This Chart Can Kill Any Bull 57 comments
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This bear market is nowhere near over.
Since its March 10 low of 666, the S&P 500 has rallied more than 20%. Pundits and media commentators alike have taken this to mean that the bear market is over and that stocks should once again be the primary asset class for investors.
None of them know what they’re talking about.
Over the last 18 months, the media has been rife with “bottom callers,” all of whom have not only been wrong, but horribly, horribly wrong. In late 2007/ early 2008, Barron’s interviewed 12 Wall Street strategists. All of them thought stocks would rise in 2008. The average forecast was a 10% gain (stocks instead sank 37%).
So it’s with some concern that I noticed Barron’s latest “Big Money Poll” (a survey of 100 money managers nationwide) showed an overwhelmingly bullish skew: 60% of respondents were either bullish or extremely bullish about stocks for 2009.
Generally speaking, any time all the “experts” agree on something, the exact opposite usually comes true. And right now the “experts” believe stocks are entering a new bull market… and that the US economy is back on track.
So let’s stop for a moment and take a bird’s eye perspective of the US stock market…
The above chart shows the S&P 500 on a weekly basis going back to 1992. The blue line is the 52-weekly moving average (WMA): the most common metric for determining a bull or bear market. If the market is above its 52-WMA, it’s in a bull market. If it’s trading below its 52-WMA, it’s in a bear market.
Today, it’s clear that the S&P 500 would have to rally another 100 points (roughly 10%) before it broke above its 52-WMA and entered another bull market.
Somehow I don’t think this will happen.
Over the last 30 years, the US has built up record debts on a personal, state, and national level. Consumers thought they were financially stable so long as they could cover the interest payments on their credit cards, states created program after program, few if any of which they could afford, and the federal government issued $30-50 trillion in debt and liabilities (Social Security and Medicare).
This all came to a screeching halt when the housing bubble (arguably the biggest debt bubble in history) imploded in 2007. Since that time, stocks have staged one of their worst years on record (2008), one in five US mortgages has fallen underwater (meaning the mortgage loan is worth more than the home itself), and some $30 trillion in US household wealth has evaporated.
These issues seem to be distinct, but in reality they all stem from a debt problem. And as you know, there is only one legitimate way to deal with a debt problem:
Pay it off.
However, instead of doing this, the Feds (the Federal Reserve, Treasury Dept, etc.) have been producing even more debt. Here’s a brief recap of their moves thus far:
- The Bear Stearns deal/ the Fed takes on $30 billion in junk mortgages (Mar ’08).
- The Fed opens up various lending windows to investment banks (Mar ’08).
- Hank Paulson spends $400 billion on Fannie (FNM) / Freddie (FRE) (Sept ’08).
- The Fed takes over insurance company AIG (Sept ’08) for $85 billion.
- The Fed doles out $25 billion to the auto-makers (Sept ’08).
- The Fed's $700 billion Troubled Assets Relief Program (TARP) (Oct ’08)
- The Fed offers $540 billion to backstop money market funds (Oct ’08)
- The Fed agrees to back up to $280 billion of Citigroup’s (C) liabilities (Oct ’08).
- The Fed spends $40 billion more on AIG (Nov ’08)
- Fed agrees to back up $140 billion of Bank of America’s (BAC) liabilities (Jan ’09)
And that’s a brief recap.
In a nutshell, the Feds have tried to combat a debt problem by issuing more debt. They’re pumping trillions of dollars into the financial system, trying to prop Wall Street and the stock market. They’ve managed to kick off a rally in stocks…
But they have not addressed the fundamental issues plaguing the financial market.
I expect this rally to run out of steam any day now. When it does, stocks are primed for a re-test of their March lows. Act accordingly…
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On May 20 07:52 AM redbaron wrote:
> I wouldn't call 60%, 'all the experts' are bullish. Perhaps a majority,
> but there is still lots of money out of the market that could help
> fuel a further upward movement. Another SA article pointed out this
> morning that the S&P could go to 1000 and still be a couple hundred
> points below where is was last fall. Stocks have rebounded because
> they were way over-sold, and they are still cheap on any sort of
> historical basis.
On May 20 08:18 AM jamookey wrote:
> The author criticizes all the bull pundants,but not the bear pundants.Of
> course we are to believe this guy knows what he is talking about.Bull.Everyone
> of these pundants have their own positions to think of,they don't
> give a crap about anyone else.Maybe he is right,maybe he is wrong.After
> reading his article,I don't think we have learned anything new.
"You clearly don't understand the crisis we faced last year, and don't
> understand that the fundamental problems have been addressed already
> by the market itself. Try getting a sub-prime loan today. Try selling
> opaque securitized debt instruments. Try selling derivatives of these.
> These ills, which were central to the collapse, have already been
> cured."
On May 20 09:41 AM Vox Rationalis wrote:
> "Today, it’s clear that the S&P 500 would have to rally another
> 100 points (roughly 10%) before it broke above its 52-WMA and entered
> another bull market. Somehow I don’t think this will happen."
>
> No. Your 52-WMA will continue to fall because the market was higher
> a year ago than it is today. If the S&P 500 maintains its current
> level, your average will fall below it come August. So no further
> rally is required to reach your "bull market" definition (which points
> to the folly of such a definition).
>
> "They’ve managed to kick off a rally in stocks… But they have not
> addressed the fundamental issues plaguing the financial market."
>
>
> You clearly don't understand the crisis we faced last year, and don't
> understand that the fundamental problems have been addressed already
> by the market itself. Try getting a sub-prime loan today. Try selling
> opaque securitized debt instruments. Try selling derivatives of these.
> These ills, which were central to the collapse, have already been
> cured.
>
> "I expect this rally to run out of steam any day now. When it does,
> stocks are primed for a re-test of their March lows. Act accordingly."
>
>
> If the market falls below 700 again, it will be yet another remarkable
> buying opportunity.
> I believe the author is also pointing out a different 'crisis',
> one which the mainstream media hasn't focused much attention on,
> outside of news regarding housing and mortgages. This second crisis
> deals with a ballooning of the debt holdings by nearly every segment
> of America - nearly every statistic I've encountered has made the
> point that percentage-wise (as opposed to strictly numerical), we've
> rarely been to levels this high.
> The argument here is that we need to reach a healthy level of debt-to-assets
> like any business, and that this can only be worked out either by
> 1) paying the debt off, or 2) inflating it away. Neither picture
> is optimistic for the economy, and there doesn't seem to be any other
> alternative.
The economy will be fine. Debt will be paid off slowly, as large debts always are. Government debt is not at unworkable levels, though clearly much needs to be done to regain long-term fiscal sanity. Inflating away government debt doesn't work, since nearly half of the government's debt is owed to itself; inflation would cause Medicare and Social Security to face days of reckoning much sooner.
As for consumer debt, remember that disposable personal income (income after taxes) is about $10 trillion per year. If we revert to the average personal savings rate of the 1959-2007 period (7%), that's $700 billion per year. At that rate, how long does it take to move consumer debt back to "reasonable" levels?
Now, consider napkin math based on the oft-cited statistic that the economy is 70% consumer spending. A move from 0.6% (2007) to 7% savings means a hit to current GDP of 4.5%. But the recurring benefit is hundreds of billions of dollars in additional investable savings every year, correspondingly lower interest rates, and faster, more sustainable future growth.
Nothing could be better for healing credit markets. Weak businesses, poor loans, and stupid lenders will go bankrupt, and fresh, unencumbered capital will reward those taking acceptable risks. The transparent replaces the opaque.
Ahh, the beauty of capitalism.
Fred Voetsch wrote:
"There IS no other alternative. Rapid growth equals inflation and add that to the quantative easing and you get REAL SERIOUS inflation."
Rapid growth only equals inflation if productive capacity is full. With high unemployment, growth can be rapid without inflation, as wage pressures won't build until the economy approaches full employment.
As for quantitative easing, without the massive expansion of the Fed's balance sheet from September to December last year, it's quite likely the credit contraction would have led to a much more significant recession than the one in which we currently find ourselves. Since December, the Fed's balance sheet has shrunk by more than 4%. So where is (a) the inflation and (b) the continued quantitative easing?
"Slow growth or no growth looks more likely and that means at our current stock valuations of about a 30 P/E..."
By using reported earnings rather than operating earnings, you're allowing current events to disproportionately impact your calculation of the value of the market -- valuations must be long-term. So unless you think these asset writedowns are going to repeat every quarter forever, when calculating an overall market value number you either shouldn't use them or else you must discount them appropriately.
What difference does it make? From 4Q99 and 2Q07, operating earnings were 13.7% higher than reported earnings. Using actuals and estimates for 3Q07 to 4Q10 (less 4Q08, which skews the numbers absurdly), that number jumps from 13.7% to 39%. Removing the outliers, in the earlier period the median difference was 8.7%, while in the latter it's 37.8%.
Unless you expect the differential between operating and reported earnings to stay this wide indefinitely, it's far better to use operating earnings for market valuation comparisons.
Looking up the place where you got your P/E of 30 (1Q10), operating P/E is projected at about 14.8. The last time operating P/E was this low for more than one quarter consecutively?
1990.
Once again, P/E shows that by itself, without critical thought, it's not very good at valuing the stock market.
> Another laughable post - to claim that the fundamental problems have
> been addressed and the ills cured is moronic. Just because the sub
> prime and derivitave markets are dead for new products doesn't make
> the trillions in dollars of those products blowing up as we speak
> "go away"
Are those trillions of dollars the fundamental problem, or are they the result of the fundamental problems?
Do I need to define "fundamental" for you?
The markets seem to be beginning to agree with you as well (down 2.5% so far today).
Earnings are really the key issue which override everything else. Corporate earnings continued to deteriorate as the market rallied, putting the Dow and the S&P at unsustainably high valuations relative to their earnings.
online.barrons.com/pub...
On May 21 02:38 PM Vox Rationalis wrote:
> wheelbarrelsofcash wrote:
"The economy will be fine. Debt will be paid off slowly, as large debts always are. Government debt is not at unworkable levels"
Fine? Slowly - how slowly considering the multi trillion dollar deficits we are gauranteed to face for the next few years?
"As for consumer debt, remember that disposable personal income blah blah"
Last year consumer debt was over 130% of income and with the economy falling off a cliff that number is higher so I won't bother to even check.
"Now, consider napkin math based on the oft-cited statistic that the economy is 70% consumer spending. A move from 0.6% (2007) to 7% savings means a hit to current GDP of 4.5%. But the recurring benefit is hundreds of billions of dollars in additional investable savings every year, correspondingly lower interest rates, and faster, more sustainable future growth"
Except the printing of trillions of dollars by the govt with less foreign nations unwilling or unable to finance our multi trillion dollar deficits interest rates will rise and more than counteract a higher savings rate. You keep talking about sustainable future growth with nothing real to back it up, especially when most of the last 10 years of growth coming from the housing bubble and banks levering up 30 to 1.
.
On May 21 01:43 PM Vox Rationalis wrote:
> Ricard wrote:
arabianmoney.net/2009/.../
> How we got here is irrelevant - what is relevant is that there are
> hundreds of trillions of derivatives and if only 10% of them blow
> up no amount of intervention will fill the gap. To say that now the
> bubble has popped everything can (or will) go back to normal is asinine.
Look, you're the one who called my posting "laughable," then went on to point out a problem which is not at all fundamental. When discussing fundamentals, how we got here is germane - if not critical - to the discussion.
> Do I need to define bubble, derivative or asinine to you?
> Your posts are so full of BS I don't where to start
You are probably making a mistake by picking a fight with me.
> Slowly - how slowly...
Consider that in 1945 government debt to GDP was more than 120%, and it took 35 years to bring it down to 33%; I'm talking comparable. We're likely to hit 70% debt/GDP this year, which BTW isn't an awful lot higher than it was in 1996 (67.3%).
> considering the multi trillion dollar deficits
> we are gauranteed [sic] to face for the next few years?
Did you miss or just ignore the part where I wrote something about needing a return to fiscal discipline?
> Last year consumer debt was over 130% of income and with the economy
> falling off a cliff that number is higher so I won't bother to even
> check.
Often wrong, never in doubt. Is throwing out scary-looking data points the extent of your ability to formulate arguments?
The 130% number you cite (household debt as a percentage of disposable personal income) was 133% a year earlier, and is certainly lower now, as the savings rate has climbed from zero a year ago to 4.2% last month. With disposable personal income at about $10.7 trillion, consumers have reduced overall debt since the beginning of the year by more than $100 billion. Your 130% is now closer to 128%.
Now look forward. Suppose the savings rate stays at 4%. Suppose personal income declines 3% this year, is flat next year, and climbs 4% annually following that (far below historical averages). Debt/disposable personal income would fall to 100% (the 2001 level) in 2014, and to 80% (the 1989 level) in 2016.
> Except the printing of trillions of dollars by the govt with less [sic]
> foreign nations unwilling or unable to finance our multi trillion
> dollar deficits interest rates will rise and more than counteract
> a higher savings rate.
You're a font of the scary-sounding, unsupported, and ultimately meritless nonsense I read here so often - this one sentence brings several such points together.
1. "The printing of trillions of dollars" is ignorant, overblown nonsense. On what do you base this contention? As I recall, the Fed's balance sheet grew by about $1.4 trillion (200% or so) between August and December, as the Fed flooded the market with liquidity in response to seizing credit markets. Since then -- since the dramatic over-hyping of the "quantitative easing" bogeyman -- the Fed's balance sheet has gotten slightly smaller. So where are these trillions of dollars the Fed's been creating?
2. At the end of March, foreign entities owned not most, not half, but less than 30% of U.S. government debt.
3. Foreigners continue to purchase Treasury securities. Since Treasurys peaked in December, in the face of scary pronouncements about dollar debauching from folks like yourself, foreign ownership of U.S. debt has increased by 6%.
> You keep talking about sustainable future
> growth with nothing real to back it up, especially when most of the
> last 10 years of growth coming from the housing bubble and banks
> levering up 30 to 1.
How funny, for somebody too lazy to do basic research to claim another has nothing backing up arguments. Please cite sources for these unsupported claims:
* Most of the 56% GDP growth between YE 1999 and 3Q08 came from the housing bubble and banks levering up to 30 to 1
* Banks actually were levered up to 30 to 1
[Data from FRED database and Treasury statistics]
Oh I forgot your argument is wee thought out and backed by tons of evidence and analysis
"The economy will be fine. Debt will be paid off slowly, as large debts always are. Government debt is not at unworkable levels, though clearly much needs to be done to regain long-term fiscal sanity. Inflating away government debt doesn't work, since nearly half of the government's debt is owed to itself; inflation would cause Medicare and Social Security to face days of reckoning much sooner"
You will surely get a Nobel Prize! Brilliant!
On May 22 02:00 PM Vox Rationalis wrote:
> wheelbarrelsofcash wrote:
> Looking up the place where you got your P/E of 30 (1Q10), operating
> P/E is projected at about 14.8. The last time operating P/E was this
> low for more than one quarter consecutively?
>
> 1990.
>
> Once again, P/E shows that by itself, without critical thought, it's
> not very good at valuing the stock market.
There's too much wrong with your comments for me to go over it all so I will just rip this last comment to shreds:
Your statement suggests we are in an economic environment like 1990. With every statement you make you imply that the leverage we built into our economy does not have to be taken out. Your obvious lack of historical perspective makes you irrelevant to anyone who use facts, data and a long term perspective.
I'll now quote you:
On Jul 14 03:23 am you said, "Little math problem here." in response to this comment:
"Over 52 weeks, by the way, the XLF loss is -47.77%, which means that to make back this capital loss requires a gain of +192%."
...showing a complete lack of basic math. 100 - 47.77 = 52.23 * 1.92 = 100
On Aug 18 (2008) 11:17 Someone wrote:
"The risk simply outweighs the reward at this juncture and a 10-20% drop (In Apple) is plausible."
You replied:
"Enjoy the ride.
Disclosure: Long AAPL "
They did; you didn't.
AAPL price then: 175
AAPL price now: 122
On Aug 17, 2008 you wrote:
"Pick whatever measures you like, and compare where the economy is now to 1992 or 1982. Go ahead. NOT THAT BAD."
It's pretty obvious you're a young person with not too much real perspective on things. Having been there I suggest you quite talking so much and start listening. You have a lot to learn.
Good luck.
seekingalpha.com/insta...
On May 24 02:10 AM E Nuff Sed wrote:
> This chart can kill any bear.
> seekingalpha.com/insta...
On May 20 06:38 AM Paul Harper wrote:
> I don't think we can get all happy about the market on volume, Monday
> & Tuesday trading very thin ... the finance houses all coming
> out & recommending each other yesterday was a joke.
> WFC has almost 95% institutional ownership ... have a look at the
> comparison between puts & calls at the moment ... what a sham
>
“There's too much wrong with your comments for me to go over it all…”
How strange then for you to look up comments I wrote more than six months ago – which aren’t directly relevant to this conversation – rather than simply refuting things I wrote here that directly attacked your assertions. And why go back so far? Certainly I've made lots of incorrect statements in my hundreds of comments in the last nine months.
“… so I will just rip this last comment to shreds… Your statement suggests we are in an economic environment like 1990.”
Not at all. I stated that operating P/E is lower than it's been at any time since 1990 - indicating little if anything about the overall economic environment of the two times. In your hurry to attack me, you don’t even bother to refute the statement: do you think my assertion about P/E is untrue, or irrelevant, and if so, why?
“With every statement you make you imply that the leverage we built into our economy does not have to be taken out.”
No, you infer this. My intent, both clearly stated and implied, is to show that many statements made by folks like you are not supported by data. This kind of argument begs for a fact-based rebuttal, which you are apparently unable to provide.
“Your obvious lack of historical perspective makes you irrelevant to anyone who use [sic] facts, data and a long term perspective.”
You write this, and yet you apparently are unable to do it yourself. Why not present a contradictory view backed by facts, data, and a long-term perspective, rather than resort to ad hominem attacks? How about a discussion about why you think operating earnings are inferior to GAAP earnings for valuing the stock market?
“I'll now quote you: On Jul 14 03:23 am you said, "Little math problem here." in response to this comment: ‘Over 52 weeks, by the way, the XLF loss is -47.77%, which means that to make back this capital loss requires a gain of +192%.’ ...showing a complete lack of basic math. 100 - 47.77 = 52.23 * 1.92 = 100”
You find 47.77 to be 192% of 52.23 (rather than 92%) and claim the one lacking basic math skills is ME?
You then go on to pull a bit from an August posting of mine about Apple out of context, and then pull this quote from mid-August: “Pick whatever measures you like, and compare where the economy is now to 1992 or 1982. Go ahead. NOT THAT BAD." Regarding August, in what ways do you think I was wrong?
Now, just as a pure goose-and-gander exercise, I’ll pull a something from one of your SA-published articles. On March 10, you wrote: “Both operating and reported earnings have gone negative in Q4 and are likely to stay that way for some time.” Here we are just one quarter later, with 97% of actuals in for Q1. Operating earnings were $10.09, GAAP earnings were $7.57. I may be going out on a limb here, but I believe neither of those numbers is negative. Perhaps by "some time" you meant "less than a quarter."
Since you pointed out that my long-term bullishness on Apple in mid-August has been followed by a 30.3% decline (pretty close to the S&P 500’s loss of about 29.7%), I must highlight your disclosure of a short position you held in the market via SDS on March 10. Compared to the market’s gain of about 31% since then, your position has netted you a loss of 47.4%. Ouch.
The bad news is that you probably think you need a gain of 190% to recoup that loss. The good news is that those of us who lack your basic math skills calculate that figure to be 90%.
“It's pretty obvious you're a young person with not too much real perspective on things. Having been there I suggest you quite [sic] talking so much and start listening. You have a lot to learn. Good luck.”
I would be the first to admit that I have a lot to learn, and that the last year held some painful lessons. But perhaps you also have one or two things to learn. Such as this: when choosing the attitude of the smartass, try not to make the arguments of a dumbass.