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James A. Kostohryz

 
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  • Bubble Stage Of This Bull Market May Be Nigh [View article]
    A.L:

    Short answer: Yes. Certain select emerging markets will benefit. As far as specific countries and instruments. I'll be going over that sort of stuff in my newsletter.

    Cheers!
    Sep 21 12:32 PM | Likes Like |Link to Comment
  • Bubble Stage Of This Bull Market May Be Nigh [View article]
    David:

    I happen to agree with you; the EPS number is just a small part of the story. But that was my whole point. My whole point was to counter those that say that there was an "earnings bubble" as a result of buybacks. You can argue that there stocks are in a bubble; you can't very well argue that stocks are in a bubble because of inflated earnings caused by stock buybacks.

    Cheers!
    Sep 21 12:28 PM | Likes Like |Link to Comment
  • Bubble Stage Of This Bull Market May Be Nigh [View article]
    David:

    "Any time prices are on an unsustainable trajectory for any reason, that's a bubble. "

    That is not a good definition of a bubble. A bubble does not just involve prices that are expensive; they must be very expensive to a very extreme degree. And they must involve such a level of overvaluation relative to the fundamentals that they collapse over a relatively short time. And they must involve frenzied speculation based on irrational exuberance. Otherwise we are not talking about a bubble, but something else.
    Sep 21 12:24 PM | Likes Like |Link to Comment
  • Bubble Stage Of This Bull Market May Be Nigh [View article]
    Flash Crash Gordon:

    That was a blunder committed in the "heat of battle". Thanks for pointing it out. I submitted the correction. The usual term in this situation is "take the offer". But I also added "buy at the market" for extra clarity.
    Sep 21 03:27 AM | Likes Like |Link to Comment
  • Bubble Stage Of This Bull Market May Be Nigh [View article]
    Thanks, bobmags. I appreciate it.

    I worked in Washington once when I was quite young, and decided it probably wouldn't be for me. I think I am an independent thinker, and I although I had a great experience, I was able to perceive that independent thinking doesn't go very well in that business. In this business, it's not about being popular. You don't have to "stay on message." You don't need to conform or compromise intellectually. It's about calling them as you see them and having a good batting average, as you say.

    Having said that, I'm playing around with the idea of maybe -- as a completely separate endeavor and in a totally separate venue -- publishing some outside-the-box thinking on policy subjects. Maybe in a couple of years from now after I have launched my new business and had a little spare time. If I ever did that, it would be on a separate website from any investment website. Investing and politics don't mix.

    So, to answer your question. I do have a civic conscience. I believe that ideas have consequences.... Maybe I can make a small contribution some day by putting some outside-the-box ideas out there. If the ideas are good enough, they could conceivably strike a cord, catch fire and take on a life of their own. Why not?
    Cheers!
    Sep 21 03:13 AM | Likes Like |Link to Comment
  • Bubble Stage Of This Bull Market May Be Nigh [View article]
    Value Doc:

    There are problems with that whole "variety of metrics" story that Hussman talks about. They are not a variety at all; they are all essentially the same thing. They are not independent metrics at all. Second, they purportedly predict long-term returns. Let's assume they do. Bubbles are not about long-term 10-year average returns. They are about steep increases in price followed by collapses in a short period of time.
    Sep 21 02:46 AM | 1 Like Like |Link to Comment
  • Bubble Stage Of This Bull Market May Be Nigh [View article]
    Value Doc:

    Margins are, of course, cyclical in that they tend to track the business cycle. But the issue is that they have been in a SECULAR uptrend for over 30 years now and the theories that they have suggested as to why they would revert back to the secular trend during THIS cycle are bogus theoretically and have already been blown out of the water empirically.

    I'm probably going to write a full article on this at some point. I won't get into it here because that is not the subject of this article.
    Sep 21 02:37 AM | Likes Like |Link to Comment
  • Anatomy Of A Market Bubble [View article]
    JS:

    I regret that you seem to have taken offense at my questions, because I think they were constructive in nature. I will reply to your rather aggressive responses and leave it at that.

    1. My only point was that the amount you signaled (by way of your comparison of the growth of credit to M2) cannot be explained by the increase in reserves. Excess reserves have increased by about 2.5 trillion -- far short of the figure you signal. Therefore, it is clear that you have not explained the "missing money." I actually think that the increase in excess reserves is a factor that contributes to rising stock prices. However, not through the path you seem to imply, nor can the impact be quantified through the sort of arithmetic method you employ.

    2. Sadly, your statement is disingenuous. Of course primary dealer banks sometimes buy stocks and of course companies sometimes buy stocks from primary dealer banks. To answer my question in that manner is to erect a disingenuous strawman -- an "absurd" one, to borrow your term. What is at issue here is that you seem to have been insinuating a direct nexus between the increase in reserves via QE and stock repurchases. Perhaps you were hinting at a conspiracy to manipulate stock prices, as in your other work where you suggest a conspiracy to manipulate gold? Either way, whether you meant to allude to a conspiracy or not, you proved no direct nexus. Money is fungible. You have absolutely no idea whom corporations were buying their shares from and you have absolutely no idea how much stock primary dealers have been buying with reserves. The shares that the corporations buy on the open market can come from mutual funds, individual investors, whatever. Furthermore, the total quantity of reserves is not altered by a single dollar through purchases of stock -- no matter who buys the stock or how many times stocks are bought. And what evidence do you have that primary dealers were using reserves to load up on stocks? You have none. It's just innuendo. In sum, your whole presentation of this appears to be aimed at innuendo -- an innuendo that in any event seems to be derived partially from a misunderstanding of how bank reserves work.

    3. On measurement problems in the money supply, I gave you a hint for you to do your own research; I don't have to provide you with a bibliography; it's easy enough for you to Google it. The issue is this: Nobody really knows how to measure broad money very well. That is one reason the Fed discontinued M3 -- because they realized that there were almost intractable measurement problems and they concluded that they were wasting their time. Even if you reconstruct M3, there is an even broader measure of money called M4 that is measured in other countries and that some people track privately in the US, and there is a similar though slightly different measure the Fed used to call L. The "missing money" could be there. And many argue that those are not broad enough - so it could be elsewhere. Further there is stuff going on in the shadow banking sector that the statistics don't capture. There are also problems with double counting involved with broad money. Again, you need to do your own research to learn about these things. Bottom line: you can't really conclude anything from your noted divergence. Certainly you did not provide any evidence that it means anything.

    4. The idea that stock repurchases are malinvestment per se is a very weak argument, at best. Assuming that the rate of return expected by investing in the stock is greater than the rate of return expected from capex AND that the expected rate of return is greater than the cost of capital it is difficult to imagine how anybody could consider that to be malinvestment. Now, if you can prove that the above conditions are not being met -- which you did not even attempt -- then you might have had a case with at least a plausible ring to it. Unfortunately, even if you had done that, the Austrian theory of malinvestment really does not apply very well at all to the case of stock repurchases in the secondary market. Stock repurchases -- even at inflated prices -- do not necessarily cause malinvestment in the capital stock. The Austrian theory of malinvestment is all about the misdirection of capital in the REAL sector, whereby firms are mislead by price signals to invest in mispriced and/or relatively unproductive plant/equipment/labor. When this occurs, real wealth is destroyed. That is not necessarily going on with stock repurchases (although it could conceivably have an indirect effect in that sense -- for example, if investors to buy into secondary share offerings at high prices previously inflated by share repurchases and the proceeds were used to build unproductive facilities). If stock prices go up because of stock repurchases and then they come crashing down later, this in and of itself does not cause any loss of real wealth or a misallocation of capital in the real economy. It might cause it to happen; it might not. You don't make the case. I myself am very concerned with the issue of malinvestment and have written about it. That is why I asked: to see if you had something interesting/plausible to say about that. Unfortunately, stock buybacks = malinvestment does not cut it.

    In sum, you provide lots of interesting research. Thanks. I was just asking some questions to see if your elaborations and/or clarifications on those points could bring out something of interest that could support your various arguments.
    Sep 21 02:05 AM | 3 Likes Like |Link to Comment
  • Anatomy Of A Market Bubble [View article]
    Joseph:

    Lots of interesting info. Thanks. Two questions/observations:

    1. Your thesis is based upon the equation of the term bubble with malinvestment. However, I do not see anywhere in the article where you have proven that there has been malinvestment in the current cycle. It would seem that this is something that needs to be proven, not simply assumed, no? I'm not saying that there isn't malinvestment; I'm saying that you don't prove this anywhere.

    2. It seems that you did not get very far in "finding" the "missing money" that you posit. First, bank reserves have not increased by the amount you signal, and if they had, it wouldn't be "missing." Second, there is absolutely no evidence to suggest that primary dealers have been using reserves to buy stocks and that corporations have been buying their stocks from primary dealers. Third, there are many potential explanations for the "missing money," the simplest being that -- and you can find this in many academic papers -- there has been a breakdown since the mid 80s in the relationships of measures of money and measures of credit. In other words, this could simply be a data/measurement problem. It could be other things. But the real question I have for you in this regard is this: Why is this "missing money" even relevant -- in general, or to the subject of the bubble in particular? You do not make this clear.

    Thanks, and Cheers!
    Sep 20 08:07 PM | Likes Like |Link to Comment
  • Bubble Stage Of This Bull Market May Be Nigh [View article]
    Hi Ed:

    I don't think there was a stock market bubble in 2007. There was a bubble in the MBS credit markets, and when this bubble popped it brought down the financial system, the stock market and the economy with it.

    You could argue that the stock market was a "bubble" because it failed to properly apprehend the problems in the MBS market and the financial system at large. But I think that would be a stretch.

    Regarding your question, I don't think there is any such thing as an "earnings bubble." Hussman, Montier and others have been cited in support of such a view, however, their theories are devoid of merit.

    Cheers!
    Sep 20 04:34 PM | Likes Like |Link to Comment
  • Bubble Stage Of This Bull Market May Be Nigh [View article]
    Robert:

    Those are not studies; they articles in the popular press by non-specialists, and they do not even address the point in question.

    The issue in question here is not whether buybacks create a bid for stocks and therefore contribute to a rise in prices -- they do. The extent of this impact is, of course subject to debate. However, I think the impact is significant and I have said so myself on many occasions. The question that was in issue was the impact of buybacks EPS; on exactly how important share buybacks are to S&P EPS as reported by the S&P. The claim was that the EPS was somehow "phony" or inflated because of buybacks. My point is that such claims are exaggerated and that one of the problems is that people -- including very many smart people -- do not understand how S&P 500 EPS is calculated nor how this relates to issues such as options expense accounting, full dilution of shares and other issues.
    Sep 20 04:26 PM | Likes Like |Link to Comment
  • Bubble Stage Of This Bull Market May Be Nigh [View article]
    zorrba:

    "Household debt is 107% of annual disposable income."

    That does not matter. Unless you think that people on aggregate are going to use that cash to pay down debt and that banks are going to choose to voluntarily shrink their balance sheets (as households pay down the debt), then that cash is going to get spent as liquidity preference declines.

    Niether households nor businesses are going to want to hold extraordinarily high cash balances forever. As the economy continues to improve, they will start spending their cash reserves at a higher rate.
    Sep 20 12:36 PM | 1 Like Like |Link to Comment
  • Bubble Stage Of This Bull Market May Be Nigh [View article]
    Innate:

    Growth should outperform value in this environment. High beta should outperform low beta.

    I will discuss more specifics in my newsletter later this year.

    Cheers!
    Sep 20 12:31 PM | Likes Like |Link to Comment
  • Bubble Stage Of This Bull Market May Be Nigh [View article]
    Value Doc:

    I agree that the way to deal with this is not by going all in or all long. I don't think that the average investor should be investing based on expectations of a bubble. In terms of how to invest in this environment is something I will be discussing in my newsletter.
    Sep 20 12:25 PM | Likes Like |Link to Comment
  • Bubble Stage Of This Bull Market May Be Nigh [View article]
    Robert:

    You said it: You evidently don't understsand the issue.

    If you don't understand what the S&P says about how S&P EPS is calculated, then you simply don't understand the issue.

    But this is not the subject of my article, so I am not going to belabor this any further.

    You can either choose to learn index theory and mathematics and the issues pertaining to such issues such as undiluted and fully diluted shares, or you can persist in believing that the S&P -- the company that manages the index and all statistics pertinent to it -- is wrong. And you can continue to believe that amateurish press analyses in popular media are correct. Your choice.
    Sep 20 12:19 PM | Likes Like |Link to Comment
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