Tag: valuations

IT’S NOT THE BREXIT STUPID

Just over a week ago the world was coming unglued, as enough British citizens grew a pair and spit in the face of the EU establishment and global elite by voting to exit the EU. The fear mongering by central bankers and their puppet political hacks failed to deter people who have become sick and tired of being abused and pillaged by bureaucrats working on behalf of bankers and billionaires.

Stock markets around the world plummeted on Thursday and Friday. The world braced for another Black Monday. The phone lines were buzzing between central bankers around the world over the weekend as their banker constituents demanded relief. If one thing has been proven over the last seven years, its a coordinated effort between central bankers and Wall Street banks to rig the stock market higher can work over a short time period.

The titans of finance were able to once again confound short-sellers and the prophets of doom with a 5% surge from the Friday lows over the next week. It was surely a coincidence the Fed declared all Wall Street banks, safe, sound, and capable of buying back their stocks to the tune of billions early in the week.

These insolvent zombies were now free to borrow billions to buy back their overvalued stocks, destroying shareholder value, while boosting executive compensation. Poor Jamie Dimon is struggling to get by on his $27 million per year. The Wall Street banks obliged by immediately announcing multi-billion dollar buyback schemes to capitalize on the short-term trading mentality of the 30 year old MBA trading geniuses who bought the news without worrying about the actual value of the stocks they were buying.

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DANGEROUS DIVERGENCE

The chart below would appear to be in conflict with the results of a recent Gallup poll regarding stock ownership by Americans. The ratio of household equities to money market fund assets is near a record high, 60% above the 2007 high and 30% above the 1999 internet bubble high. The chart would appear to prove irrational exuberance among the general populace.

In reality, the lowest percentage of Americans currently own stock over the last two decades. With the stock market within spitting distance of all-time highs, only 52% of Americans own stock, down from 65% in 2007. As the stock market has gone up, average Americans have left the market. They realize it is a rigged game and they are nothing but muppets to the Wall Street shysters.

InvestInStocks1

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On The Impossibility Of A Soft Landing

Guest Post by

While the robo-traders play tag with the chart points, it is worth considering how it will all end. After all, at today’s close the broad market (S&P 500) was valued at 24.3X LTM earnings per share. That is, valuations are in the nosebleed section of history, but financial history has tumbled into the sub-basement of future possibilities.

Stated differently, every first year spread-sheet jockey knows that what drives LBO models and NPV calculations is the assumed terminal year growth rate. Get imaginative enough about the possibilities out there, and you can come up with a swell return on today’s investment even if the next few years look a little rocky—-or even alot so.

So never mind that earnings have fallen five straight quarters and at $86.53 per share are now down 18.5% from their September 2014 LTM peak. Also ignore the fact that this quarter will be down 10% and that there is no rational basis for a rebound any time soon.

But somewhere behind the robo-machines which line the casino there is a corporals guard of carbon units buying what Wall Street is dumping. And whether they know it or not, at 24.3X they are betting on one whopping big terminal growth rate on the far side of the deflationary turmoil now afflicting the global economy.

Here’s the thing, however. The current deflationary wave is not a one-time detour which will pass in due course. Per the above analogy, we do not have merely two years of bad numbers in a 10-year LBO model with a robust terminal value at the end.

What we have, instead, is merely the initial shock waves from the actions of central banks which are trashing the joint. Lurking on the other side, therefore, is unfathomable risk, not extraordinary growth.

In a word, the stock market is not worth even 15X its current earnings or 1300. At length, the carbon units out there catching today’s bouncing dead cats will thank their lucky stars if their losses are only 40% from here.

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THE WORSE THINGS GET FOR YOU, THE BETTER THEY GET FOR WALL STREET

On October 2 the BLS reported absolutely atrocious employment data, with virtually no job growth other than the phantom jobs added by the fantastically wrong Birth/Death adjustment for all those new businesses springing up around the country. The MSM couldn’t even spin it in a positive manner, as the previous two months of lies were adjusted significantly downward. What a shocker. At the beginning of that day the Dow stood at 16,250 and had been in a downward trend for a couple months as the global economy has been clearly weakening. The immediate rational reaction to the horrible news was a 250 point plunge down to the 16,000 level. But by the end of the day the market had finished up over 200 points, as this terrible news was immediately interpreted as good news for the market, because the Federal Reserve will never ever increase interest rates again.

Over the next three weeks, the economic data has continued to deteriorate, corporate earnings have been crashing, and both Europe and China are experiencing continuing and deepening economic declines. The big swinging dicks on Wall Street have programmed their HFT computers to buy, buy, buy. The worse the data, the bigger the gains. The market has soared by 1,600 points since the low on October 2. A 10% surge based upon lousy economic info, as the economy is either in recession or headed into recession, is irrational, ridiculous, and warped, just like our financial system. This is what happens when crony capitalism takes root like a foul weed and is bankrolled by a central bank that cares only for Wall Street, while throwing Main Street under the bus.

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4 Warnings And Why You Should Pay Attention

Submitted by Lance Roberts via STA Wealth Management,

When I was growing up my father, probably much like yours, had pearls of wisdom that he would drop along the way. It wasn’t until much later in life that I learned that such knowledge did not come from books, but through experience. One of my favorite pieces of “wisdom” was:

“Exactly how many warnings do need before you figure out that something bad is about to happen?”

Of course, back then, he was mostly referring to warnings he issued to me “not” to do something I was determined to do such as jumping off the roof with a bedsheet convinced it was a parachute. After I had broken my wrist, I understood what he meant.

Over the weekend, those warnings came to mind as the recent bounce in the financial markets once again has individuals scrambling to grab “bedsheets” to jump off the roof once again. Of course, much of their behavior is driven by mainstream commentary suggesting that the recent market rout is over.

However, there are currently plenty of warning signs that suggest that individuals might want to reconsider the risks before taking that leap. Here are four warnings to consider.

Warning 1: Profit Margins

Edward Harrison at Credit Writedowns picked up on the issue of declining profit margins that I addressed last week. 

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THIS BEAR IS JUST WAKING FROM HIBERNATION

“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

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DANGER WILL ROBINSON

It’s funny how the truth sometimes leaks out from the government. I’m guessing that Mr. Ted Berg will not be working for the Office of Financial Research much longer. This new agency was created by the Dodd Frank Law and is supposed to protect consumers from the evil Wall Street banks. But we all know the evil Wall Street banks wrote the bill, have gutted the major provisions, have captured all the regulatory agencies, own the Federal Reserve, and control all the politicians in Washington D.C. So, when an honest government analyst writes an honest truthful report that unequivocally proves the stock market is grossly overvalued and headed for a crash, the Wall Street banking cabal will surely call the top government apparatchiks to voice their displeasure. Truth is treason in an empire of lies.

The soon to be fired Mr. Berg’s verbiage is subtle, but pretty clear.

Option-implied volatility is quite low today, but markets can change rapidly and unpredictably, a phenomenon described here as “quicksilver markets.” The volatility spikes in late 2014 and early 2015 may foreshadow more turbulent times ahead. Although no one can predict the timing of market shocks, we can identify periods when asset prices appear abnormally high, and we can address the potential implications for financial stability.

Markets can change rapidly and unpredictably. When these changes occur they are sharpest and most damaging when asset valuations are at extreme highs. High valuations have important implications for expected investment returns and, potentially, for financial stability.

However, quicksilver markets can turn from tranquil to turbulent in short order. It is worth noting that in 2006 volatility was low and companies were generating record profit margins, until the business cycle came to an abrupt halt due to events that many people had not anticipated.

The full report can be found here:

http://financialresearch.gov/briefs/files/OFRbr-2015-02-quicksilver-markets.pdf

The meat of the report is in the charts. The CAPE Ratio, which has been a highly accurate predictor of market tops is now almost two standard deviations above the long term average and at the same level it was before the 2008 crash. It has only been higher in 1929 and 1999. That should give you a nice warm feeling about the coming bull market. Right?

Profit margins are at all-time record highs as corporations don’t have to pay higher wages, can borrow for virtually free, and continue to outsource to foreign countries. Profit margins are 60% above the long-term average and always revert to the mean. Do you expect them to expand or contract from here?

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