“Every man has a right to his own opinion, but no man has a right to be wrong in his facts” ― Bernard M. Baruch
“The main purpose of the stock market is to make fools of as many men as possible.” ― Bernard M. Baruch
As the market drops 200 to 300 points daily on a fairly frequent basis these days, and has now dropped 13% in the last four months, John Hussman’s valuation analysis based upon historical facts is proving to be accurate. He’s not an “I told you so” type of person, but I am. The MSM stories follow the same old storyline – this is just a correction, time to buy the dip, stocks are undervalued, the Fed won’t let the market fall. We’ve been here before, twice in the last fifteen years. Wall Street and their media mouthpieces attempted to spread misinformation about the nature of the markets in 2000 and 2007, as epic bear markets were just getting underway. John Hussman cut through their crap then and he is cutting through it now.
“Is our profession really so lazy that we would advise people to risk their financial security based on tinker-toy models and pretty pictures that we don’t even have the rigor to test historically? Investors appear eager to ‘scoop up’ so-called ‘bargains’ on the belief that stocks are ‘cheap relative to bonds.’ All of this is predicated on the belief that profit margins will remain at record highs, that the Fed Model is correct, and that P/E ratios based on extremely elevated measures of earnings should be evaluated based on norms for much more restrained measures of earnings. Based on daily closing prices, the S&P 500 has not even experienced a 10% correction, yet the recent decline has been characterized as if investors are acting ‘like the world is about to end.’ This is not the pinnacle of human irrationality, but in fact, quite a shallow selloff from a historical standpoint. The fact that Wall Street is branding it otherwise is evidence that investors have completely forgotten how deep the market’s losses can periodically become.”
Hussman Weekly Market Comment, August 2007
Long-Term Evidence on the Fed Model and Forward Operating P/E Ratios
“Given the damage already wrought on the Nasdaq, there is a natural inclination to buy the dip. We believe that there is little merit in doing so. The current market climate is characterized by extremely unfavorable valuations, unfavorable trend uniformity, and hostile yield trends. This combination is what we define as a Crash Warning, and this climate has historically occurred in less than 4% of market history. That 4% of market history includes the 1929 crash and the 1987 crash, as well as a number of less memorable crashes and panics. We prefer to hedge until there is a rational prospect for market gains. When valuations are favorable, stocks are attractive from the standpoint of ‘investment’ – meaning that stock prices are attractive compared to the conservatively discounted value of cash flows which will be thrown off in the future. When trend uniformity is favorable, stocks are attractive from the standpoint of ‘speculation’ – meaning that regardless of valuation, investors are displaying an increased tolerance for risk which favors a further advance in prices.”
Hussman Investment Research & Insight, November 2000
The Dow has dropped 2,300 points with no particular event responsible. The Fed has continued to delay their perennially imminent interest rate increase, six years into a supposed economic recovery. Bernanke declared he would raise rates when unemployment reached 6.5%. According to BLS propaganda, that happened sixteen months ago. The Fed will not be coming to the rescue. Their credibility is shot. This correction is just the beginning. As Hussman points out, this market is still overvalued and primed for a vertical drop. The collapse of Glencore and their $18 billion derivatives book seems like as good a trigger as any.
If there is a single pertinent lesson from history at present, it is that once obscenely overvalued, overvalued, overbullish market conditions are followed by deterioration in market internals (what we used to call “trend uniformity”), the equity market becomes vulnerable to vertical air-pockets, panics and crashes that don’t limit themselves simply because short-term conditions appear “oversold.”
When you tell people in self denial the market could drop 40% in a few months, they think you are crazy. They declare this could never happen. They would get out of the market before it would fall vertically. Their memories are conveniently short as their normalcy bias and cognitive dissonance blind them to what happened over three months in 2008/2009.
So here’s an interesting question: how quickly, historically, have valuations tended to mean-revert? The answer is a bit tricky, because it depends on the condition of market internals. If valuations are elevated and market internals are unfavorable, valuations can retreat vertically. In 2008, for example, the market went from steep overvaluation to slight undervaluation within the span of three months, losing over 40% of its value. On the other hand, rich valuations have periodically been sustained for long periods of time, as they were in the late-1990s and in recent years, because investors stayed in a risk-seeking mood, as evidenced by uniformly favorable market internals.
Now for the really bad news. When markets are extremely overvalued, reversion to the mean requires a long period of undervaluation. They call this a secular bear market. We had one from 1966 to 1982. This one began in 2000 and will likely extend into the early 2020’s. We’ve now had two cyclical bear markets and one cyclical bull market within this secular bear market. Secular bear markets end with extremely low valuations (PE ratios of 10, Price to Book values under 1.0, Price to Sales ratios under 1.0). We are a long long way from the bottom of this secular bear.
What the historical evidence shows is this. First, the overvaluation or undervaluation of the market, on reliable measures, is generally “worked off” over a period of about 12 years, on average. That’s mean-reversion, but that’s not where the process ends. Rather, the valuation extremes of the market tend to be fully inverted over a horizon of about 18-21 years; ending with extremes of the same degree but in the opposite direction. That’s what we’ll call “mean-inversion.” Statistically, a period of somewhere close to two decades has typically stood between the wildest exuberance and the deepest despair on Wall Street, and vice-versa.
While the concept of mean-inversion seems strange – almost preposterous – it actually aligns very well with what we know about so-called “secular” market phases. Specifically, we can describe a “secular bull market” as a period that comprises a number of individual bull-bear market cycles, typically reaching successively higher valuations at the peak of each bull market advance. Conversely, a “secular bear market” comprises a number of individual bull-bear market cycles, typically reaching successively lower at the trough of each bull market decline. These “secular” bull and bear phases are each commonly recognized as lasting somewhere about two decades.
As usual, and expected, the perennial bulls working on Wall Street and blathering on the boob tube, care not a wit for history, facts, or the truth about markets. They are driven by emotion. Greed and fear alternate as human beings never change. We don’t improve over time. Our arrogance, hubris and delusional thinking always bite us in the ass. John Hussman provides the lesson, but the students aren’t paying attention. They are focused on the latest tweet or new social media IPO.
Following the panic of 1908, the stock market enjoyed total returns averaging 14% annually until the 1929 peak. The culmination of that advance was a 9-year period when stocks enjoyed total returns averaging nearly 26% annually. The most memorable secular bear period in U.S. history then began, running from 1929-1949. During those two decades, the S&P 500 would turn in a nominal total return of less than 1% annually, including an interim loss approaching 90%, and a negative real return overall. That period was followed by a secular bull phase from 1950-1965, during which the S&P 500 turned in a nominal total return of about 17.5% annually. The secular bear period that followed from 1965-1982 again left investors with a negative real return after inflation. The 1982-2000 advance represented a classic secular bull market period, and produced a total return for the S&P 500 averaging 20% annually. By the 2000 peak, valuations were so extreme that reliable valuation measures accurately projected negative total returns on a 10-year horizon (as we estimated at the time). The nominal total return of the S&P 500 since the 2000 peak has averaged just 3.5% annually, but even that gain is entirely due to the fact that valuations have again been pushed to offensive extremes. We fully expect that entire total return to be wiped out over the completion of the current market cycle. Doing so would not even bring the most reliable valuation measures back to their historical norms.
Remember the good old days of 2000? Budgets were practically in balance. Over 67% of working age Americans had a job. There were no American initiated wars raging in the world. The stock market was reaching new highs. Since 2000, the country has essentially been in recession, despite the fake economic propaganda peddled to the masses. The stock market peak was the end of the secular bull market. The market will need to drop by approximately 70% to reach its secular low. That can happen rapidly over the next couple years or drag on for another 5 to 7 years. But it will happen.
The beginning and end of secular phases are generally identified on a valuation basis, not on a price basis, so we continue to view the most recent secular peak as being 2000, even though prices are higher today.
The 2009 low is often discussed as a “secular” valuation trough. It didn’t even come close. While I did emphasize after the 2008 plunge that stocks had become undervalued relative to historical norms, remember that valuations similar to the 2009 trough were followed, in the Depression, by a further two-thirds loss in the value of the stock market. The market would have had to decline by an additional 50% to match the valuations observed at prior secular lows. I’ve regularly detailed the challenges that followed from my insistence on stress-testing our methods against Depression-era data, and how we fully addressed them in mid-2014. We don’t require anything near valuation levels of 2009, much less 1974 or 1982, in order to encourage a constructive position – provided that we observe an improvement in market internals. But investors shouldn’t kid themselves into thinking that some 18-20 year “count” began in 2009 from which many more years of advancing prices should follow, despite obscene valuations that already eclipse those of 1907, 1929, 1937, 1965, 1972, 1987, and 2007.
If there’s any “count” to be considered, investors might consider the one that began at the 2000 peak. They might also consider that the market peak in May of this year reached valuations more extreme than we observed at the beginning of every secular bear phase except 2000. The good news here is not only that secular bear markets contain a series of individual cyclical bull market advances, but also that the low of a secular bear, from a price perspective, has typically occurred earlier than the low from a valuation perspective (for example, the lowest price of the 1965-1982 secular bear was actually in late-1974).
I wonder how many willfully ignorant investors can handle a 50% to 70% haircut in their 401k, especially if they are over 50 years old. I wonder how many people still trust Jim Cramer and the Wall Street muppet fleecing machine to tell them the truth about the markets. The saddest part of this entire Federal Reserve created debacle is there is no place to hide. Bonds yielding 2% will provide a negative real return over the next ten years. Real Estate is at least 30% overvalued nationally, and as much as 60% overvalued in hot markets like San Francisco, Miami and NYC. The bear market will ravage all markets. I wonder how much angrier the populace will become when the current recession results in more job losses, bankruptcies and revelations of Wall Street malfeasance. Beware of the bear.
by Karl Denninger
Here We Go Again
We didn’t learn a damn thing from the last time with Lehman, did we?
Allegedly we put “all derivatives” onto exchanges — or at least we were supposed to. This, and margin supervision, was supposed to prevent any sort of “credit event” from spreading because with margin supervision you couldn’t go underwater; you would be identified and liquidated before it happened.
Oh sure, you might go broke, but that happens every day in the markets and it’s not a big deal. It’s the prospect of you failing and taking a bunch of other people with you due to cross-defaults and such that causes the problem.
So now we have this little outfit called “Glencore.” Ok, they’re a fair bit more than a “little outfit; they did almost $200 billion in revenue. But here’s the thing — who cares if their stock goes to zero?
For that matter, who cares if their bonds go to zero? Yes, they have a lot of debt out, but it’s hardly a systemically-important amount of money on a global basis, and this is a global company.
No, the reason people are getting nervous is that nobody knows how much exposure exists to their credit in the derivative markets.
The reason nobody knows is that we still have not forced these trades onto exchanges where margin capacity is known on a daily basis which means that we have not put a stop to writing derivatives with no capital behind them, exactly as AIG did back before it blew up in their face in 2008.
This is an outrage — and it’s even more of an outrage that any financial institution is able to be licensed to do business here in the United States under these conditions.
We deserve what comes if it indeed does because we, the people, stood back and allowed the fraud of early 2009, that of making “mark to fantasyland” to become a formal accounting standard under the FASB due to a committee of Congress mandating same without legislation or public debate.
The market turned around almost to the hour that this scam was put through Congress and it has been on a tear since. Not one thing changed in that committee room other than legalizing accounting fraud. If we get reamed by this on a global scale the blame is ours as citizens for not only allowing it to happen but cheering it on.
KD ..” that nobody knows”
And that will be the new excuse , same as the old excuse for Wall Street bailouts…”nobody could have known”
anon again I.
I wonder if Glencore, or the next, will be the domino that doesn’t stop the cascading failures that eventually results in our bank accounts being Cyprus’d thanks to the FDIC and CONgressional decree.
Don’t people SEE? They have STATED, in the MSM, that the rules and now laws, pay banksters for BAD derivatives bets FIRST.
So, bye bye stocks, 401k’s, and when those are at, or near, zero, they’ll ramp up confiscation as the public unions freak out. Then they take bank accounts, eventually making cash illegal/obsolete along the way.
Their plans have been openly stated, no one will believe. Yet.
And it all starts with another banksters, corrupted, Enron.
Ponzi the freak on folks. The party’s just getting started.
Carl Icahn Says Market “Way Overpriced”, Warns “God Knows Where This Is Going”
Submitted by Tyler Durden on 09/29/2015 07:04 -0400
To be sure, no one ever accused Carl Icahn of being shy and earlier this year he had a very candid sitdown with Larry Fink at whom Icahn leveled quite a bit of sharp (if good natured) criticism related to BlackRock’s role in creating the conditions that could end up conspiring to cause a meltdown in illiquid corporate credit markets. Still, talking one’s book speaking one’s mind is one thing, while making a video that might as well be called “The Sky Is Falling” is another and amusingly that is precisely what Carl Icahn has done.
Over the course of 15 minutes, Icahn lays out his concerns about many of the issues we’ve been warning about for years and while none of what he says will come as a surprise (especially to those who frequent these pages), the video, called “Danger Ahead”, is probably worth your time as it does a fairly good job of summarizing how the various risk factors work to reinforce one another on the way to setting the stage for a meltdown. Here’s a list of Icahn’s concerns:
Low rates and asset bubbles: Fed policy in the wake of the dot com collapse helped fuel the housing bubble and given what we know about how monetary policy is affecting the financial cycle (i.e. creating larger and larger booms and busts) we might fairly say that the Fed has become the bubble blower extraordinaire. See the price tag attached to Picasso’s Women of Algiers (Version O) for proof of this.
Herding behavior: The quest for yield is pushing investors into risk in a frantic hunt for yield in an environment where risk free assets yield at best an inflation adjusted zero and at worst have a negative carrying cost.
Financial engineering: Icahn is supposedly concerned about the myopia displayed by corporate management teams who are of course issuing massive amounts of debt to fund EPS-inflating buybacks as well as M&A. We have of course been warning about debt fueled buybacks all year and make no mistake, there’s something a bit ironic about Carl Icahn criticizing companies for short-term thinking and buybacks as he hasn’t exactly been quiet about his opinion with regard to Apple’s buyback program (he does add that healthy companies with lots of cash should repurchases shares).
Fake earnings: Companies are being deceptive about their bottom lines.
Ineffective leadership: Congress has demonstrated a remarkable inability to do what it was elected to do (i.e. legislate). To fix this we need someone in The White House who can help break intractable legislative stalemates.
Corporate taxes are too high: Inversions are costing the US jobs.
Here’s more from Reuters:
Billionaire investor activist Carl Icahn ramped up criticism of the U.S. Federal Reserve, warning about the unintended consequences of ultra low interest rates on the economy and financial markets.
“They don’t understand the treacherous path they are going down,” Icahn said in an interview with Reuters, in which he also declared his support for Donald Trump as a candidate to be the next U.S. president.
“God knows where this is going. It’s very dangerous and could be disastrous,” said Icahn, who has been a consistent critic of the Fed for keeping its benchmark interest rate close to zero since late 2008.
Icahn said he felt compelled to raise red flags about the state of the financial markets because he believes if more big investors had warned about subprime mortgage market in 2007, the United States might have avoided the crisis that strangled the economy the following year.
In a video entitled “Danger Ahead” and released on Tuesday, Icahn said the Fed’s rate policy had enabled U.S. chief executives – many of whom he describes as “nice but mediocre guys” – to pursue “financial engineering” that he said has exacerbated an already wide gap between rich and poor in America.
Icahn, who slammed money managers who benefit from the so-called “carried interest” loophole under which their earnings are taxed as capital gains rather than ordinary wage income, also endorsed Donald Trump’s presidential bid.
Trump unveiled a tax plan on Monday that he said would eliminate the loophole.
“Those guys who run these companies are borrowing money very cheaply, leveraging up their companies, using it to do two things … They are going in and they are buying back stock or even worse, making stupid takeovers,” said Icahn, adding some recent acquisitions have been done at a too high a price.
Much of this debt is bought via exchange-traded funds, a popular vehicle for trading baskets of bonds and stocks.
Icahn said retail investors had a false sense of security about how easy it would be to sell their holdings of such debt if the market turns.
“It’s like a movie theater and somebody yells fire. There is only one little exit door,” he said. “The exit door is fine when things are OK but when they yell fire, they can’t get through the exit door … and there’s nobody to buy those junk bonds.”
Ultimately what Icahn has done is put the pieces together for anyone who might have been struggling to understand how it all fits together and how the multiple dynamics at play serve to feed off one another to pyramid risk on top of risk. Put differently: one more very “serious” person is now shouting about any and all of the things Zero Hedge readers have been keenly aware of for years.
This Time it is Different – We Have Two Bears Rising At The Same Time
The Financial Bear – And The Russian Bear
Trust Wall Street. They’ve never misled us before. Right?
………..It’s be nice if the USA could seat one Congress that was not rotten to the core, corrupt as Chicago and that gave a rip about this nation. Unfortunately, she can’t.
Well the 20W crossed under the 50W, so it looks like it is an official bear market. But there should be one more rally to the 50 week moving average (around 2050) before the first real big leg downward begins. The problem is that the 20W crossed under the 50W back in 2011, yet that bear market got snuffed out really quick with yet more money printing. There is absolutely no guarantee they will not do it again.
“In theory, investors can exit an open-ended mutual fund or an ETF at will. But the growing popularity of these funds forces them to invest in an ever larger share of less liquid bonds. If everyone wants to exit at once, prices could fall very far, very fast. A lucky few may get out in time. Others will probably get trampled.”
um Privately owned central banks is the cause of this is just my eduacated guess lol .
Someone dissuade me from my opinion please . There can be no real market conditions if a privately owned entity is obfuscating everything for their own purpose and goals . How can I ,or anyone, invest in anything if the so called market can be distorted based on the desires of a secretive cabal ,that only they know? These privately owned central banks actually shape the reality that is given to everyone . They want a reality that is under their control in some form or another and thems the facts jack .
You can ignore reality ,but you cant ignore the consequences of ignoring reality , not my quote , think its ann ryand? Reality is that almost everyones reality is set by a fucking privately owned central bank and the consequences of missing that central reality will indeed slap you up side your fucking head when you least expect it ! Hedge accordingly
Yes, it’s a bear market when it’s been a bull market. Any fool knows this.
Marketoracle knows a first class financial thinker. It posts his stuff often. Congrats on the recognition ,Admin.
Baby boomers have no idea what they’re doing with retirement planning
By Howard Gold
Published: Sept 30, 2015 8:33 a.m. ET
It turns out that they have too much of their money in equities
Baby boomers could lose a massive amount of their 401(k) money in the event of a stock market crash.
I’m rarely surprised by anything I read anymore about the mistakes investors make, but I came across something last week that almost made me fall out of my chair.
It was a commentary in the Fiscal Times about a recent report issued by Fidelity on the state of 401(k) plans it administers.
First, the good news — sort of: Account balances averaged $91,000 at the end of the second quarter. That’s still well short of what most people will need for a comfortable retirement, but it’s 50% higher than the average 401(k) balance was five years ago, right after the financial crisis.
Chalk that up to the bull market, which caused the S&P 500 Index to almost double before the big correction that began in August.
But this bull market in stocks has led to a bull market in complacency for too many mom-and-pop investors.
Those of you who have too much stock in your 401(k) ought to look at your statements for a change, and then go to the mirror and tell yourself: ‘I just can’t manage my own retirement money.’
About one in 10 participants in Fidelity 401(k) plans who are in their 50s have all — that’s right, 100% — of their assets in stocks.
Another 27% of participants from 55 to 59 years old have stock allocations at least 10 percentage points more than financial-services firms recommend. And those recommendations, in my view, are usually far too high, driven by the exaggerated fear that people will outlive their money.
That suggests that since Fidelity recommends people in their 50s put 70% of their money in stock, nearly four out of every 10 50-plus participants in Fidelity 401(k) plans may have at least 80% of their retirement assets tied to the fortunes of equity markets. (Disclosure: I’m a baby boomer and have about 50% of my retirement assets in stocks.)
The report covers only Fidelity plans, but it may reflect the behavior of a wide spectrum of 401(k) investors. That means a lot of baby boomers could face yet another rude awakening when they’re ready to retire.
Of course, these people may have other assets invested more conservatively or a big inheritance waiting for them. And some will win lottery jackpots.
But the retirement security of the vast majority will depend on how their 401(k) plans perform. Far too many are vulnerable to black swans, market shocks or garden-variety bear markets, which have happened more than 30 times over the past century, every 3.5 years on average, according to Ned Davis Research.
And as behavioral finance has taught us, the fear of losing your money now is a much stronger motivator than the prospect of a secure retirement in 20 years. That’s why during financial panics and bear markets, people sell at just the wrong time. And I’d wager many of these people who have surfed this bull market all the way up will be the first to sell when it’s going down, just as many did in 2008-2009.
There’s an unwritten rule in business journalism. You can chide people for not saving enough, you can wag your finger at them for cashing out their 401(k)s early. But questioning some of your readers’ intelligence and judgment? Well, better not go there.
Well, I’m going there. This makes the characters in “Dumb and Dumber” look like Stephen Hawking and Albert Einstein.
So I’d like to ask my fellow boomers who have 80% or more of your assets in stocks a simple question: What the hell are you thinking?
Listen, people, we’ve lived through two huge bear markets in just the past 15 years. This is not our parents or grandparents telling us about the Great Depression. This wasn’t just a reality show; it was our life.
And it can happen again, or something less devastating but still bad enough to cut your living standards in retirement drastically and permanently.
We have gotten a great gift: a bull market in stocks that has rescued many of our retirements. It’s as if God gave us forlorn sinners one more chance to redeem ourselves — or at least our financial lives. There may be second chances in American lives, but not too many third chances.
So those of you who have that much stock in your 401(k) really ought to look at your statements for a change, and then go to the mirror and tell yourself: “I just can’t manage my own retirement money.”
I would then recommend selling all your stock funds and putting your money into whatever target retirement fund for, say, 2020 or 2025, that your 401(k) plan offers.
They probably have a little too much invested in stock for my taste, but, unlike you, at least the managers know what they’re doing. Even more important, they’ll protect you from yourself.
Thanks again for the Hussman commentary. There’s about a dozen friends and relatives that I talk about investments with. When I suggest they hedge their positions with an inverse ETF or increase their cash holdings or buy PMs they think I’m crazy. They are all long stocks. Some are 100% in stocks. In the long run I think that most financial assets will be wiped out in a “Great Reset” or WW3 or some epic disaster(4th Turning). I don’t have the courage to take everything out of the system and put it all into tangible assets, yet.