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Eric Parnell, CFA  

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  • The Madness Of Mr. Market [View article]
    Hello munibill,

    This is an excellent series of questions and are point that I plan on addressing directly in an upcoming article. Thanks for raising these points here. Using history as a guide, whether it was the financial crisis, the bursting of the tech bubble, the oil crisis in the 1970s or the stock market crash to start the Great Depression, the stock market did not plunge to the downside all at once. Even the recent drop in oil prices can be included on this list. Instead, in each case the market provided warning signals and opportunities to get out, but for those not watching for them they can easily be missed. This does not necessarily mean that you can exit at the absolute peak of the market, but enables one to continue participating to the upside and then exit without sustaining too much in the way of losses to the downside (example: if the market falls -10% after peaking at 2500 on the S&P 500 Index a year from now in providing exit confirmation, one would still be higher in value from where they are today).

    But to your point, these are unprecedented times we are operating in today, so we should all hold out the possibility that things could play out differently this time. It is for this reason in part that I hold a meaningful allocation to cash. But I consider such an outcome with no advance warnings a low probability event.

    Thanks again for your comment and great questions.
    Apr 26, 2015. 08:20 AM | 1 Like Like |Link to Comment
  • The Madness Of Mr. Market [View article]
    Hello Packer Man,

    Thanks for your comment. You raise an important point that has repeatedly dogged the bears since the calming of the financial crisis several years ago, for once it seemed that the market was set to break to the downside, monetary policy makers would intervene with yet another asset purchase program. It has been "Fed put" to the extreme. For bulls, this risk represents a reason for comfort, and for bears it continues to represent the primary downside risk from a shorting perspective.

    It has seemed that under Janet Yellen the Fed is increasingly looking to get out of the QE game and would like to raise interest rates a few quarter points to store up some dry powder for the next recession. Whether they have the luxury to actually raise rates before it's all said and done remains to be seen.

    Great points and thanks again!
    Apr 26, 2015. 08:12 AM | 3 Likes Like |Link to Comment
  • A Case For Attractive Stock Valuations [View article]
    Hello Alan,

    Thanks for your comment and for sharing your perspective. I also enjoyed reading your recent article on the U.S. Dollar outlook leading up to the 2016 election - a very interesting perspective.

    http://seekingalpha.co...

    Thanks again!
    Apr 24, 2015. 10:53 PM | 1 Like Like |Link to Comment
  • A Case For Attractive Stock Valuations [View article]
    Hello pica314,

    Thanks for your comment. You have hit on some excellent points. First, while the overall focus is on deflation, it seems to be continuously overlooked that many segments of the economy continue to experience steady and measurable inflation. Moreover, it stands to wonder why for so many years when oil prices were rising it was considered a transient non core inflation issue that could be disregarded, but suddenly when oil prices are falling it implies a broader deflation problem that warrants close attention. If you are right and sustained inflationary pressures not only take hold but start to accelerate, things could get interesting in a hurry.

    Thanks again.
    Apr 24, 2015. 10:44 PM | Likes Like |Link to Comment
  • A Case For Attractive Stock Valuations [View article]
    Hello DH51,

    Thanks for your comment and excellent point. You have actually anticipated the theme of my next article, as I look forward to expanding on the point that you have raised here!

    Thanks again!
    Apr 24, 2015. 10:39 PM | Likes Like |Link to Comment
  • A Case For Attractive Stock Valuations [View article]
    Hello Occasional Contributor,

    Thanks for your comment and for raising an excellent point. As I know you well know, equity risk premia can be computed in a variety of different ways. For the purpose of this discussion, I opted to focus on the earnings based approach for estimating the expected total return on stocks (k = E/P) at any given point in time throughout history. To your point about cash flows, another reasonable approach would have certainly been to use the dividend based approach (k = D/P + g), but I opted for the earnings based approach given that it is relatively more straightforward and ties directly into the frequent discussion about P/E ratios for the stock market. Both models have generated fairly comparable results over the long-term time period investigated in this article. As for your point about the negative ERP in this instance, my point in this article was not to assess the premium versus the risk-free rate but instead against a comparable alternative asset to stocks in the 10-Year Treasury, which is subject to risk in its own right despite the fact that they may still be considered risk free as long as the bond is held to maturity. In short, the emphasis was to compare stocks not necessarily to a risk-free rate but instead to a straightforward benchmark and highly liquid alternative to stocks in the form of 10-year Treasuries. Now it could certainly be argued that a better ERP would compare the earnings yield to the real 10-year Treasury yield over the nominal rate, but incorporating this adjustment did not change the underlying conclusions of the article that stocks are much better valued today in this regard than they have been over the last 35 years, thanks in large part to interest rates currently being so low.

    Excellent questions and thanks for raising them here.
    Apr 24, 2015. 10:38 PM | 3 Likes Like |Link to Comment
  • A Case For Attractive Stock Valuations [View article]
    Hello RV,

    Thanks for your comment and your good point about the yield curve. Given that the Fed has kept interest rates pinned at 0% for so long and all of the distorting effects that have resulted whether the traditional pattern of the inverted yield curve predicting the next bear market and economic recession will play out this time around. And with this inverted yield curve thinking in mind, it is also reasonable to wonder whether the fact that rates have gone negative so far out the yield curves across Europe, which is technically inverting these yield curves albeit in a very unusual way, is a predictor of anything regarding the future market and economic prospects across the region. It will be interesting to see, but these are certainly unusual times in so far as global yield curves go.

    Great comment and thanks again.
    Apr 24, 2015. 10:17 PM | 2 Likes Like |Link to Comment
  • U.S. Stocks: Timber! [View article]
    Hello goindians,

    Thanks for your comment and your point is well taken. I may come off as bearish, but my intent is to try to keep readers aware of the risks that may exist around them in capital markets. So much time gets spent in the financial media talking about how great things are all the time, which of course is an understandable bias given that investment institutions need investors that want to put money into the market in order to survive. As a result, I often feel compelled to focus instead on what investors should be watching out for, as these risks often get either ignored or minimized by the media in the process (when an analyst on a business news network says stocks are going higher, they hardly ever get challenged or even a follow up question asking "why?", but if an analyst suggests that stocks are going down, it is often followed by an inquisition and a good dose of derision).

    But I appreciate your comment. I actually have a few more bullish articles in the queue. Maybe I'll bring them forward to show my sunnier side.

    Thanks again.
    Apr 23, 2015. 07:29 PM | 4 Likes Like |Link to Comment
  • U.S. Stocks: Timber! [View article]
    Hello eagle1003,

    Thanks for your comment and hope that you are doing well. I always enjoy reading your perspective and great point on the Fed and lumber. Unfortunately for the energy space right now, the Fed can't burn millions of barrels of oil each day either.

    Thanks again!
    Apr 23, 2015. 07:23 PM | 1 Like Like |Link to Comment
  • U.S. Stocks: Timber! [View article]
    Hello DH51 - Thanks again for your comment both here and on my article from yesterday!
    Apr 23, 2015. 07:22 PM | Likes Like |Link to Comment
  • U.S. Stocks: Timber! [View article]
    Hello Ted - Thanks as always for your comment and for sharing your perspectives. Great point as always. Hope you are doing well.
    Apr 23, 2015. 07:21 PM | Likes Like |Link to Comment
  • The Naked Truth [View article]
    Hello zonadlatoma,

    These are good questions. I'll try to answer each in order succinctly. For companies, buying back stock is less risky than capital spending. And for financial institutions, challenging this liquidity into financial markets is less risky than lending it out to someone that may not pay you back. As for deflationary forces, this serves as an added benefit for those assets that can produce a sustainable yield, particularly when companies have ample cash and are inflating EPS through stock buybacks. Your question on QE and ZIRP as they relate to deflationary forces is a particularly good one - I believe that while they helped prevent a more dramatic deflationary shock in the early stages of the post crisis period, they are not causing deflation to be more pervasive because the uncertainty surrounding the state of the economy if/when/once these policies are finally removed are adding to business uncertainty. As for the forces containing the price of gold, massive liquidation pressures in the paper market in 2013 coupled with the heavy influence of commercial institutions and selected sovereigns in the gold market in general have played a major role in keeping gold prices below what they might otherwise be at this point. As for the Fed's timing of starting rate hikes, I believe they would like to start hiking rates simply to provide themselves some dry powder ahead of the next recession, but they may not have an economy cooperative enough to allow them to do so in the coming months. I originally felt they were targeting June for their first rate hike, but I am more inclined to think that September is now the more likely date on the table for the first rate hike.

    Thanks again. These are all great questions and I appreciate your thoughts and perspectives.
    Apr 23, 2015. 02:04 PM | Likes Like |Link to Comment
  • The Naked Truth [View article]
    Hello Michael,

    Thanks as always for all of your great comments here on my article. I appreciated your note to me including the Siberia comment that made me laugh.

    Thanks again!
    Apr 23, 2015. 12:13 PM | Likes Like |Link to Comment
  • The Naked Truth [View article]
    Thanks WDL - I appreciate it!
    Apr 23, 2015. 12:12 PM | Likes Like |Link to Comment
  • The Naked Truth [View article]
    Hello zonadlatoma,

    Thanks for your comment and for raising some excellent questions. I believe QE and ZIRP inflated asset prices because it made liquidity abundantly available, but this liquidity has not in a meaningful way flowed into productive activities such as capital spending due in part to the persistent risk aversion among corporations and financial institutions. As a result, this liquidity ended up flowing into paper assets such as stocks and bonds that provide liquidity in their own right along with a predictable yield in many cases. These same forces also helped support the commodities markets in the early years of the "post crisis" period given the expectations that all of the QE and stimulus would ultimately be inflationary. But since 2011 it has become increasingly clear that deflationary forces are likely to continue dominating over inflationary forces for the foreseeable future (the declining demand from China also does not help), commodity prices have lagged, particularly since they do not generate a yield. This does not fully explain gold, however, which saw its physical demand increase by +21% in 2013 at a time when physical supplies fell by -7%, yet the price fell by -30%. I'll put it this way when it comes to gold - the price behavior in gold over the last few years can best be described as "curious", but I think the long-term upside potential in gold is still meaningful if the forces that have kept the price contained to this point are ever alleviated. It will be interesting to see.

    Thanks again for your comment and great questions.
    Apr 23, 2015. 12:07 PM | Likes Like |Link to Comment
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