Legends of the Fall
by ilene - September 3rd, 2010 1:47 am
Legends of the Fall
Courtesy of Joshua M Brown, The Reformed Broker
Firstly, I apologize for my recent absence from the site this week, I was temporarily struck down by a digestive attack that required 4 days of hospitalization and stomach pumping. But I’m out and about and starting to make some new health changes… Josh Brown 2.0. For example, Josh Brown 2.0 will probably not be rolling up pizza slices and wedging them into his face like "Italian Spring Rolls". Josh Brown 2.0 will also not be taking escalators instead of stairs or putting butter in his coffee.
OK, back to the regularly scheduled programming. Let’s start with the Sept/October/Fall market meme…
I see that the "September is the Cruelest Month" linkbaiting posts have already been arriving in droves. I’ll shred them to pieces real quick typing with one hand and only about a tenth of my common sense.
Let’s start here with a bit from Minyanville:
The month of September gives equity investors a sinking feeling and for good reason: Historically, this has proven a bad month for the stock market.
Oy vey, when it starts like that, you already know you’re reading filler. Allow me to deconstruct the genre of "month/season/timeframe" articles and posts so that you never waste your time on another one again:
1. Timing - designed to coincide within a few days of the beginning of the new time frame (September in this case, post date on this example is Aug 30th)
2. Post Title - The title will mention the month and within a descriptor or two attempt to scare you into to clicking on it. It will work, you will click, because we were all conditioned by the same commercials as kids when Duck Tales came on after school. Cereal was purchased, let’s keep it real.
3. Data - They will steal all the data from either the Bespoke Investment Group or Ned Davis Research so just set your feedreader to grab both of those for the raw numbers minus the ex-banner ad salesman’s "contextualization".
4. But wait! – About halfway through the post which has just given you all the historical reasons you should just blow your brains out rather than be invested, a White Knight shall come galloping up over the crest of the hill, banners aflutter, with a reason to live, dammit! The White Knight will be the…
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HAVE WE SEEN CAPITULATION?
by ilene - August 26th, 2010 12:08 pm
HAVE WE SEEN CAPITULATION?
Courtesy of The Pragmatic Capitalist
We’re not even close according to David Rosenberg:
“Short interest on the Nasdaq down 1.6% in the first week of August?
The Rasmussen investor
confidence index at 80.4? Call us when it hits 50, which in the past was a “classic” washout level.Investors Intelligence did show the bull share declining further this past week, to 33.3% from 36.7%. But the bear share barely budged and is still lower than the bull share at 31.2%. Are we supposed to believe that at the market lows, there will still be more bulls than bears out there? Hardly. At true lows, the bulls are hiding under table screaming “uncle!”.
Yes, Market Vane equity sentiment is down to 46, but in truth, this metric is usually in a 20-30% range when the market correction ends. We are waiting patiently.
As for bonds, well, Market Vane sentiment is 73%. Now what is so bubbly about that. Call us on extreme positive sentiment when this measure of excessive bullishness is closer to 90%, and we’ll be in the correction camp hopefully by the time this happens.”
I would tend to agree. We have seen nothing in the fear gauges that convinces me that people believe in a sustained downturn in the economy. The cult of the equity investor has spent the last several months debating the possibility of a bubble in bonds, however, almost every single person who makes these claims is an owner of stocks and I have more and more trouble finding people these days who believe in bonds. Yet, for some odd reason there is a never ending love affair with the equity portion of their portfolio. Perhaps the bubble they should be more concerned about is the one that has been imploding underneath them over the course of the last 10 years.
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TIM BOND: EQUITY INVESTORS ARE DANCING ON THE EDGE OF THE VOLCANO
by ilene - February 10th, 2010 12:21 pm
TIM BOND: EQUITY INVESTORS ARE DANCING ON THE EDGE OF THE VOLCANO
Courtesy of The Pragmatic Capitalist
Tim
“Never has a bull market climbed a steeper wall of worry. Despite a proliferation of positive economic indicators, the consensus remains resolutely gloomy. Bullish economists are still rarer than hens’ teeth. The average forecast for Q3 US GDP growth is an anaemic 0.8% increase, which would be by far the slowest first quarter of any recovery on record.”
He couldn’t have been much more accurate. The economic landscape is quickly changing, however, and Bond’s outlook is turning decidedly less optimistic. Bond now believes the problem of debt is becoming contagious in Europe and that higher bond yields will accompany the process:
“Fiscal dynamics point towards higher government bond yields in many economies, including the UK and US. History is unequivocal in linking fiscal deterioration to higher yields. This point is clearly becoming recognized by investors. As a result, a contagious process has started, during which risk premia in bonds, equities and currencies adjust higher to reflect the fiscal situation. This process is unlikely to remain confined to southern Europe, but will eventually embrace all those economies with sizeable budget deficits.”
Bond has argued for much of the last year that low rates and de-leveraging were actually very bullish for equities. As monetary policy begins to shift and fiscal policy remains imprudent the landscape is shifting. Like Teun Draaisma, Bond is concerned about the impending higher rate environment that will accompany global rate increases and continuing risks associated with an indebted global economy. Bond argues the long-term situation remains unfavorable for 3 primary reasons:
- 1) The majority of the G20 is a fiscal mess
- 2) Demographic trends of the G20 are highly negative
- 3) Containing the long-term government debt problem will be painful
Most alarming to Bond, however, is the close relationship between high…
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BONDS SAY DEFLATION, STOCKS SAY REFLATION. WHO IS RIGHT?
by ilene - October 8th, 2009 2:39 pm
BONDS SAY DEFLATION, STOCKS SAY REFLATION. WHO IS RIGHT?
Courtesy of The Pragmatic Capitalist
Stocks have surged 11% since June 10th. At the same time, the 10 year treasury yield has declined almost 70 basis points to close at 3.18% yesterday. What is curious here is that the stock market is telling a very different story from the bond market. Bond investors (who tend to have a longer time horizon) are forecasting a long battle with deflation. Equity investors (who tend not to think much farther than one quarter into the future), on the other hand, are putting their money on the line in the hopes that the reflation trade is alive and well.
Unfortunately for equity investors, they have a poor record of forecasting the future when compared to bond investors. There have been 4 famous cases of such bond and stock divergences in the last 20 years. The most famous is the summer of 1987. We all know what occurred then. The other three cases were fall ‘94, summer ‘98 and winter 2000. All three preceded declines in the market. Of all 4 instances, three of them preceded 15% declines in the S&P 500.
The real crux of the issue here is not terribly complex. In order for corporations to tack on to the $80 in operating earnings that the equity market is currently pricing in for 2010, they will need pricing power. The cost cutting and resulting margin expansion we are seeing is great in the near-term, but we’re unlikely to see pricing power and hence real revenue expansion without at least some inflation. The bond market, however, is pricing in little to no inflation. The bond market’s message is clear – we are in a deflationary world. That doesn’t bode well for the prospect of corporate earnings and that likely means stocks are getting a bit frothy here. Investors would be wise to take a step back and reconsider the risk/reward of owning equities once the euphoria surrounding Q3 earnings wears off….
Related -
John Paulson’s Huge Reflation Bet
Are 20 Years of Deflation Ahead of Us?
Photo: Goddesses of Inflation and Deflation, courtesy of Elaine Supkis.
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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...
Ilene is editor and affiliate program
coordinator for PSW.
