The 2 Biggest Risks Facing Stocks Right Now [View article]
Hello Gerry,
Thanks for your comment. You raise excellent points here as always.
Thanks for sharing Cullen Roche's recent article on JGBs. I have been a long time follower of Cullen's and remember reading this specific article, so I appreciate where you are coming from by sharing it completely. I know where Cullen is coming from in his point, but I view it a bit differently for the same reasons that you have highlighted in your comment. Moreover, viewing data like yields on a standard scale can be a bit deceiving because it obscures the impact of convexity. And for a 10-year bond with a yield of 1% or less, the impact of convexity is extreme.
The following is a vastly oversimplified example to highlight this point. Suppose a $1,000 par value bond has a coupon of $80, implying a coupon rate of 8%. If the yield to maturity on this bond is 10%, the current value of the bond would be $800 (80/800 = 10%). Thus, a two percentage point move higher in the bond yield at this higher coupon rate resulted in a 20% loss in the value of the bond. Now suppose a $1,000 par value bond has a coupon of $5, implying a coupon rate of 0.5%. If the yield to maturity on this bond suddenly moves to 1%, the current value of the bond would be $500 (5/500 = 1%). Thus, just a half percentage point move higher in the bond yield at this much lower coupon rate resulted in a 50% loss in the value of the bond. Once again, while this is a vastly oversimplified example with many elements held equal, it highlights how the impact of convexity is obscured when looking at yields on a standard scale absolute number basis.
But with all of this being said, I agree with Cullen's point and I appreciate you raising it here that not too much should be made about the move in JGB yields to this point. But if the volatility and trend higher continues going forward, the potential for increasing instability could quickly present themselves in full force.
The 2 Biggest Risks Facing Stocks Right Now [View article]
Hello Oxyman,
Thanks for your comment and for sharing your perspectives. A good argument can certainly be made for your strategy at this point. By holding cash for now, you've protected yourself against the risk of a sharp and unexpected downside loss. And if fundamentals do ultimately return to support the market, there will always be attractive investment opportunities to reenter the market.
The 2 Biggest Risks Facing Stocks Right Now [View article]
Hello bartpr,
Thanks as always for your comment. I agree with your points here completely. Investment markets in general and the stock market in particular has become increasingly disconnected from reality over the last several years. And your point on past episodes is spot on - we've seen this script before, and while it seems like nothing will stop it when its roaring higher, it has never ended well. I don't suspect this time will be any different, particularly given the fact that the stock market has registered virtually all of its gains over the last 18 months purely on multiple expansion.
The 2 Biggest Risks Facing Stocks Right Now [View article]
Hello skywola,
Thanks for your comment. We are certainly long overdue for some type of correction at this point in U.S. stocks. It will be interesting to see if it actually comes to pass in the coming weeks. The resiliency of the stock market has been incredible in recent months, so it could definitely break either way.
The 2 Biggest Risks Facing Stocks Right Now [View article]
Hello Rich,
Thanks as always for your comments and for sharing your insights both here and in your comment below. I agree with your view that the Fed is increasingly monitoring the potential froth building in many pockets of the economy. It also seems after they missed the mark with their recent "may give more or less if needed" language that Bernanke was compelled to get the point across more directly during his recent Congressional testimony that tapering may be coming sooner rather than latter. Whether they actually follow through or not is another story, but clearly it is at least on the radar screen at the Fed. I also think that your call that the correction may end up being more severe than anticipated once it takes hold is a very good one. Given all of the leverage that has been accumulated in the system, the potential is certainly there. You have been spot on with so many of your calls over the last several years, so I appreciate your sharing your views here.
The 2 Biggest Risks Facing Stocks Right Now [View article]
Hello aarc,
Thanks for your comment and for the detailed information on employment particularly as it relates to the dearth of qualified candidates in the high tech industry.
Your comment caused me to think about a related point. Often people will talk in the media or the press about the pending economic recovery as a reason for optimism about the stock market going forward. And while some do offer compelling arguments as to why this will occur, many will simply make this statement in passing without explaining exactly why we should expect this to happen. Because of the fact that a sustained recovery has been widely called for since 2010 but has proven elusive makes such statements warrant at least further explanation in many cases instead of simply being accepted as given, particularly with all of the persisting risks and areas of weakness today.
The 2 Biggest Risks Facing Stocks Right Now [View article]
Hello bobbobwhite - Thanks for your comment and for sharing your thoughts and perspectives here on my article. You make a number of very good points. Thanks again.
The 2 Biggest Risks Facing Stocks Right Now [View article]
Hello wrschindler,
Thanks for your comment. You make a good point that the virtually exclusive driver of stock gains over the last 18 months has been valuation expansion, as the "E" in P/E has ground to a halt and forward earnings estimates continue to come down along with profit margins still at historical highs. Thus, the more stocks continue to rise, the multiple headwind is only going to increase. And if earnings were to happen to fall into a sustained decline the pressure in this regard would become all the more acute regardless of how much stimulus is being pumped into the system. After all, stocks are not the only asset class that liquidity can flow to find a home.
The 2 Biggest Risks Facing Stocks Right Now [View article]
Hello ejmoosa,
Thanks for your comment and excellent point. I've been writing articles on SA with greater frequency lately, and sometimes I overlook the fact that readers may not have caught some of my previous articles. So I apologize for my oversight here and you are absolutely correct to raise this point.
The point that you have raised in your comment is something that I have been hammering on for much of the last year in many of my articles. The fact that stocks have soared to all time highs in the face of not only declining earnings growth over much of the past year but also earnings forecasts that have been steadily revised lower for more than a year now is curious to say the least. This is one of the many disconnects from fundamentals that we have seen in stocks over the past 12 to 18 months.
My reason for excluding this point in the article here is because it seems that stocks have become so solely focused on the daily sentiment surrounding Fed stimulus that fundamentals no longer seem to matter very much. This of course is the point that you've wisely made here and is one with which I completely agree.
Thanks for your comment and for raising a good question here. I'm going to be overly simplistic with my response here, but it is an analogy that I typically find fitting. The economy can be viewed like a person. When an economy is going through the expansionary phase of the business cycle, everything is going well and the party is on. And like any party, people can be prone to eat and drink too much. If such behavior goes on too long, a person will become overweight and represent a health risk. Thus, at some point, the partying must end and its time to diet and get back into shape, which is where the recessions come in. During recessions, projects that should have never been started get cancelled, people who should have never been hired are let go, and debt that should have never been accumulated is paid off. Just like going on a diet and hitting the gym, recessions can be a difficult and painful process when your going through it, but what your left with is a far healthier situation once its all over. But by not allowing the economy to go into recession, it is the equivalent of allowing the economy continue to party and overeat with the defense that a handful of diet pills will quick fix the problem. What ultimately happens in the end is that the economy will have a heart attack, which is effectively what happened in 2008 after effectively skipping over recessions in 1986, 1994, 1998 and 2006. And instead of finally forcing the economy to get into shape in the aftermath of 2008, it's more monetary quick fix diet pills to try and wish the problem away. Unfortunately, for this reason the next shock could end up being much worse.
This response may not answer your question, but hopefully it makes sense.
Thanks a lot for your comment. I appreciate it and you hit on one of the key points and primary concerns, for the longer policy makers try to put off dealing with the excesses that have been built up in the economy, the more severe and disorderly the final corrective is likely to be.
Thanks for your comment. I appreciate it, and as I mentioned to Lawrence in a comment above, the ability to engage in a broad and substantive debate is a great way to explore topics in far greater depth and discover new insights. For point without counterpoint quickly becomes most unproductive, and I always believe it is important to respect all sides of the argument.
Thanks for your comment and for you kind words. I appreciate it.
You make a number of outstanding points here with which I agree. In particular, your points about unproductive spending and improving the regulatory environment are spot on. I have contended for some time that more than additional monetary stimulus or fiscal spending, what would benefit our economy most would be far greater regulatory clarity. This is something that fiscal policy makers could take action on immediately with little cost. In fact, it offers the potential to improve the growth potential of the economy while at the same time reducing spending and lowering debt through greater efficiencies. Unfortunately, such an outcome is far beyond the realm of what could be hoped for on the fiscal policy front in this or any environment for that matter.
Great comment. Thanks for sharing your thoughts and perspectives.
The 2 Biggest Risks Facing Stocks Right Now [View article]
Thanks for your comment. You raise excellent points here as always.
Thanks for sharing Cullen Roche's recent article on JGBs. I have been a long time follower of Cullen's and remember reading this specific article, so I appreciate where you are coming from by sharing it completely. I know where Cullen is coming from in his point, but I view it a bit differently for the same reasons that you have highlighted in your comment. Moreover, viewing data like yields on a standard scale can be a bit deceiving because it obscures the impact of convexity. And for a 10-year bond with a yield of 1% or less, the impact of convexity is extreme.
The following is a vastly oversimplified example to highlight this point. Suppose a $1,000 par value bond has a coupon of $80, implying a coupon rate of 8%. If the yield to maturity on this bond is 10%, the current value of the bond would be $800 (80/800 = 10%). Thus, a two percentage point move higher in the bond yield at this higher coupon rate resulted in a 20% loss in the value of the bond. Now suppose a $1,000 par value bond has a coupon of $5, implying a coupon rate of 0.5%. If the yield to maturity on this bond suddenly moves to 1%, the current value of the bond would be $500 (5/500 = 1%). Thus, just a half percentage point move higher in the bond yield at this much lower coupon rate resulted in a 50% loss in the value of the bond. Once again, while this is a vastly oversimplified example with many elements held equal, it highlights how the impact of convexity is obscured when looking at yields on a standard scale absolute number basis.
But with all of this being said, I agree with Cullen's point and I appreciate you raising it here that not too much should be made about the move in JGB yields to this point. But if the volatility and trend higher continues going forward, the potential for increasing instability could quickly present themselves in full force.
Great comment as always. Thanks again Gerry.
The 2 Biggest Risks Facing Stocks Right Now [View article]
Thanks for your comment and for sharing your perspectives. A good argument can certainly be made for your strategy at this point. By holding cash for now, you've protected yourself against the risk of a sharp and unexpected downside loss. And if fundamentals do ultimately return to support the market, there will always be attractive investment opportunities to reenter the market.
Thanks again.
The 2 Biggest Risks Facing Stocks Right Now [View article]
Thanks as always for your comment. I agree with your points here completely. Investment markets in general and the stock market in particular has become increasingly disconnected from reality over the last several years. And your point on past episodes is spot on - we've seen this script before, and while it seems like nothing will stop it when its roaring higher, it has never ended well. I don't suspect this time will be any different, particularly given the fact that the stock market has registered virtually all of its gains over the last 18 months purely on multiple expansion.
Great points as always. Thanks again.
The 2 Biggest Risks Facing Stocks Right Now [View article]
Thanks for your comment. We are certainly long overdue for some type of correction at this point in U.S. stocks. It will be interesting to see if it actually comes to pass in the coming weeks. The resiliency of the stock market has been incredible in recent months, so it could definitely break either way.
Thanks again.
The 2 Biggest Risks Facing Stocks Right Now [View article]
Thanks as always for your comments and for sharing your insights both here and in your comment below. I agree with your view that the Fed is increasingly monitoring the potential froth building in many pockets of the economy. It also seems after they missed the mark with their recent "may give more or less if needed" language that Bernanke was compelled to get the point across more directly during his recent Congressional testimony that tapering may be coming sooner rather than latter. Whether they actually follow through or not is another story, but clearly it is at least on the radar screen at the Fed. I also think that your call that the correction may end up being more severe than anticipated once it takes hold is a very good one. Given all of the leverage that has been accumulated in the system, the potential is certainly there. You have been spot on with so many of your calls over the last several years, so I appreciate your sharing your views here.
Thanks again.
The 2 Biggest Risks Facing Stocks Right Now [View article]
The 2 Biggest Risks Facing Stocks Right Now [View article]
Thanks for your comment and for the detailed information on employment particularly as it relates to the dearth of qualified candidates in the high tech industry.
Your comment caused me to think about a related point. Often people will talk in the media or the press about the pending economic recovery as a reason for optimism about the stock market going forward. And while some do offer compelling arguments as to why this will occur, many will simply make this statement in passing without explaining exactly why we should expect this to happen. Because of the fact that a sustained recovery has been widely called for since 2010 but has proven elusive makes such statements warrant at least further explanation in many cases instead of simply being accepted as given, particularly with all of the persisting risks and areas of weakness today.
Thanks again for your comment.
The 2 Biggest Risks Facing Stocks Right Now [View article]
The 2 Biggest Risks Facing Stocks Right Now [View article]
Thanks for your comment. You make a good point that the virtually exclusive driver of stock gains over the last 18 months has been valuation expansion, as the "E" in P/E has ground to a halt and forward earnings estimates continue to come down along with profit margins still at historical highs. Thus, the more stocks continue to rise, the multiple headwind is only going to increase. And if earnings were to happen to fall into a sustained decline the pressure in this regard would become all the more acute regardless of how much stimulus is being pumped into the system. After all, stocks are not the only asset class that liquidity can flow to find a home.
Thanks again for your comment and great point.
The 2 Biggest Risks Facing Stocks Right Now [View article]
Thanks for your comment and excellent point. I've been writing articles on SA with greater frequency lately, and sometimes I overlook the fact that readers may not have caught some of my previous articles. So I apologize for my oversight here and you are absolutely correct to raise this point.
The point that you have raised in your comment is something that I have been hammering on for much of the last year in many of my articles. The fact that stocks have soared to all time highs in the face of not only declining earnings growth over much of the past year but also earnings forecasts that have been steadily revised lower for more than a year now is curious to say the least. This is one of the many disconnects from fundamentals that we have seen in stocks over the past 12 to 18 months.
My reason for excluding this point in the article here is because it seems that stocks have become so solely focused on the daily sentiment surrounding Fed stimulus that fundamentals no longer seem to matter very much. This of course is the point that you've wisely made here and is one with which I completely agree.
Great comment. Thanks again.
The 7 Reasons Why People Hate QE [View article]
Thanks for your comment and for raising a good question here. I'm going to be overly simplistic with my response here, but it is an analogy that I typically find fitting. The economy can be viewed like a person. When an economy is going through the expansionary phase of the business cycle, everything is going well and the party is on. And like any party, people can be prone to eat and drink too much. If such behavior goes on too long, a person will become overweight and represent a health risk. Thus, at some point, the partying must end and its time to diet and get back into shape, which is where the recessions come in. During recessions, projects that should have never been started get cancelled, people who should have never been hired are let go, and debt that should have never been accumulated is paid off. Just like going on a diet and hitting the gym, recessions can be a difficult and painful process when your going through it, but what your left with is a far healthier situation once its all over. But by not allowing the economy to go into recession, it is the equivalent of allowing the economy continue to party and overeat with the defense that a handful of diet pills will quick fix the problem. What ultimately happens in the end is that the economy will have a heart attack, which is effectively what happened in 2008 after effectively skipping over recessions in 1986, 1994, 1998 and 2006. And instead of finally forcing the economy to get into shape in the aftermath of 2008, it's more monetary quick fix diet pills to try and wish the problem away. Unfortunately, for this reason the next shock could end up being much worse.
This response may not answer your question, but hopefully it makes sense.
Thanks again.
The 7 Reasons Why People Hate QE [View article]
The 7 Reasons Why People Hate QE [View article]
Thanks a lot for your comment. I appreciate it and you hit on one of the key points and primary concerns, for the longer policy makers try to put off dealing with the excesses that have been built up in the economy, the more severe and disorderly the final corrective is likely to be.
Great point. Thanks again.
The 7 Reasons Why People Hate QE [View article]
Thanks for your comment. I appreciate it, and as I mentioned to Lawrence in a comment above, the ability to engage in a broad and substantive debate is a great way to explore topics in far greater depth and discover new insights. For point without counterpoint quickly becomes most unproductive, and I always believe it is important to respect all sides of the argument.
Thanks again for your comment. I appreciate it.
The 7 Reasons Why People Hate QE [View article]
Thanks for your comment and for you kind words. I appreciate it.
You make a number of outstanding points here with which I agree. In particular, your points about unproductive spending and improving the regulatory environment are spot on. I have contended for some time that more than additional monetary stimulus or fiscal spending, what would benefit our economy most would be far greater regulatory clarity. This is something that fiscal policy makers could take action on immediately with little cost. In fact, it offers the potential to improve the growth potential of the economy while at the same time reducing spending and lowering debt through greater efficiencies. Unfortunately, such an outcome is far beyond the realm of what could be hoped for on the fiscal policy front in this or any environment for that matter.
Great comment. Thanks for sharing your thoughts and perspectives.