Another Indication The Bull Market is Coming to an End!

[valueorama]

my observation on markets is that yes we are seeing these random folks now talking about stocks and at the same time, CNBC is looking for correction.

 

This makes me believe we might have no correction for sometime. Personally, i have unusual amount of cash at hand and want a correction.

[LC]

my observation on markets is that yes we are seeing these random folks now talking about stocks and at the same time, CNBC is looking for correction.

 

This makes me believe we might have no correction for sometime. Personally, i have unusual amount of cash at hand and want a correction.

Yes I sort of agree. I am reading Howard Mark's "The Most Important Thing..." and one section he characterizes risk as that being unobservable. He references Taleb and describes risk as the possibility that an alternate history which could have occurred but never developed. So can I envision a potential future where the market drops 20%? Yes, but it seems a lot of other people certainly are talking about this risk as well.

 

Now that doesn't mean anything in and of itself, so I simply try to go back to the fundamentals...Market cap-to-GNP is about 104%. That I believe is fully valued.

 

Additionally I am not finding any screaming bargains (is anyone else!?). Now, I'm not a professional and there are far superior investors out there who may be finding undervalued businesses...I've mostly been trolling for special situations to eek out some small percentages.

 

On the flip side I don't see many radically overpriced businesses either. There's always a few of the high-flying tech stocks, but in terms of more traditional businesses, they all seem to sell around 20x earnings. So yes, that's somewhat overvalued, but not a screamingly high price (or is it? perhaps buyers are paying solely for the status quo and assuming a lot of downside risk). But I take a look at the "short ideas" thread...not too too many names mentioned. It's turned into the Lululemon thread. 

 

I am curious as to how everyone sees the corporate reinvestment environment going forward. Will it be cheap to reinvest? Will reinvestment be directed abroad? Is there some inflationary pressure on corporations which individuals are not experiencing? Sales and profits are high but I wonder if businesses will sustain those.

[compoundinglife]

I am reading "The Most Important Thing" as well. One thing he mentions is the three stages of a bull market, the third being "Everyone's sure things will get better forever".

 

1. Few people begin to believe things will get better

2. Most investors realize improvement is actually underway

3. Everyone's sure things will get better forever

 

I don't put a ton of weight in these stages but in that context IMO we are still in stage 2.

[20ppy]

Guys, we just came out of a 50-year-event slump, since when have we had a seculer bull market? The market is just responding to a potentially recovering economy. Some ups and downs are surely to ensue, but why are we here try to prodict the market? I don't see an obvious period of time to predict the market like in 2007.

[Packer16]

I think in Mark's latest memo he states we are in beginning of stage 2.

 

Packer

[stahleyp]

If the market was really that overvalued, do you guys think Buffett would have got in on the HNZ deal? Sure, we might have a correction (I'm sure we will sometime) but will the market go up more before that happens? Who knows!

[ScottHall]

Speculating on the stock market probably isn't worth anyone's time. I just buy cheap stuff, and if the market goes down, well, great. I'll have a wider selection to choose from. If you're not in a stage in your life where you're adding cash to your investments, maybe it's a different story, but I welcome a 50% drop because as long as I don't get fired I'll keep adding more cash to my portfolio every month.

[stahleyp]

Speculating on the stock market probably isn't worth anyone's time. I just buy cheap stuff, and if the market goes down, well, great. I'll have a wider selection to choose from. If you're not in a stage in your life where you're adding cash to your investments, maybe it's a different story, but I welcome a 50% drop because as long as I don't get fired I'll keep adding more cash to my portfolio every month.

 

+1

 

http://media.screened.com/uploads/0/5125/478346-razor_ramon.jpg

 

Yes, I'm a bit immature.  :P

[Palantir]

 

Additionally I am not finding any screaming bargains (is anyone else!?).

 

 

Oracle (ORCL)

[compoundinglife]

If the market was really that overvalued, do you guys think Buffett would have got in on the HNZ deal? Sure, we might have a correction (I'm sure we will sometime) but will the market go up more before that happens? Who knows!

 

Not sure if that is a good barometer. WEB made plenty of stock picks during 2007. But yeah who knows :)

[compoundinglife]

Speculating on the stock market probably isn't worth anyone's time. I just buy cheap stuff, and if the market goes down, well, great. I'll have a wider selection to choose from. If you're not in a stage in your life where you're adding cash to your investments, maybe it's a different story, but I welcome a 50% drop because as long as I don't get fired I'll keep adding more cash to my portfolio every month.

 

I agree but what is wrong with talking about it? We are not trying to predict anything IMO just discussing.

 

Being aware of when we are in a period of people thinking "Things will get better forever" is useful, don't think we are there yet but I would like to be aware when we are.

 

[Palantir]

I don't understand the bear case. As long as Fed is continuing QE, stocks will do well. Fed will slow and stop QE when growth picks up, stocks will still do well.

 

 

The only bear case I see is if Ben is replaced by some inflation hawk who cuts down on QE prior to growth.

[stahleyp]

If the market was really that overvalued, do you guys think Buffett would have got in on the HNZ deal? Sure, we might have a correction (I'm sure we will sometime) but will the market go up more before that happens? Who knows!

 

Not sure if that is a good barometer. WEB made plenty of stock picks during 2007. But yeah who knows :)

 

Did he have any big aqusitions though? Maybe he did and I just don't remember. I do remember him saying that the subprime crisis shouldn't affect the general economy though. :P

[bmichaud]

I don't understand the bear case. As long as Fed is continuing QE, stocks will do well. Fed will slow and stop QE when growth picks up, stocks will still do well.

 

The only bear case I see is if Ben is replaced by some inflation hawk who cuts down on QE prior to growth.

 

 

Barry Ritholtz and Hussman both use the argument that the Fed kept the market from declining further in 2011....

 

What did the Fed do in 2011? They implemented operation twist. If someone can walk me through the steps of how OT put a floor under the market, I would be very much appreciative.

 

Further - if someone can walk me through how QE makes its way into stocks I would like that too. From my understanding, the Fed swaps dollars for treasurys on PD balance sheets - mechanically how do those dollars make their way from a bank balance sheet to the stock market? Are banks buying equities and I don't know about it? Last I checked, WFC, C, BAC and JPM have little equity exposure.

 

QE is purely psychological IMO and with the entire hedge fund universe fully invested on the belief all risks are contained due to QE and the market is somehow cheap based on record high profit margins, I'm concerned.

[Palantir]

^No, they're not getting banks to buy equities. The goal of Monetary Easing is to suppress rates to below the growth rate of GDP. What happens is that low rates push investors into riskier assets in order to get a good return - equities, HY debt, hard assets, housing, oil, gold etc. Asset prices broadly rise, it's not just equities.

[compoundinglife]

If the market was really that overvalued, do you guys think Buffett would have got in on the HNZ deal? Sure, we might have a correction (I'm sure we will sometime) but will the market go up more before that happens? Who knows!

 

Not sure if that is a good barometer. WEB made plenty of stock picks during 2007. But yeah who knows :)

 

Did he have any big aqusitions though? Maybe he did and I just don't remember. I do remember him saying that the subprime crisis shouldn't affect the general economy though. :P

 

There was the 80% of Iscar that valued the whole company at around 5B in 2006. Brooks/Russell was in 2006 but on the small side around 500M. Business Wire was in 2006, not sure how much that was. But yeah to your point in 2007 I don't think they had any major outright purchases.

 

 

 

[stahleyp]

Oh yeah Iscar was a decent sized one. Thanks for the reminder. How it been that long ago? Wow!

[LC]

 

Additionally I am not finding any screaming bargains (is anyone else!?).

 

 

Oracle (ORCL)

This is my weekend homework, thanks :)

[HJ]

Maybe it's QE3, maybe it's Mario Draghi buying European sovereigns, but it certainly is true that private credits started flowing again at a reasonable level somewhere around that time frame.  It could well be that private credits would have restarted anyway without the central banks, but the final psychological push of "you are not going to see a reasonable yield out of treasury in the next 5 years" seemed to have at least helped switch on the financial system.  And as George Soros taught us, financial markets do not simply reflecting what's going on in the real economy, they drive it as well. 

 

The reversal of those actions, on the other hand, doesn't have to drive things in the other direction the same way.  There are plenty of problems in this world, but there always were.  Somewhere in there, the economy figures out a different engine to drive itself.  And it's really up to us to figure out what that engine is.

 

 

I don't understand the bear case. As long as Fed is continuing QE, stocks will do well. Fed will slow and stop QE when growth picks up, stocks will still do well.

 

The only bear case I see is if Ben is replaced by some inflation hawk who cuts down on QE prior to growth.

 

 

Barry Ritholtz and Hussman both use the argument that the Fed kept the market from declining further in 2011....

 

What did the Fed do in 2011? They implemented operation twist. If someone can walk me through the steps of how OT put a floor under the market, I would be very much appreciative.

 

Further - if someone can walk me through how QE makes its way into stocks I would like that too. From my understanding, the Fed swaps dollars for treasurys on PD balance sheets - mechanically how do those dollars make their way from a bank balance sheet to the stock market? Are banks buying equities and I don't know about it? Last I checked, WFC, C, BAC and JPM have little equity exposure.

 

QE is purely psychological IMO and with the entire hedge fund universe fully invested on the belief all risks are contained due to QE and the market is somehow cheap based on record high profit margins, I'm concerned.

[Cardboard]

QE is demand in the market that would not exists otherwise. So whomever is selling these bonds to them (treasuries and MBS) ends up with cash that they are very likely to redeploy in some similar instruments. So it puts pressure on yields (lower) and once they are low enough, some will make its way into equities by more agressive investors.

 

What people are missing IMO is that technicals or supply and demand do not determine entirely the pricing of assets. This equation changes all the time. It is even more true when someone is a known buyer out there. Just think about stocks where management is agressively buying stock only to see it drop 30% or more.

 

If economic fundamentals deteriorate, people will sell stocks no matter what the Fed does. Fear is much more powerful than their buying and early 2009 is a proof to that after QE1 was introduced, TARP and an $800 million stimulus.

 

IMO keeping some dry powder would be a better strategy for the Fed as I still believe that this program currently is way bigger than it should be vs the need (now larger than when the economy was weaker) and it likely hurts the economy by creating uncertainty (like a crutch). I have yet to read also a rational comment as to how it helps small folks get access to loans at low rates.

 

Cardboard

[bmichaud]

I understand Dalios deleveraging thesis and keeping rates below nominal growth.

 

However, I don't understand the mechanics. Why does rising reserve balances all of the sudden induce investors to take risk? Think about it - the act of buying risky assets drives down non-treasury yields. If someone were to explain QE to an alien, the alien would assume the Fed first drives down rates and THEN investors would buy risky assets!! It doesn't happen - the Fed causes treasury yields to in fact rise and investor action is what drives down non treasury yields. So do investors drive down yields via buying, and THEN feel compelled to buy more because rates are even lower???

 

Stocks were on a tear from October 2011 to September 2012, as well as all risk assets, and the Fed was not doing QE. Merely operation twist.

 

My conclusion? QE has nothing to do with risk taking - but rather sentiment and profitability drive risk taking. Sentiment became far too negative in 2011 thus driving a QE-less rally into last September....and record high profit margins are driving the illusion that junk rated companies will never default again.

 

QE 1 began in late 2008, yet the market proceeded to decline to its March 2009 lows. Yes QE was expanded, but massive profit expansion and extreme pessimism drove the post bottom rally.

 

Optimism is high by virtually every measure and profits are flat to declining - I don't see how the rally materially continues.

[Palantir]

 

 

However, I don't understand the mechanics. Why does rising reserve balances all of the sudden induce investors to take risk? Think about it - the act of buying risky assets drives down non-treasury yields. If someone were to explain QE to an alien, the alien would assume the Fed first drives down rates and THEN investors would buy risky assets!! It doesn't happen - the Fed causes treasury yields to in fact rise and investor action is what drives down non treasury yields. So do investors drive down yields via buying, and THEN feel compelled to buy more because rates are even lower???

 

Why do you feel the Fed causes treasury yields to rise prior to investor action? Do you feel that rates would be lower had the Fed not initiated QE?

 

Stocks were on a tear from October 2011 to September 2012, as well as all risk assets, and the Fed was not doing QE. Merely operation twist.

 

Correct, however, rates were still suppressed at that point in time right?

 

My conclusion? QE has nothing to do with risk taking - but rather sentiment and profitability drive risk taking. Sentiment became far too negative in 2011 thus driving a QE-less rally into last September....and record high profit margins are driving the illusion that junk rated companies will never default again.

 

QE 1 began in late 2008, yet the market proceeded to decline to its March 2009 lows. Yes QE was expanded, but massive profit expansion and extreme pessimism drove the post bottom rally.

 

I think you are focusing too solely on the capital markets response. What caused the changes in sentiment that drove the market rallies? I say it was the injection of liquidity that did it, otherwise we'd face a substantial monetary contraction, there would be no appetite for risk in that scenario.

 

 

[bmichaud]

Why do you feel the Fed causes treasury yields to rise prior to investor action? Do you feel that rates would be lower had the Fed not initiated QE?

 

They do not rise prior to investor action - they rise during QE as investors sell/short safety in order to buy risky assets.

 

Depends on what rates you are talking about. Treasury yields? Yes. Non-treasury yields in fact fell as investors took on risk from October 2011 thru September 2012....WITHOUT the help of QE. 

 

Correct, however, rates were still suppressed at that point in time right?

 

Which rates? Non-treasury rates? Heck no - everyone was risk off due to the euro crisis. Treasury yields? Yes, as investors sought safety.

 

I think you are focusing too solely on the capital markets response. What caused the changes in sentiment that drove the market rallies? I say it was the injection of liquidity that did it, otherwise we'd face a substantial monetary contraction, there would be no appetite for risk in that scenario.

 

The Fed coming in and backstopping BAC and C (think Tepper) could have....fiscal stimulus could have. Didn't matter - sentiment became far too negative. QE was already in place. Likely the massive deficits drove it, b/c the deficits drove the huge margin expansion we've seen since then (have you seen expansionary deficits in Spain? no. Have you seen profit growth in spain? no.).

 

[HJ]

I do believe QE3 had a much bigger impact than QE1 and QE2, partly because the timing was in sync with the healing of the structured finance market that's very much at the core of the financial systems (this is how the private banking system creates the "private base money" if you will, not the M1 created by the Fed, but much more crucial to private credit creation). 

 

Here's my interpretation of the flow.  QE1 was way early for the credit market, it's not completely clear yet which "private base money" is good which is not, since babies was thrown out with the bath water on all structured products, and its too early to tell definitely if something has survived.  QE2 got very much diluted by the European crisis, all the European banks were behaving as if another Lehman was right around the corner.  By the time QE3 came around, the credit market was ready.  You can look at auto ABS's, CMBS, CLO's, even seasoned RMBS, all the structured creations in the financial system, and know which ones can be treated as "base money" again.  Here come QE3, taking all the treasuries and MBS away, not just through secondary purchases, by the way, also from the new issue market.  If you were a bank who historically have bid on treasuries auctions, or took agency mortgages in the pass through market, you all of a sudden couldn't getting filled, as there's no products to buy.  It forced you to look into the secondary market, having to buy an off the run 5 year treasury, for example, rather than on the run ones, which is less liquid.  As long as you are looking at the secondary market, you see the alternative "private base money" in the form of these structured products looking like good money again. 

 

Since QE3, the floodgate opened in the structured finance market.  CMBS and CLO's had record years in terms of issuance, and Auto ABS market is hotter than ever.  And these are core to private credit market flowing.  The other risk assets then flows on top of that. 

 

 

[bmichaud]

Further....

 

The ECB has not printed a single dime since July 2012 - all Draghi said was that he'll "do whatever it takes". Simply knowing a sovereign backstop was in place was enough to allow for risk-takers to come back in the market. Literally zero Euros flowed through the EU financial system "into" sovereign debt, bank debt, bank equities and broad equity indices. And the ECB balance sheet has actually contracted recently....

 

So if QE is purely psychological, then it must follow that QE is actually back-stopping something such as Draghi's yet-to-be-implemented OMT program. But wait - OMT actually backs the sovereign debt market. If you short Spanish debt to yields of 7%, you are going to get your lunch handed to you bc OMT-based printed Euros will actually buy unlimited amounts of SD at yields far lower than 7%.

 

What is QE backstopping in order to induce risk taking? It's certainly not backstopping the treasury market - yields RISE during QE. Is it backstopping junk bonds? Last I checked A) the Fed does not buy junk bonds and B) primary dealers do not buy junk bonds with reserves held at the Fed.

 

I think it's one of the biggest investment farces of all time. What happened to the so-called "Greenspan Put"? Did it prevent a 13-year secular bear market with two 40%+ declines?

 

It's gotta be something else driving the market. It's gotta be corporate profits and psychology.

 

Revenue is flat to declining. Corporate profits are contracting. And psychology is high (See attached chart)....