Posts Tagged ‘Editors’ Picks’

Whoops: Stocks Now 20%+ Overvalued

Whoops: Stocks Now 20%+ Overvalued

Courtesy of Henry Blodget at Clusterstock

Stocks have jumped 65% from the March lows.  They have also blasted past fair value, which is about 900 on the S&P 500 on a cyclically-adjusted price-earnings ratio (see professor Robert Shiller’s chart below).  So, unless it’s different this time, they’re now more than 20% overvalued.

(Jeremy Grantham puts fair value at 880 on the S&P 500.  That seems a bit precise.  Let’s call it 900).

shillerpe112009.jpg

Of course, today’s overvaluation doesn’t tell you much about what stocks will do next week, next year, or even the next 5-10 years.  As the chart above shows, before the 2007 market crash, stocks were overvalued for the better part of 20 years--and observing that didn’t help you make money.  On the contrary, it usually got you fired.

What today’s valuation does suggest is that stocks are priced to return a bit less than average over the next decade, perhaps 3%-4% real per year (inflation adjusted), as compared to the 6%-7% average.

Today’s valuations also suggest that stocks may have gotten way ahead of themselves, especially in light of the structural problems that will continue to bog down the economy.

As the chart above illustrates, every one of the prior mega-busts in the past century has been followed by a "trough" in which the cyclically adjusted PE ratio hit the high single-digits.  We didn’t quite make it there in March (the P/E bottomed around 12X), although we did get close.

This, combined with what is likely to be a decade of deleveraging, consumer retrenchment, and sluggish growth as we work off our debt binge, suggests that we still yet might hit that single-digit low before we take off on another secular bull market, again.  This could be achieved either through another market crash, or a prolonged period of backing and filling as earnings growth gradually reduces the long-term PE ratio (this is what happened in the 1970s).

On the other hand, it is possible that that enormous stimulus and zero interest rates over the past two years will produce that "v-shaped" recovery.   At this point, given the extent of the recent rally, it would presumably have to be one heck of a "V" to send stocks soaring from here.  But the last eight months have already made


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Silly chart of the day, data-fitting edition

40% Higher? You Gotta Be Kidding!

Okay, the chart was floating around earlier but I was sufficiently skeptical that I initially ignored it. Now it’s popping up at some of my favorite sites, so let’s examine it, starting with the Bloomberg article. – Ilene

S&P 500 May Surge 40% in Duplication of Japan: Chart of the Day, Bloomberg 

By Alexis Xydias

Aug. 28 (Bloomberg) — U.S. stocks are behaving like Japanese equities in the 1990s, meaning the Standard & Poor’s 500 Index may return 40 percent in the next year, according to Bank of America Corp.

The CHART OF THE DAY shows the Nikkei 225 Stock Average since 1980 and the S&P 500 during the past two decades, when adjusted for currencies. The Nikkei doubled between October 1998 and April 2000 in dollar terms, as the chart illustrates. The S&P 500 has risen 34 percent since March when the Dollar Index, a measure of the dollar against currencies in six major U.S. trading partners, is factored in.

A “melt-up” rally in the U.S. may be triggered by central bankers keeping interest rates near record lows, an economic recovery or an undervalued dollar, Bank of America strategists wrote in an Aug. 26 report.

“Even in economies overcoming credit booms, rallies can be powerful and last much longer than you think,”…
 

japangraph.jpg

Continue reading S&P 500 May Surge 40% in Duplication of Japan here.

 

Silly chart of the day, data-fitting edition

By Felix Salmon at Reuters Blogs

Paul Kedrosky finds this chart in a Bloomberg story: it’s the kind of thing which really reinforces one’s belief in the wonders of data-fitting.  [My emphasis, bolded]

The story isn’t actually particularly clear on exactly what the graph is showing, and specifically what “adjusted for currencies” means:

The Nikkei doubled between October 1998 and April 2000 in dollar terms, as the chart illustrates. The S&P 500 has risen 34 percent since March when the Dollar Index, a measure of the dollar against currencies in six major U.S. trading partners, is factored in.

So it seems that the BofA analysts who came up with this chart first converted the Nikkei to dollars, only to then convert the S&P 500, which was in dollars all along, out of dollars. Hm. And they chose pretty random start points: what makes 1980 in…
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You Fools Don’t Get It: This Is A V-Shaped Recovery!

You Fools Don’t Get It: This Is A V-Shaped Recovery!

jetcar.jpg v-shaped recoveryCourtesy of Henry Blodget at Clusterstock

Finally, a rip-roaring bull case supporting the idea that the market will rocket higher from here.

As we noted last week, the current consensus is that the economy will soon start growing but that the recovery in 2010 will be feeble.  (To brush up on this consensus, see the presentation below.)

This consensus is likely to be wrong--the consensus is usually wrong--but uber-bulls and uber-bears have been so shamed of late that most are afraid to come out and really bang the drum one way or the other (Gary Shilling excepted).

But now comes Tim Bond, head of asset allocation at Barclays, who puts his mouth where his money is.  Tim’s full article in the FT is here.  Here are the key points:

Economies recover much faster than most people think. "The average forecast for third-quarter US gross domestic product growth is a weak 0.8 per cent, which would be by far the slowest first quarter of any recovery on record. Since 1945, the average annualised real US growth rate in the first two quarters of recovery is 7 per cent. History provides abundant evidence that the deeper the recession, the stronger the bounce. Even the recovery from the Great Depression conformed to this rule, real US GDP grew 10.8 per cent in 1934 and 8.9 per cent in 1935."

Asia is already seeing a v-shaped recovery.   "[O]utput, employment and demand [are] all following V-shaped trajectories, and regional industrial production rapidly bouncing back above the previous peak. Yet this recovery is dismissed by western analysts, who appear unable or unwilling to believe the region is capable of endogenous growth."

10% unemployment will not derail the recovery.  "The 9.5 per cent US unemployment rate is also viewed as an obstacle…This objection ignores the many contrary examples of high unemployment rates and subsequent recoveries, not least in the US. Thus in 1982, US unemployment hit 10.8 per cent, yet GDP soared at an average annual pace of 7.7 per cent over the next six quarters."

One reason unemployment is so high is that employers over-reacted, firing too many people.  "[T]he large post-Lehman rise in US unemployment was a mistake on the part of panicky


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Nope, The P-PIP Probably Still Won’t Work

Nope, The P-PIP Probably Still Won’t Work

Courtesy of John Carney at ClusterStock

geithner wrinkles tbi

Now that we’ve got the buy-side managers for the Obama adminstrations Public Private Investment Program lined up, the question is whether there will be anyone on the sell-side.  With the buy-side guys saying that the P-PIP will allow them to pay between 5% and 10% more for toxic assets, you might think banks would be all over this thing.

But that’s not how its shaping up. The P-PIP is still stumbling. Many are now wondering whether bankers will sell into the program. Today Lucian Bebchuck has a guest column on the WSJ’s Real Time Economics blog explaining why banks aren’t eager to unload toxic assets. Mostly, its that so much of what the government has done is enabling and encouraing banks to retain the junk on their balance sheets.

  • We suspended mark-to-market. "A month after the PPIP program was announced, under pressure from banks and Congress, the U.S. Financial Accounting Standards Board watered down accounting rules and made it easier for banks not to mark down the value of toxic assets. For many toxic assets whose fundamental value fell below face value, banks may avoid recognizing the loss as long as they don’t sell the assets."
  • The Stress Test Gave A Free Pass For Losses After 2010. "In another blow to banks’ potential willingness to sell toxic assets, however, bank supervisors conducting stress tests decided to avoid assessing banks’ economic losses on toxic assets that mature after 2010. The stress tests focused on whether, by the end of 2010, the accounting losses that a bank will have to recognize will leave it with sufficient capital on its financial statements. The bank supervisors explicitly didn’t take into account the decline in the economic value of toxic loans and securities that mature after 2010 and that the banks won’t have to recognize in financial statements until then."

The combined effect is that banks are strongly discouraged from selling any toxic assets that mature after 2010 for any price lower than the current mark on the books.

Bebchuck’s analysis doesn’t go far enough. The worst off banks, especially those with low levels of common equity, won’t sell because they don’t want to give up the potential upside of the assets.

"My paper


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It’s Great News That GM Will Keep Lobbying The Government!

Courtesy of John Carney at ClusterStock

It’s Great News That GM Will Keep Lobbying The Government!

gmlogoflagsap103008.jpgA lot of attention is being paid this morning to a story by Tim Carney* revealing that General Motors will continue its multimillion-dollar lobbying operation in Washington even after the federal government takes ownership of it. Many are questioning whether it is appropriate for a government owned firm to hire high priced lobbyists to influence policy.

GM spent $13.1 million on lobbying in 2008. In the first quarter of this year, while surviving on federal bailout money, the company’s lobbying tab was $2.8 million.

Frankly, we’re relieved that GM plans to keep lobbying the government. It’s a sign that both the government and GM still view themselves as having different interests, which US taxpayers should certainly hope is the case.

All along the debate over the bailout of GM, the specter of government control has haunted the company. Would the government use the takeover of GM in order to force the company to adopt policies and products favored by special interests? These would hurt the revenues of the company and exercise a perverse effect on the broader markets. The news that GM plans to lobby may mean the company has enough sense of self-interest intact that it will attempt to resist becoming the plaything of policy-makers.

On the other hand, there has also long been the danger that GM’s managers would use the government rescue as a chance to basically capture the government, using taxpayer dollars to privately profit. The fact that the company still feels the need to lobby indicates that, at least for now, this capture is not complete.

On a broader, more general level we’re relieved to hear that freedom to petition the government will continue despite the growth of the government’s role in the economy. 

[*Yep, you guessed it! Tim Carney is my brother.]

See Also:

 


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Your Field Guide To The Mortgage Collapse

Courtesy of Henry Blodget at ClusterStock

Your Field Guide To The Mortgage Collapse

mortgage meltdown, chart 5-9The housing market is crashing, and it’s taking us, our banks, our economy, and our government down with it.  Why?  Because of the debt!  The value of our houses is plummeting, but the value of our debt is staying just the same.

You knew that already.  What you didn’t maybe know, or at least fully appreciate, is exactly what’s happening in the mortgage market that’s causing all this hideousness.

Well, thankfully, Whitney Tilson has laid it all out for us.  START THE TOUR >

Whitney’s the managing partner at T2 Partners, a hedge fund and mutual-fund company.  He’s also just published a book called More Mortgage Meltdown: 6 Ways To Profit In These Bad Times.

In the book, Whitney lays out the whole mortgage disaster in pictorial form, and he has been kind enough to allow us to reprint some of his charts here.  If you’d like to see updated, interactive versions, please visit www.moremortgagemeltdown.com.  Or just head over to Amazon and buy the book.

START YOUR FIELD GUIDE TO THE MORTGAGE COLLAPSE >

 

 


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Phil's Favorites

What is an inverted yield curve? Why is it panicking markets, and why is there talk of recession?

 

What is an inverted yield curve? Why is it panicking markets, and why is there talk of recession?

Markets know what has happened each time the yield curve has turned negative. The idea of a negative curve without a a recession would take some getting used to. Shutterstock

Courtesy of Mark Crosby, Monash University

Since President Trump tweeted about imposing new tariffs on China, global equity markets have gone into a tailspin.

Trump’s more recent announcement that the new tariffs would be ...



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Zero Hedge

Morgan Stanley: "The Global Economy Is Deteriorating Faster Than Offsetting Policy Action"

Courtesy of ZeroHedge View original post here.

Sunday Start, submitted by Jonathan Garner and James Lord of Morgan Stanley

As regular readers know, Morgan Stanley is pretty bearish on global risk assets. This applies to emerging markets (EM) too, where we've been calling for wider credit spreads, weaker EM currencies, particularly in Asia, and lower equity prices. However, not so long ago the narrative guiding investors ran something like this: The Fed was ahead of the curve, EM bond yields looked attractive in a world of negative interest rates and a US-China trade deal seemed within reach...



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The Technical Traders

Negative Yields Tell A Story Of Shifting Economic Leadership

Courtesy of Technical Traders

Negative yields are becoming common for many of the world’s most mature economies.  The process of extending negative yields within these economies suggests that safety is more important than returns and that central banks realize that growth and increases in GDP are more important than positive returns on capital.  In the current economic environment, this suggests that global capital investors are seeking out alternative solutions to adequately develop longer-term opportunities and to develop native growth prospects that don’t currently exist.

Our research team has been researching this phenomenon and how it relates to the continued “capital shift&rdq...



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Insider Scoop

Heavy Volume Drives Low-Float Stock Plus Therapeutics Up 200%

Courtesy of Benzinga

Plus Therapeutics Inc (NASDAQ: PSTV) is the latest and one of the most extreme recent examples of the powerful combination of low float and heavy trading volume.

Plus shares traded higher by more than 215% on Friday. The biotech stock more than tripled after the company reported ...



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Lee's Free Thinking

Long Term Stock Market Chart Perspective

Courtesy of Lee Adler

After a big day like yesterday, I like to get a little long term stock market chart perspective. (Yes, this stilted verbiage is for search engine optimization ).

We do that with a monthly bar chart, which I update when relevant in Lee Adler’s Technical Trader. That’s in addition to the regular daily bar/cycle charts covering the past year, and a weekly cycle chart covering the past 4 years.

I wrote on July 14, in reference to the price and indicator patterns on the weekly chart:

The market has overshot a 3-4 year cycle projection in terms of both price and time. There are no long term projections. A 4 year cycle high is ideally due now. A 4 ye...



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Kimble Charting Solutions

S&P About To Decline 14%, Catching Up With The Crude Oil Declines?

Courtesy of Chris Kimble

This chart looks at the performance of the S&P 500, Crude Oil and the Yield on the 10-Year note over the past 4-months.

Crude Oil has declined around 14% more than the S&P during this time frame. Yields have declined, even more, around 36%. The is a huge spread between these assets over this short of a time period.

A few importa...



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Chart School

Bitcoin 2019 fractal with Gold 2013

Courtesy of Read the Ticker

Funny how price action patterns repeat, double tops, head and shoulders. These are simply market fractals of supply and demand.

More from RTT Tv

Ref: US Crypto Holders Only Have a Few Days to Reply to the IRS 6173 Letter

Today's news from the US IRS has been blamed for the recent price slump, yet the bitcoin fractal like the gold fractal suggest the market players have set bitcoin up for a slump to $9000 USD long before the IRS news hit the wire.

Get the impression some market players missed out on the b...

more from Chart School

Digital Currencies

New Zealand Becomes 1st Country To Legalize Payment Of Salaries In Crypto

Courtesy of ZeroHedge View original post here.

Bitcoin and other cryptocurrencies have been on a persistent upswing this year, but they're still pretty volatile. But during a time when even some of the most developed economies in the word are watching their currencies bounce around like the Argentine peso (just take a look at a six-month chart for GBPUSD), New Zealand has decided to take the plunge and become the first country to legalize payment in bitcoin, the FT reports.

The ruling by New Zealand’s tax authority allows salaries and wages to b...



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Mapping The Market

How IPOs Are Priced

Via Jean Luc 

Funny but probably true:

...

more from M.T.M.

Biotech

DNA testing companies offer telomere testing - but what does it tell you about aging and disease risk?

Reminder: We're is available to chat with Members, comments are found below each post.

 

DNA testing companies offer telomere testing – but what does it tell you about aging and disease risk?

A telomere age test kit from Telomere Diagnostics Inc. and saliva. collection kit from 23andMe. Anna Hoychuk/Shutterstock.com

Courtesy of Patricia Opresko, University of Pittsburgh and Elise Fouquerel, ...



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Members' Corner

Despacito - How to Make Money the Old-Fashioned Way - SLOWLY!

Are you ready to retire?  

For most people, the purpose of investing is to build up enough wealth to allow you to retire.  In general, that's usually enough money to reliably generate a year's worth of your average income, each year into your retirement so that that, plus you Social Security, should be enough to pay your bills without having to draw down on your principle.

Unfortunately, as the last decade has shown us, we can't count on bonds to pay us more than 3% and the average return from the stock market over the past 20 years has been erratic - to say the least - with 4 negative years (2000, 2001, 2002 and 2008) and 14 positives, though mostly in the 10% range on the positives.  A string of losses like we had from 2000-02 could easily wipe out a decades worth of gains.

Still, the stock market has been better over the last 10 (7%) an...



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Promotions

Free eBook - "My Top Strategies for 2017"

 

 

Here's a free ebook for you to check out! 

Phil has a chapter in a newly-released eBook that we think you’ll enjoy.

In My Top Strategies for 2017, Phil's chapter is Secret Santa’s Inflation Hedges for 2017.

This chapter isn’t about risk or leverage. Phil present a few smart, practical ideas you can use as a hedge against inflation as well as hedging strategies designed to assist you in staying ahead of the markets.

Some other great content in this free eBook includes:

 

·       How 2017 Will Affect Oil, the US Dollar and the European Union

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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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Ilene is editor and affiliate program coordinator for PSW. She manages the site market shadows, archives, more. Contact Ilene to learn about our affiliate and content sharing programs.

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