federal Reserve Board’s Monetary Policy Report to the Congress dated July 1997. The strategist dubbed it the “Fed’s Stock Valuation Model” (FSVM), and that’s what it’s been called ever since.
During the week of August 13, Yardeni says, the forward P/E of the S&P 500 was 11.8. The forward earnings yield, which is just the reciprocal of the P/E, was 8.5%. The 10-year Treasury bond’s yield is 2.60% this morning. So its P/E, which is the reciprocal of the yield, is 38.5.
According to the FSVM, that means stocks are 64.8% undervalued relative to bonds.
James Swanson, chief investment strategist at MFS Investment Management, agrees that stocks now look cheap relative to bonds and that, as an asset class, equities boast more opportunity for investors looking ahead.
In short, the stock market is now priced for an economic future that Swanson thinks remains unlikely. “This only makes sense if the world is going into a deflationary scenario,” the strategist says. “Otherwise, this is a mispricing.”
Yes, stocks might look cheap relative to bonds, but that’s because the economic outlook remains bleak. Mike Shedlock, a well-known registered investment adviser for Sitka Pacific Capital Management, argues that the economy is already mired in deflation, a dangerous downward spiral in prices that will prove lethal for corporate profits.
"Why are Treasury yields low?" Shedlock asks. "It’s because the economy is in recession."
Furthermore, Shedlock argues that investors are ultimately best advised
by ilene - July 13th, 2010 12:09 pm
When discussing Robert Prechter, reactions can be strong, ranging from the extreme of hero worship to the other extreme of complete skepticism. So while Robert Prechter has a cult-like following of Elliott-Wavers, others (such as Damien of Wall St. Cheat Sheet) seriously ask whether he is certifiably insane. My own thoughts are mixed, with conclusions pending. – Ilene
By Elliott Wave International
Robert Prechter thinks about markets and wave patterns, and goes back to the 1700s, the 1800s, and — most tellingly for our time now — the early 1900s when the Great Depression weighed down the United States in the late 1920s and early 1930s. With this large wash of history in mind, he is able to explain why he thinks we have a long way to go to get to the bottom of this bear market.
Here is an excerpt from the EWI Independent Investor eBook, in which Robert answers the question: How close to the bottom are we?
* * * * *
Originally written by Robert Prechter for The Elliott Wave Theorist, January 2009
Some people contact us and say, “People are more bearish than I have ever seen them. This has to be a bottom.” The first half of this statement may well be true for many market observers. If one has been in the market for less than 14 years, one has never seen people this bearish. But market sentiment over those years was a historical anomaly. The annual dividend payout from stocks reached its lowest level ever: less than half the previous record. The P/E ratio reached its highest level ever: double the previous record. The price-to-book value ratio went into the stratosphere, as did the ratio between corporate bond yields and the same corporations’ stock dividend yields.
During nine and a half of those years, from October 1998 to March 2008, optimism dominated so consistently that bulls outnumbered bears among advisors (per the Investors Intelligence polls) for 481 out of 490 weeks. Investors got so used to this period of euphoria and financial excess that they have taken it as the norm.
With that period as a benchmark, the moderate slippage in optimism since 2007 does appear as a severe change. But observe a subtle irony: When commentators agree that investors are too bearish, they say so to…
by ilene - April 25th, 2010 2:21 am
As the pendulum swings between greed and fear, investors typically become over-enthusiastic during bull markets and over-despondent as the bear’s growl grows louder.
It stands to reason that in order to be a successful investor, it is important to distance yourself from the herd mentality and to take objective decisions based on fundamental reasons.
The typical behaviour of investors is linked to the so-called investor psychology cycle, as illustrated below.
Before seeking to apply the cycle to the present stock market situation, let’s consider a short definition of each of the stages.
Contempt: According to the cycle, a bull market typically starts when a market is at a low and investors scorn stocks.
Doubt and suspicion: They try to decide whether what they have left should be invested in a safe haven such as a money market fund. They have burnt their fingers with stocks and vow never to invest again.
Caution: The market then gradually starts showing signs of recovery. Most investors remain cautious, but prudent investors are already drooling at the possibility of profit.
Confidence: As stock prices rise, investors’ feeling of mistrust changes to confidence and ultimately to enthusiasm. Most investors start buying their stocks at this stage.
Enthusiasm: During the enthusiasm stage, prudent investors are already starting to take profits and get out of the stock market, because they realize that the bull market is coming to an end.
Greed and conviction: Investors’ enthusiasm is followed by greed, which is often accompanied by numerous IPOs on the stock market.
Indifference: Investors look beyond unsustainably high price-earnings ratios.
Dismissal: As the market declines, investors show a lack or interest that quickly turns to dismissal.
Denial: Then they reach the denial stage where they regularly affirm their belief that the market definitely cannot fall any further.
Fear, panic and contempt: Concern starts to take a hold and fear, panic and despair soon follow. Investors again start scorning the market and once again they vow never to invest in stocks again.
by Chart School - April 1st, 2010 2:23 pm
Links for previous chapters:
Courtesy of Pharmboy of Phil’s Stock World
In Figure 1 below, typical up trends and down trends are shown. These zigzag patterns are seen all the time, but why do they form? Let’s say someone bought a stock at a certain point. If that stock went up, but pulled back to the original purchase price, they will often think that it’s an opportunity to buy more at their original price, thus adding to their position. This is also the same for shorts when they are able to short a stock at the same price they shorted previously. Then why do peaks form? People sell (or cover) to take profits. Obviously, any increase in selling will pull the stock back. Those who bought at a lower level may start buying again. This repeats and repeats until 1) there is no more stock left for people to buy, or 2) there is too much supply and not enough buyers. On a larger scale, this is how bull and bear markets begin and end.
Figure 1 Typical up and down trends.
by ilene - January 5th, 2010 4:01 am
Courtesy of Adam Sharp’s Bearish News
The latest sentiment reading by Investors Intelligence shows a disturbing trend. Only 15.6% of financial newsletters are currently bearish on equities.
Last time the bearish indicator was this low was April 1987. A few months later (Black Monday) the DJIA dropped 21% in a single day:
In other words – when everything seems peachy — watch out. Turns out that peaks and troughs in investor sentiment are pretty good contra-indicators. Bullish sentiment tends to peak as bubbles are near their top, and vice versa.
From the revamped and newly Bloombergesque Business Week:
Pessimism about U.S. stocks among newsletter writers fell to the lowest level since April 1987, six months before the equity market crash known as Black Monday, following the biggest rally in the Standard & Poor’s 500 Index in seven decades.
The proportion of bearish publications among about 140 tracked by Investors Intelligence fell to 15.6 percent yesterday from 16.7 percent a week earlier. Sentiment has improved since October 2008, when the financial crisis drove the figure to a 14-year high of 54.4 percent. After plunging 38 percent in 2008, the S&P 500 has risen 25 percent this year.
This is not to say markets wont’ run again in 2010. Irrational bull markets can last much longer than you’d think. The momentum they build up is impossible to fight. Gotta wait for that to break before getting seriously short. Example – After the bearish-sentiment index bottomed in 1987, the market rallied another 14% before crashing.
Smart investors like Bill Fleckenstein have been highlighting the credit bubble since the mid-1990’s. And today markets are more irrational than ever. Government intervention is preventing market cycles from proceeding like never before.
Industries like housing, banking, and commercial real estate have become completely dependent on government support. Their future (and that of our currency) depend on whether our leaders will extend or end this support. It’s a ludicrous, manipulated market.
So far America’s leaders have repeatedly demonstrated that they have zero tolerance for economic pain. Their support for the financial markets seems unlimited, no matter the long-term cost. I don’t see that changing without something drastic hapenning – another huge round of bailouts, a shift in the political landscape, or something…