Posts Tagged ‘boom and bust cycles’

Save Our Short-Sellers

Tim presents a good argument in favor of not restricting short-selling in an effort to prop up overvalued markets.  - Ilene 

Save Our Short-Sellers

elaine supkisCourtesy of Tim at The Psy-Fi Blog 

Short Selling Scapegoats

Whenever there’s some kind of major market crash and people start looking for handy scapegoats the usual line-up of suspects will include a preponderance of short-sellers, accused of unpatriotically selling stocks they don’t own in order to make windfall profits. It’s as though making a profit when everyone else is losing money suddenly becomes wrong. When times are tough it seems everyone’s a bleeding heart socialist.

Instead of banning short-selling regulators ought to be focusing on what measures they could take to make it more popular. If you want markets to be roughly efficient and not to fly off on some behaviourally induced flight of fancy then you need intelligent investors to be able to short-sell over-valued stocks. Waiting until everything goes wrong and then artificially distorting the markets in order to apply a tiny band-aid to a market holed below the waterline by a bloody great iceberg of behavioural bias is to invert cause and effect. Short-selling doesn’t cause market crashes, people do.

Shorting’s Scary

Shorting a stock is roughly the opposite to buying it. Technically you’re selling a security you don’t own and then waiting for it to fall so you can buy it back at a lower price, pocketing the difference. Although there are different ways of shorting there are ultimately only a couple of basic variations – covered shorting where you either own or, more likely, borrow the stock for a fee or naked shorting where you actually don’t have any of the stock you’re selling.

Shorting shares is not, generally, a widespread activity amongst investors. There are multiple reasons for this. Many institutional investors aren’t allowed to short stocks due to their remit, most individual investors don’t short due to behavioural issues and fears of unlimited losses. These individual concerns are linked – as we saw in discussing behavioural portfolios investors don’t like their losses from their upside potential layer eating into their downside protection layer, but as losses from shorting are potentially unlimited, this is a real risk for short-side investors.

Unlimited Liability

When we buy stocks the maximum we risk is the capital we put down up front, but when…
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IS THE MARKET FAIRLY VALUED?

Pragcap shares a tool he uses to answer the question, 

IS THE MARKET FAIRLY VALUED?

Courtesy of The Pragmatic Capitalist

Maria Shriver's 2008 Women's Conference

I’ve long argued that most valuation metrics are fraught with pitfalls that the average investor too often falls for.  What is often described as “value” is too often a bloated price divided by some analyst’s guesstimate.  The myth of “value” and the dream of becoming the next Warren Buffett (see the many myths of Warren Buffett here) has resulted in untold stock market losses over the decades and/or misconceptions of adding “value” to a portfolio that most likely doesn’t outperform a correlating index fund after taxes and fees. Nonetheless, the PE ratio and other faulty valuation metrics remain one of the primary sources of investment strategists, stock pickers and market researchers.

While I am no fan of valuation metrics, I do happen to be a student and believer of mean reversion.  In an effort to attach a “value” to this market I’ve used an old Jeremy Grantham tool to see where we are today.  Grantham is a big believer in the cycle of corporate profits and specifically profit margins.  As regular readers know, one of the primary reasons why we have been bullish ahead of the past 5 earnings seasons was due to the expansion in corporate margins and very low analyst expectations.  Analysts became extremely negative in Q4 2008 and severely underestimated the pace at which companies were able to cut costs and support the bottom line.  This stabilization in corporate margins set the table for the massive rally in stocks as profits continued to expand at a far faster pace than anyone expected.

Corporate margins are extremely cyclical.  As companies expand their businesses and revenues grow they are able to better manage their costs, hire personnel, etc.  But if the economy weakens for any number of reasons revenues will contract, costs will remain high and margins will ultimately contract.  Businesses are then forced to cut costs in order to salvage profits.  In other words, margins are constantly expanding and contracting with the business cycle around the mean.

Over the last 50 years corporate profit margins (corporate profits/GDP) have averaged 9.5%.  If we multiply GDP by the average margin growth we can create a long-term trend of what corporate profits should look like.  We can then compare actual corporate profits to this result in an effort to see whether…
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Boom and burst

Boom and burst
Don’t be fooled by false signs of economic recovery. It’s just the lull before the storm

Barry:  Andy Xie is a former Morgan Stanley economist now living in China; The following is from the South China Morning Post:

By Andy Xie, in South China Morning Post

Posted by Barry Ritholtz at The Big Picture

The A-share market is collapsing again, like many times before. It takes numerous government policies and "expert" opinions to entice ignorant retail investors into the market but just a few days to send them packing. As greed has the upper hand in Chinese society, the same story repeats itself time and again.

A stock market bubble is a negative-sum game. It leads to distortion in resource allocation and, hence, net losses. The redistribution of the remainder, moreover, isn’t entirely random. The government, of course, always wins. It pockets stamp duty revenue and the proceeds of initial public offerings of state-owned enterprises in cash. And, the listed companies seldom pay dividends.

The truly random part for the redistribution among speculators is probably 50 cents on the dollar. The odds are quite similar to that from playing the lottery. Every stock market cycle makes Chinese people poorer. The system takes advantage of their opportunism and credulity to collect money for the government and to enrich the few.

I am not sure this bubble that began six months ago is truly over…

This bubble will truly burst in the fourth quarter when the economy shows signs of slowing again. Land prices will start to decline, which is of more concern than the collapse of the stock market, as local governments depend on land sales for revenue. The present economic “recovery” began in February as inventories were restocked and was pushed up by the spillover from the asset market revival. These two factors cannot be sustained beyond the third quarter. When the market sees the second dip looming, panic will be more intense and thorough.

The US will enter this second dip in the first quarter of next year. Its economic recovery in the second half of this year is being driven by inventory restocking and fiscal stimulus.

However, US households have lost their love for borrow-and-spend for good.…
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Panic!

Throw out the economic models and prepare for the next panic.  And welcome to Tim at Psy-Fi Blog 

Panic!

panic_of_1873_bank_runCourtesy of Tim at Psy-Fi Blog

Economic Stability Is Not The Norm

The exceptional market conditions of the last couple of years are a reminder that we should regard stable markets as a pleasant interlude rather than the normal state of affairs. In general, of course, people tend to expect tomorrow to be much the same as yesterday and to behave as such. It’s little wonder, then, that when everything goes wrong people start to panic, assuming the world is coming to an end.

Of course, so far, the world hasn’t come to an end – although a lot of people have lost lots of money in the meantime. What we can see from history is not that market panics are exceptional but that they’re the norm.

Kindleberger on Economic History

Every investor should read and re-read Charles Kindleberger’s seminal “Manias, Panics and Crashes’ which details the course of market disasters over a near three hundred year period. Kindleberger was an economist of a different hue to many we’ve met before: an economic historian who relied not on mathematical models – about which he was enjoyably and pointedly vague – but on historical incident and anecdote. At the very least, he argued, the various competing economic schools have to explain the happenings of the markets rather than either ignoring them, or simply claiming that they shouldn’t happen so they’re going to stick their fingers in their ears and go “tra-la-la” until they go away.

Underpinning the concept is a simple idea – people are irrational, they do the irrational things which it suits them to do and the consequences are often very nasty. What he set out to show was that the mental behaviour of market participants that we’ve recently witnessed is a perfectly normal state of affairs. Indeed, based on the historical records one ends up wondering how anything ever works at all in the markets. Everything going wrong is what happens, all the time, it seems.

The Fallacy Of Composition

However, it’s not simple irrationality that drives the market. Underlying this is a sneaky human behavioural failing known as the fallacy of composition – a trait that sees every individual acting in their own self interests yet, at the same time, acting in a


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Phil's Favorites

5 reasons the coronavirus hit Italy so hard

 

5 reasons the coronavirus hit Italy so hard

A nursing home resident in Rome is moved to a hospital. Mauro Scrobogna/LaPresse via AP

Sara Belligoni, University of Central Florida

Italy is one of the nations worst hit by the global coronavirus pandemic. As a scholar in the field of security and emergency management who has studied and worked in Italy, I have determined that there are at least five major reasons why the country is suffering so much.

1. Lots of old people

Italians have the ...



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Biotech/COVID-19

5 reasons the coronavirus hit Italy so hard

 

5 reasons the coronavirus hit Italy so hard

A nursing home resident in Rome is moved to a hospital. Mauro Scrobogna/LaPresse via AP

Sara Belligoni, University of Central Florida

Italy is one of the nations worst hit by the global coronavirus pandemic. As a scholar in the field of security and emergency management who has studied and worked in Italy, I have determined that there are at least five major reasons why the country is suffering so much.

1. Lots of old people

Italians have the ...



more from Biotech/COVID-19

Zero Hedge

Stocks Bid Into Month-End Despite Americans' Unprecedented Scramble For Cash

Courtesy of ZeroHedge View original post here.

Amid an ever-escalating guess at the size of pension fund re-allocations funds (latest we saw was $150 billion) into month-end, both bonds and stocks were bid early on today, but as the day wore on, bonds weakened as stocks gained (driven by record IG issuance-driven rate-locks)...

Source: Bloomberg

But while some are rebalancing into stocks, the scramble for cash among average Americans has almost never been more panicky...



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Kimble Charting Solutions

Tech Testing 9-Year Support, With Fear Levels At 2009 Highs!

Courtesy of Chris Kimble

Is an important Tech Index sending a bullish message to investors? It is making an attempt!

Does that mean a low in this important sector is in play? Humbly it is too soon to say at this time!

This chart looks at the Nasdaq Composite Index over the past 25-years on a monthly basis.

The index has spent the majority of the past 9-years inside of rising channel (1), as it has created a series of higher lows and higher highs. It created bearish reversal patterns in January & February as it was kissing the underside of the top of the channel and...



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Insider Scoop

With Everybody Stuck At Home, Investor Conferences Are Going Virtual

Courtesy of Benzinga

With the world at a COVID-19-induced standstill, many conference organizers have either gone online (Benzinga is one of them) or had to cancel upcoming events altogether. There is no clear timetable on how much longer we will be in this state.

Publicly traded companies are already limited in wh...



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Members' Corner

10 ways to spot online misinformation

 

10 ways to spot online misinformation

When you share information online, do it responsibly. Sitthiphong/Getty Images

Courtesy of H. Colleen Sinclair, Mississippi State University

Propagandists are already working to sow disinformation and social discord in the run-up to the November elections.

Many of their efforts have focused on social media, where people’s limited attention spans push them to ...



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Digital Currencies

While coronavirus rages, bitcoin has made a leap towards the mainstream

 

While coronavirus rages, bitcoin has made a leap towards the mainstream

Get used to it. Anastasiia Bakai

Courtesy of Iwa Salami, University of East London

Anyone holding bitcoin would have watched the market with alarm in recent weeks. The virtual currency, whose price other cryptocurrencies like ethereum and litecoin largely follow, plummeted from more than US$10,000 (£8,206) in mid-February to briefly below US$4,000 on March 13. Despite recovering to the mid-US$6,000s at the time of writin...



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The Technical Traders

These Index Charts Will Calm You Down

Courtesy of Technical Traders

I put together this video that will calm you down, because knowing where are within the stock market cycles, and the economy makes all the difference.

This is the worst time to be starting a business that’s for sure. I have talked about this is past videos and events I attended that bear markets are fantastic opportunities if you can retain your capital until late in the bear market cycle. If you can do this, you will find countless opportunities to invest money. From buying businesses, franchises, real estate, equipment, and stocks at a considerable discount that would make today’s prices look ridiculous (which they are).

Take a quick watch of this video because it shows you ...



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Chart School

Cycle Trading - Funny when it comes due

Courtesy of Read the Ticker

Non believers of cycles become fast believers when the heat of the moment is upon them.

Just has we have birthdays, so does the market, regular cycles of time and price. The market news of the cycle turn may change each time, but the time is regular. Markets are not a random walk.


Success comes from strategy and the execution of a plan.















Changes in the world is the source of all market moves, to catch an...

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ValueWalk

Entrepreneurial activity and business ownership on the rise

By Jacob Wolinsky. Originally published at ValueWalk.

Indicating strong health of entrepreneurship, both entrepreneurial activity and established business ownership in the United States have trended upwards over the past 19 years, according to the 2019/2020 Global Entrepreneurship Monitor Global Report, released March 3rd in Miami at the GEM Annual Meeting.

Q4 2019 hedge fund letters, conferences and more

The Benefit Of Entrepreneurial Activity ...

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Promotions

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Feb. 26, 1pm EST

Click HERE to join the PSW weekly webinar at 1 pm EST.

Phil will discuss positions, COVID-19, market volatility -- the selloff -- and more! 

This week, we also have a special presentation from Mike Anton of TradeExchange.com. It's a new service that we're excited to be a part of! 

Mike will show off the TradeExchange's new platform which you can try for free.  

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Lee's Free Thinking

Why Blaming the Repo Market is Like Blaming the Australian Bush Fires

 

Why Blaming the Repo Market is Like Blaming the Australian Bush Fires

Courtesy of  

The repo market problem isn’t the problem. It’s a sideshow, a diversion, and a joke. It’s a symptom of the problem.

Today, I got a note from Liquidity Trader subscriber David, a professional investor, and it got me to thinking. Here’s what David wrote:

Lee,

The ‘experts’ I hear from keep saying that once 300B more in reserves have ...



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Mapping The Market

How IPOs Are Priced

Via Jean Luc 

Funny but probably true:

...

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About Phil:

Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...

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About Ilene:

Ilene is editor and affiliate program coordinator for PSW. Contact Ilene to learn about our affiliate and content sharing programs.