Showing posts with label CAPE. Show all posts
Showing posts with label CAPE. Show all posts

Wednesday, December 18, 2019

Stocks Pause But Are Likely To Go Higher Soon

Markets took a breather on Tuesday, possibly in anticipation of the impeachment vote in the House of Representatives coming on Wednesday, but also not discounting the fact that stocks are once again hitting new record highs.

An appreciation that stocks may have reached untenably high valuations would likely slow down or reverse trends in most markets, but stocks in the era of free Fed money are far removed from anything approaching normalcy. This slow trading will likely last only a day or two at best, for there is money to be made in finding the greater fool, upon whom one can dispose of overpriced assets.

As far as measures of valuation are concerned, one of the best is Robert Shiller's CAPE (Cyclically Adjusted P/E) ratio, which takes the average P/E ratio of a stock over the past ten years, not just the past year or forward year as the simple P/E ratio does. It stands today at 30.60, a level above that of Black Tuesday, the fateful day in 1929 which kicked off the Great Depression.

Shiller's CAPE level, while accurately delineating the high valuation of stocks being bought and sold in today's marketplace, should also not alarm. They've been at, above or near that same level for some time. It might be instructive to note that the highest CAPE reading ever was in 2000, at the peak of the NASDAQ bubble, when the ratio stood at nearly 45.

This one-day bout of sleepiness is probably an outgrowth of being a little bit overextended in some people's minds. They are likely to be changed soon. There still appears to be plenty of room to run.

At the Close, Tuesday, December 17, 2019:
Dow Jones Industrial Average: 28,267.16, +31.27 (+0.11%)
NASDAQ: 8,823.36, +9.13 (+0.10%)
S&P 500: 3,192.52, +1.07 (+0.03%)
NYSE Composite: 13,795.35, +0.20 (+0.00%)

Monday, December 24, 2018

Reversion To The Mean... Can It Happen? Mnuchin Panics Markets With Calls To Banks, PPT

Stocks and math really should be on everybody's radar, if not today, then certainly every other day the markets are open. It's a major cause of angst and stupidity that people don't apply mathematic principles to investments. Math runs everything, it's immutable, and unmoved by emotion, which is what often moves stocks and other investments into absurd areas.

Speaking of absurd, how out of line were the valuations of stocks just a few months ago?

The answer is, historically speaking, VERY. Stocks were valued as if nothing negative would ever happen ever again in the world. US unemployment would forever be under four percent. GDP would always be above three percent. Politicians would never, ever lie again. Democrats and Republicans would make peace and compromise in support of the American people, and ordinary citizens in France would just accept the uber-liberal policies that are taxing them out of existence and stop their silly protesting.

Yeah, sure. Throw in some unicorns that barf up rainbows and poop gold and you'd be close to the kind of valuations the stock market was assigning to banks (bailed out in 2008), tech companies (many which have never experienced a severe recession) and plenty of other stocks. The distorted valuations of the past ten years exist because of easy money policies and corrupt corporate executives who used stock buybacks to reduce the number of shares outstanding, thus boosting the value of their stocks via higher earnings per share.

Let's put the past behind us, where it belongs. The Fed is trying, despite serious criticism from the president (he's wrong about the Fed being the real problem... the Fed can be a solution, and should be, since they created the problem originally) to right the global financial ship. The Fed and other central banks extended too much credit prior to the sub-prime debacle, and did it again in its aftermath, bailing out the banks who loaned money to people who could not make the payments.

Now, the Fed is drawing back on the easy money. Nobody likes it, but it must be done. Interest rates of two to three percent are an anomaly, unlike any time in history. The 10-year treasury note should ideally be in a range of 4-6 percent, which would make borrowers think twice about borrowing, and lenders would scrutinize their potential loans with much more dedication and diligence than to standards with which they've become comfortable.

Bad debts, many of them left over from the GFC, need to clear.

Policies are changing, and, with that, valuations will adjust, so here comes the math part of today's monologue.

Using the CAPE ratio for the S&P, stocks closed out today - another disaster, by the way - at 26.02. The mean CAPE ratio for the S&P is 15.69. If reversion to the mean occurs, at some point in the near future (3-12 months), the S&P will decline from it's current value of 2,357.54, to 1,552.20, because it is 65.84% above the mean. That would wipe out the gains of the past six years, sending the S&P back to where it peaked in 2007.

That actually would be a good outcome, since the 2007 levels were later found out to be a bubble, and they went south from there. So, it's very likely that the S&P will overshoot the mean, sending the index down to maybe 1400 or even 1300. Some people with good memories will recall that the S&P bottomed out BELOW 800 at the depths of the Great Financial Crisis of 2008-09, so 1300 or 1400 would be a pretty good outcome.

The same can be applied to the Dow, NASDAQ, NYSE Composite, Dow Transports, the Russell, or whatever US index one chooses. Take the current level, multiply by 65, divide by 100, and you'll have a good estimate of the mean valuation, and maybe even the actual bottom, but, chances are good that the bottom will be quite a bit lower than the mean, that is, if fundamentals matter once again, and we are done with the Fed backstopping every decline via asset purchases, the PPT, QE, ZIRP, NIRP, bailouts, fancy derivatives and generally speaking, voodoo economics (a favorite term of George HW Bush, BTW, in reference to Reaganomics or trickle-down theory).

Just because Money Daily likes to focus on the Dow, the mean is probably somewhere around 14,164.93. You may notice that is a further decline of more than 7000 points, but that should not be out of the equation since the Dow has already lost more than 5000 points just since October 3 (26,828.39, the all-time high) and it's down more than 3700 points just this month.

As has been the theme here for some time now, this is only the beginning of a long decline in stocks.

Treasury Secretary Steven Mnuchin made calls to six major banks and the Plunge Protection Team, and announced that he did so to the press and the general public. Talk about transparency! These kinds of inside baseball moves were, in former times, kept very, very quiet. Mnuchin's up-front attitude about this was meant to panic markets, not calm them. In that regard, he did the bidding of the Fed and his Wall Street friends. Remember, Mnuchin is a Goldman Sachs alum. Surely, his buddies at GS and JP Morgan Chase, Bank of America, Morgan Stanley, Citi, and Wells Fargo aren't losing money nor sleep over these most recent declines in the stock market. Their clients may be losing massive amounts, but, hey, they're just the little people, muppets, right?

Unless you've got a million or more for these guys to manage, you're not worth their precious time.

Merry Christmas. Ho, Ho, Ho.

Dow Jones Industrial Average December Scorecard:

Date Close Gain/Loss Cum. G/L
12/3/18 25,826.43 +287.97 +287.97
12/4/18 25,027.07 -799.36 -511.39
12/6/18 24,947.67 -79.40 -590.79
12/7/18 24,388.95 -558.72 -1149.51
12/10/18 24,423.26 +34.31 -1115.20
12/11/18 24,370.24 -53.02 -1168.22
12/12/18 24,527.27 +157.03 -1011.19
12/13/18 24,597.38 +70.11 -941.08
12/14/18 24,100.51 -496.87 -1437.95
12/17/18 23,592.98 -507.53 -1945.58
12/18/18 23,675.64 +82.66 -1862.92
12/19/18 23,323.66 -351.98 -2214.90
12/20/18 22,859.60 -464.06 -2678.96
12/21/18 22,445.37 -414.23 -3093.19
12/24/18 21,792.20 -653.17 -3746.36

At the Close, Monday, December 24, 2018:
Dow Jones Industrial Average: 21,792.20, -653.17 (-2.91%)
NASDAQ: 6,192.92, -140.08 (-2.21%)
S&P 500: 2,351.10, -65.52 (-2.71%)
NYSE Composite: 10,769.83, -267.01 (-2.42%)

Sunday, December 23, 2018

WEEKEND WRAP: Stocks Wrecked, Bull Market Finished; Bears' Claws Are Out

If the week prior to last was characterized as one in which "the wheels fell off" (Money Daily, 12/16/18), the most recent week was nothing short of a full-blown train wreck.

Everything was on sale, but especially stocks, as the Fed raised rates, the US federal government ground to a halt over a $5 billion border wall, and investors were spooked by collapsing long-term interest rates and the specter of a recession in coming months.

More than anything else, however, stocks were on sale mostly because they were being perceived as overpriced, and by most accounts they were and still are. According to Robert Shiller's CAPE index, the week ended with the Shiller PE ratio for the S&P 500 at 26.75, down from the peak of 30 two weeks ago, but still well above the mean (16.59) and the median (15.69) levels.

Shiller PE ratio is based on average inflation-adjusted earnings from the previous 10 years, known as the Cyclically Adjusted PE Ratio (CAPE Ratio), Shiller PE Ratio, or PE 10

This is how bubbles are pricked, and, as Doug Noland candidly attests, "There is never a good time to pierce a Bubble." More from Noland:

"Expiration for the aged “Fed put” was long past due. For too long it has been integral to precarious Bubble Dynamics. It has promoted speculation and speculative leverage. It is indispensable to a derivatives complex that too often distorts, exacerbates and redirects risk. The “Fed put” has been integral to momentous market misperceptions, distortions and structural maladjustment. It has been fundamental to the precarious “moneyness of risk assets,” the momentous misconception key to Trillions flowing freely into ETFs and other passive “investment” products and strategies. It was central to a prolonged financial Bubble that over time imparted major structural impairment upon the U.S. Bubble Economy."

Noland's entire Credit Bubble Bulletin commentary can be seen here.

If Noland's perception is accurate (and there's little reason to doubt it), this week's cascading declines are merely the end of the first act in what is likely a three-act drama to be played out over the next 12-18 months. Surely, the tremors from February and March were early warnings that the persistent bull market was coming to a conclusion.

October's declines were blamed by some analysts - incorrectly - on the lack of stock buybacks during the "quiet period," and were nothing about which to be worried. Obviously, that analysis was short-sigthed and based upon the bubble hypocrisy that has guided markets since the Great Financial Crisis of 2008-09.

December's nosedive was pretty predictable. Stocks hadn't shown any inclination toward the upside for months and there wasn't a good catalyst for investors, nothing even remotely resemblant of a buying opportunity. Of course, some too the "buy the dip" bait a few times this year and have been destroyed. That concept is a dead doornail for the time being. Selling into any strength is likely to be the prevailing rear-guard action.

Once 2018 comes to an end - in just five more trading days - there will be some regrouping, repositioning, but until there's resolution of some basic issues (the Wall, Brexit, China, tariffs), there isn't going to be any kind of rally. Gains will be hard-fought, and sellers will be eager on short-term wins. The second phase of the selloff will last well past January, into the summer and possibly the fall before the endgame commences, with sellers capitulating en masse. By this time next year it may be nearing a bottom some 40-60 percent below the all-time highs. Investor confidence will have been at first shaken, then eroded, and finally, shattered. Wall Street will have a crisis of its own making, and the economy will be embarking into recession.

Markets have come full circle. Central banks have decided that the experiments of QE, ZIRP, and NIRP which propelled stocks to dizzying heights, are over, their purpose achieved, and now comes the hard work of withdrawing some level of liquidity from markets in an attempt to normalize markets.

The problems lie in execution. It's not going to be easy to take corporations off the baby bottle of leveraged stock buybacks which blew up expectations and prices but caused serious long-term harm to capital structures. This current crisis may turn out to be worse than the sub-price fiasco or the dotcom malaise simply because it involves so many companies that have gutted their balance sheets and will have no other recourse than to slash production, wages, jobs, capital expenditures or all of the above.

This week was a full stop.

There aren't going to be any more bailouts, white knights, back-room deals or "Fed Put." The coming regime is going to be one of hard and cold capitalism, where the strong get stronger and the weak are slaughtered. Wall Street brokerages are sure to be among the most celebrated casualties when everybody realizes these heroes of the past ten years aren't all that bright and that there aren't that many good stock pickers in down markets. The financial industry, already under siege, is about to be breached and downsized to more human and humane proportions.

There's only so much one can say about stock routs. The numbers are there for perusal and they are horrifying enough all by themselves. Hashing over the events of the week, as stocks slid, then rallied and slid more, and finally crashed on a Friday afternoon would be little more than overkill.

It was a very, very bad week, the worst since 2008, and some say, since the Great Depression. It may not have been the worst we will witness however, as this is only the beginning of the bear market.

Dow Jones Industrial Average December Scorecard:

Date Close Gain/Loss Cum. G/L
12/3/18 25,826.43 +287.97 +287.97
12/4/18 25,027.07 -799.36 -511.39
12/6/18 24,947.67 -79.40 -590.79
12/7/18 24,388.95 -558.72 -1149.51
12/10/18 24,423.26 +34.31 -1115.20
12/11/18 24,370.24 -53.02 -1168.22
12/12/18 24,527.27 +157.03 -1011.19
12/13/18 24,597.38 +70.11 -941.08
12/14/18 24,100.51 -496.87 -1437.95
12/17/18 23,592.98 -507.53 -1945.58
12/18/18 23,675.64 +82.66 -1862.92
12/19/18 23,323.66 -351.98 -2214.90
12/20/18 22,859.60 -464.06 -2678.96
12/21/18 22,445.37 -414.23 -3093.19

At the Close, Friday, December 21, 2018:
Dow Jones Industrial Average: 22,445.37, -414.23 (-1.81%)
NASDAQ: 6,332.99, -195.42 (-2.99%)
S&P 500: 2,416.62, -50.80 (-2.06%)
NYSE Composite: 11,036.84, -185.96 (-1.66%)

For the Week:
Dow: -1655.14 (-6.87%)
NASDAQ: -577.67 (-8.36%)
S&P 500: -183.33 (-7.05%)
NYSE Composite: -718.54 (-6.11%)

Everything was not gloom and doom, however. Here's Darlene Love, in one of her many appearances on the Late Show with David Letterman, performing "Chirstmas (Baby Please Come Home)." This is one of her best.

Saturday, October 27, 2018

WEEKEND WRAP: Bombs Away, Markets Crack, Mid-Term Turmoil

October is always full of surprises, whether they be political or financial in nature.

This week was not an exception, but, rather, the rule. Losses being sustained this month - since a topping out on October 3 - have been more severe and more significant than those encountered during February and March of this year.

That's saying quite a bit, since those winter months were quite scary. President Trump was under assault from Robert Mueller, the Special Prosecutor assigned to look into allegations (not a crime, mind you, but mere allegations, an unprecedented situation in American jurisprudence) of collusion with Russian operatives in the 2016 presidential election. Since there's been no mention of "Russia, Russia, Russia" for more than a few months now, it's safe to say that Trump was right all along: the entire investigation was a massive witch hunt.

Fast forwarding to October, Trump is still being assailed, though lately it's been over what really rankles Democrats and other detractors of the billionaire in the White House: his manners, or lack thereof, his incessant tweeting, and his very obvious disdain for liberals, Democrats and especially the media at his campaign rallies. Trump gets under people's skins. Some of it is by design. He likes making people uncomfortable. It's a way of seeing what they're made of; whether they'll lash out emotionally or display grace under pressure. For the most part, the people he's attacked, prodded, and called out have reacted with a modicum of restraint, though astute observers of the political class can tell that some, like Nancy Pelosi or Maxime Waters, are becoming unhinged or already were and Trump's thumping on them is only exacerbating their conditions of unease.

Not to belabor the point, but Trump hasn't been a bad president. In many regards, he's been good for the country. It's his rhetoric that annoys people, even his supporters. He's just not very mild-mannered or even-tempered as Americans are used to in their politicians. Some people actually enjoy his brash, unvarnished behaviors, taking them as a breath of fresh air and realism, apart from the usual stultified, superficial, and, yes, condescending attitude so popular among the Washington, DC elite.

Wall Street has taken a semi-political stance on Mr. Trump. Largely, they'll tolerate his decisions and commentaries on trade, tariffs, jobs, the economy, the Federal Reserve, and unemployment. Beneath the surface in many board rooms, however, there's a distaste for his bluster and boldness. It's just not the way things are done in higher-up circles of business. C-Suite executives prefer evenhandedness couched in cloudy rhetoric, ensconced in data points. Thus, there's a willingness to blame corporate shortfalls on this president. He presents himself as a convenient scapegoat and Wall Street honchos are more than willing to cast blame his way.

More than a few earnings reports this week included references to Trump's tariffs - those either in place or those he's only proposed - as excuses for shortfalls in revenue or earnings, or, most often, in forward guidance. There is a not-so-cleverly-disguised blame game being played at the highest levels of corporate America. Executives in growing numbers are calling out Trump's trade policies as a rationale for their own failures, and, for some, rightly so.

President Trump never promised Wall Street or anybody else a Rose Garden party. He always knew, and often made clear, that his imposition of tariffs on a variety of trading parties - but particularly, China - were going to have some negative effects. Naturally, he was right. Prices for many things made outside US borders are going up, a direct result of tariffs, but the end goal is not higher prices, but fairer trade, and that is not going to occur without some pain, and some of that will be significant.

Laying ahead for the economy, Wall Street and US consumers are higher prices right at the most inopportune time, the holiday buying season. When the final tallies from the fourth quarter are posted via retail sales figures and fourth quarter earnings in January, 2019, the numbers are likely to cause an even bigger shock. With all of America preconditioned for ever-expanding economic data, the fourth quarter of 2018 may look to some like the end of the world, if certain conditions are met, those being, retailers will slash prices to boost demand, resulting in lower profit margins and poor performance for some major companies. Trump and his terrible tariffs will be blamed.

This week was also overwhelmed by the "one big story" about the mad bomber from Florida who sent poorly-designed pipe bombs to former presidents and officials, presidential detractors, and a few current office-holders, all of whom shared one characteristic: they disliked or disagreed with President Donald J. Trump. Fortunately, the bomb-maker was highly unprofessional. None of his masterpieces of terror actually detonated.

Nevertheless, the "suspicious" packages that appeared all at once in mailrooms, postal facilities and elsewhere engendered a media frenzy and resulted in a quick arrest of the very obvious suspect, Cesar Sayoc. His background and the continuing investigation and eventual trial will extend well beyond the mid-term elections. For those wearing tin-foil caps and assigning this event to the "false flag" files, Sayoc's timing appeared to be too coincidentally close to election day. There's all sorts of spin. Most of it is not worth a moment's reflection.

Which brings up the matter of the mid-term elections, as if they were some world-changing event upon which the ultimate survival of American democracy and the rule of law hinged. That's how the media would have us view it, though contention for House of Representative seats occurs every two years without fail. Which party controls it gives power over committees to the winning side, the losers left to plot ways to undermine and unseat their successful opponents. This one's a little different, as it is something of a referendum on the Trump presidency, or so we've been told. The results won't matter much in the larger scheme of things since Washington DC politicians seldom do anything well, or right, or, at all. The mid-terms are just an excuse for advertising companies to make money and for politicians to claim they're on the right sides of various issues. Generally speaking, the American public would be better off if there were less politicking, less government overall, and less preening and posing for cameras by the stuffy types that populate the interior the DC Beltway.

How does politics affect stock prices: a little, but, in the end, not much at all. The mid-terms are all about bloviating and posturing and ballot-box stuffing, and boasting. Whoever wins will claim the juicy committee chairs. Should the House flip from Republican to Democrat this year, though, it will be an unmitigated mess, rom media crowing about the victory of globalism over nationalism, to absurd proposals to impeach President Trump. That is the one scenario that even Wall Street is afraid to embrace. It could unhinge everybody and everything.

Notwithstanding any such Democrat miasma, the mid-terms will come and go in another 10 days or so, and with it any chance to blame either party for the downfall of the economy (which is actually doing quite well) or for particular industries or companies. They'll be done and the media can dance around the implications until the new political faces are sworn in come January. None of it will make any difference to stocks, bonds, or the prices of oil, natural gas, gold, silver, sugar, tea, coffee, or Diet Pepsi. Nothing. Unless the Democrats take control of the House. Then, look out.

As far as stocks are concerned, well, they're still largely overvalued by most traditional measures, those being straight up PE ratios or the more in-vogue CAPE (Cyclically Adjusted Price Earnings) ratio, a Robert Schiller concept that measures PE over a 10-year period rather than just the most recent one. It's sensible, and now, widely employed. According to the current chart, the CAPE is at 30.00, down a little due to the recent sliding, but still above 2008 levels and about even with 1929's Black Tuesday, from which the stock market crashed and was a contributing factor in the Great Depression.

That said, this bout of volatility in markets is not about to abate. Not by any means. All of the major indices closed out the week below their 200-day moving averages, and, maybe more importantly, the weekly charts put them below their 40-month moving averages, something that hasn't happened since 2008-09.

Stating the all-too-obvious, markets move in cycles, and the bullish cycle is about over. The bearish case - and this again is confirmed by Dow Theory, and we will spare readers the explicit numbers for now - has been signaled and is already underway. The only way up from here is to get to the bottom. There will be bumps, grinds, irrational exuberance, toil, trouble, relief rallies and false alarms, but the trend is your friend and the trend, friend, is down.

Dow Jones Industrial Average October Scorecard:

Date Close Gain/Loss Cum. G/L
10/1/18 26,651.21 +192.90 +192.90
10/2/18 26,773.94 +122.73 +315.63
10/3/18 26,828.39 +54.45 +370.08
10/4/18 26,627.48 -200.91 +169.17
10/5/18 26,447.05 -180.43 -11.26
10/8/18 26,486.78 +39.73 +28.47
10/9/18 26,430.57 -56.21 -27.74
10/10/18 25,598.74 -831.83 -859.57
10/11/18 25,052.83 -545.91 -1,405.48
10/12/18 25,339.99 +287.16 -1,118.32
10/15/18 25,250.55 -89.44 -1,207.76
10/16/18 25,798.42 +547.87 -659.89
10/17/18 25,706.68 -91.74 -751.63
10/18/18 25,379.45 -327.23 -1,078.86
10/19/18 25,444.34 +64.89 -1,013.97
10/22/18 25,317.41 -126.93 -1,140.90
10/23/18 25,191.43 -125.98 -1,265.88
10/24/18 24,583.42 -608.01 -1,873.89
10/25/18 24,984.55 +401.13 -1,472.76
10/26/18 24,688.31 -296.24 -1,769.00

At the Close, Friday, October 26, 2018:
Dow Jones Industrial Average: 24,688.31, -296.24 (-1.19%)
NASDAQ: 7,167.21, -151.12 (-2.06%)
S&P 500: 2,658.69, -46.88 (-1.73%)
NYSE Composite: 11,976.95, -141.90 (-1.17%)

For the Week:
Dow: -756.03 (-2.97%)
NASDAQ: -281.81 (-3.78%)
S&P 500: -109.09 (-3.94%)
NYSE Composite: -480.32 (-3.86%)