S&P Target 2000: Air Pocket Ahead - Part IV [View article]
Change, thanks for the Delong article. In French we say "jamais parier contre les Grands Argentiers". It seems to me that a fair conclusion is this: hedge strategies may work in normalized markets, but not in markets which experience structural changes. To me, the structural changes started in 1995, first culminated with the Internet Bubble, were then patched with the Refinancing Bubble which ended in the 2008 Meltdown.
The Bernanke/Paulson Bazooka was the next disruptive change, which Bernanke had publicly laid out in 2002 - meaning he had thought about this long before the Bubble burst.
The tripling of the initial US QE was also disruptive. The European QE is less visible because of the way they publish data, but the Japanese, the actual inventors of QE, which they called Ryoteki Kinyu Kanwa in March 2001 - twelve years ago...are now coming out of the closet, and then some.
I think Hedge funds are going to leave substantial money on the table here. This is time to be Long Only, and use cash as the hedge. Shorting is suicide in the face of rising Earnings and P/E expansion. One example: Pulte Homes ( which combined with Centex, making it a power house in the low-to-middle housing market) is selling at a TTM P/E of around 30. Toll Brothers, higher-end builder, is selling at 11 times. Do you really want to do what the models say, long TOL, short PHM... I am long both, and JOE.
S&P Target 2000: Air Pocket Ahead - Part IV [View article]
Change, I had not thought of that. Simple, Dr. Watson...:) here is a useful link http://1.usa.gov/Z431lw And guess what LTCM (remember them) and Bill Sharpe have in common: three Nobel Prizes in Economic Science...
Reality will ultimately determine whether the risk built into the model is appropriate. I suspect reality is still murkied by the CDS problem, which is very difficult to quantify, even when talking to BIS. But if I am right on Housing - I have a pretty good handle in the US, where I expect a wave of immigration from Europe on top of a regression to the mean -, the employment needle will continue to move and growth will take care, over time, of what's left of the skeletons in the banks' closets. Then what's not needed of the $1.7Tn will trickle down to M1, inflation expectations will revive, so will the Multiplier, all bona fide reasons for the Fed to reverse QE - first slow, then stop, then withdraw. While this may create headline related "corrections", to me these will be dips to be bought because the corollary will be an improvement in the economy and the worldwide financial system. The sooner the better, because stocks are moving up too fast.
S&P Target 2000: Air Pocket Ahead - Part IV [View article]
Well, Change, I guess we'll now need to make a case for a short term breakout... I am starting to see articles on historical P/Es. Most miss the point, as they don't go back far enough in history, and none that I have seen talk about the Earnings Yield. I just wrote this long piece to comment on one of them, by Bespoke which has 34,000 followers. However, there must be follow-through next week if the market is to establish a new historical support at 1600. Here is the comment:
Mobyss, you are absolutely correct. I personally have looked at a the post WWII period. From 1946, which was a period when earnings troughed due to Post War conversion, to 1949, when there were strikes and a recession, Earnings more than doubled, and as a result the S&P 500 P/E went from 24 to 6, with the S&P 500 itself basically flat at around 20 (not a typo...). It then took until 1957 for the P/E to gradually inch up to 14, and the SnP basically tripled to 60. from then on, until 1974, it hovered in a range of 14 to 23. With the Oil shock, food inflation, and baby boom demand led inflation, it broke down that range to trade between 14 and 7. It took the big Volcker recession of 1981-1982 to bring it back to 14in 1983. While I have seen no explanation for this, I have my own: during that period, financial assets, stocks and bonds alike, were depreciated for fear of structural inflation. Then, after some hesitation, the previous range was restored, with an even higher peak in the Bubble years. Which brings me to the real thing - The Earnings Yield, i.e. the reverse of the P/E, which with the advent of Modern Portfolio Theory in the 60's, is to be compared to the risk-free rate, i.e. the 10-Year Note Yield usually. You can see the historical chart in my article http://seekingalpha.co... . From 1980 or so to 2003, there was a very strong correlation between the two, which checks with the 14 to 28 P/E range of the period, similar to the one from 1957 to 1974. However, this correlation broke down in 2003, and is still broken - a P/E of 16.3 translates into an Earnings Yield of 6.1%, when the 10-Year is at 1.8%. This implies that stocks are extremely cheap, the theory behind my series of articles entitled "S&P Target 1600", which I started writing in October 2011, and which I just upgraded to "S&P Target 2000". The question then becomes why would P/E expand? I am afraid you'll have to read these to get a complete picture, but the first question is "why the 2003 breakdown?". In my opinion, Sarbanes Oxley: it induced the notion that company lied about their earnings - which was true as we found out not only in the Internet Bubble, but also in the 2008 Meltdown - see my book http://bit.ly/rDjanF . This risk perception is very much still in people's mind - actually, in banks' mind as well if one is to figure out why they are holding Excess Reserves of $1.7 Trillion, compared to the $10 Billion or so (not a typo either) they were holding before the Meltdown. Now that the only sector that is capable of moving the employment needle is recovery (Housing) and that people understand QE worked, and will work for Japan too, I think this risk premium will normalize. The breakout last week seems to confirm that - I was a bit hesitant to forecast it, I must admit - I prefer Walls of Worry to exponential spikes.
See my long answer to Mobyss above. The Real Thing is not the P/E, although there is a strong case to be made for a normalized Post WWII range of 14-28, it is the reverse of the P/E, i.e. the Earnings Yield vs. the 10-Year Note.
Mobyss, you are absolutely correct. I personally have looked at a the post WWII period. From 1946, which was a period when earnings troughed due to Post War conversion, to 1949, when there were strikes and a recession, Earnings more than doubled, and as a result the S&P 500 P/E went from 24 to 6, with the S&P 500 itself basically flat at around 20 (not a typo...). It then took until 1957 for the P/E to gradually inch up to 14, and the SnP basically tripled to 60. from then on, until 1974, it hovered in a range of 14 to 23. With the Oil shock, food inflation, and baby boom demand led inflation, it broke down that range to trade between 14 and 7. It took the big Volcker recession of 1981-1982 to bring it back to 14in 1983. While I have seen no explanation for this, I have my own: during that period, financial assets, stocks and bonds alike, were depreciated for fear of structural inflation. Then, after some hesitation, the previous range was restored, with an even higher peak in the Bubble years. Which brings me to the real thing - The Earnings Yield, i.e. the reverse of the P/E, which with the advent of Modern Portfolio Theory in the 60's, is to be compared to the risk-free rate, i.e. the 10-Year Note Yield usually.You can see the historical chart in my article http://seekingalpha.co... . From 1980 or so to 2003, there was a very strong correlation between the two, which checks with the 14 to 28 P/E range of the period, similar to the one from 1957 to 1974. However, this correlation broke down in 2003, and is still broken - a P/E of 16.3 translates into an Earnings Yield of 6.1%, when the 10-Year is at 1.8%. This implies that stocks are extremely cheap, the theory behind my series of articles entitled "S&P Target 1600", which I started writing in October 2011, and which I just upgraded to "S&P Target 2000". The question then becomes why would P/E expand? I am afraid you'll have to read these to get a complete picture, but the first question is "why the 2003 breakdown?". In my opinion, Sarbanes Oxley: it induced the notion that company lied about their earnings - which was true as we found out not only in the Internet Bubble, but also in the 2008 Meltdown - see my book http://bit.ly/rDjanF . This risk perception is very much still in people's mind - actually, in banks' mind as well if one is to figure out why they are holding Excess Reserves of $1.7 Trillion, compared to the $10 Billion or so (not a typo either) they were holding before the Meltdown. Now that the only sector that is capable of moving the employment needle is recovery (Housing) and that people understand QE worked, and will work for Japan too, I think this risk premium will normalize. The breakout last week seems to confirm that - I was a bit hesitant to forecast it, I must admit - I prefer Walls of Worry to exponential spikes.
S&P Target 2000: Air Pocket Ahead - Part IV [View article]
Change, I hate to say, I covered all shorts at the open the next day. You gotta play with the wind, I still think some stocks are getting overvalued - whenever I see an exponential curve, barring a take-out possibility, I worry: I sold PH today, even though I think it is a cheap stock. I am still short HYG.
S&P Target 2000: Air Pocket Ahead - Part IV [View article]
You know Seth, when I ask myself "maybe", I start to worry about greed. I have nothing against making "stupid" bets - my best performers YTD have been ODP, RSH, FIATY.K and I expect GTI to follow. Of course, these are special situations. Re the big sectors, Housing and related remains overweight, Consumer non Durables as well as Durables are OK, by my book, because while their multiples look high, I think their E's are too low. Short term, I would sell any that look exponential - unless it has a huge short interest.
Debunking Birinyi's 'S&P To 1900' Thesis [View article]
Hi Damir, good try to take on Laslo. But good luck, he is pretty good. FYI, I called S&P 1600 in October 2011 - see http://seekingalpha.co... , and 2000 in April 2013. Plenty of fundamental arguments. The main one you are missing, even though you have part of the story right, is that the only post WWII period during which P/Es were in a 8-14 range was 1972-1981. I found no other explanation than mine, which is that at the time, inflation was deemed structural, a combination of concerns over Oil Supply and Baby Boomers Demand-led inflation. Since 2008, the spread between the Earnings Yield and the 10-Year Note reflects the uncertainty about the economy, Sarbanes Oxley, QE, etc. However, the bet to make was, would we go back to the normalize spread and P/E trading range of 14/26? In the meantime, of course, one had to take a stand on Europe and a potential liquidity crash there. It's all in my articles if you need arguments.
S&P Target 2000: Air Pocket Ahead - Part IV [View article]
Good question. Ultimately, the B/S will shrink back, to which level, I don't know. Remember, $800 Bn used to support a $15 Trillion GDP, now we need $3 Trillion. All you need to look at is http://bit.ly/smHrcb I don't believe QE will end before the Multiplier revives, so the first step will be a decrease in growth.
S&P Target 2000: Air Pocket Ahead - Part IV [View article]
Mano,
Charts are one tool in my tool box. if you care to o back to my other articles, you'll see a lot of other tools that you actually may never have heard of.
S&P Target 2000: Sold To The Gentleman With The Beard - Part III [View article]
I tend to disagree, actually. I own stocks at their lows and stocks at their highs. What I have learnt is that you only get a ten bagger if you keep a stock despite the fact that it is at its high - best example: URI since March 2009. Worst example so far: GTI.
S&P Target 2000: Sold To The Gentleman With The Beard - Part III [View article]
Seth, that's an interesting point, and true to a certain extent. It depends on whether the growth is linear or cyclical. Take homebuilders for example - one of the best performing groups since September 2011 - TOL sells at 12 times, PHM at 29, and JOE at 291. Back to the bearish comment from JCATRI, this shows that earnings are not yet normalized - another example: SLM sells at 8 times, and one of my favorites, AGM, at 7.
S&P Target 2000: Air Pocket Ahead - Part IV [View article]
The Bernanke/Paulson Bazooka was the next disruptive change, which Bernanke had publicly laid out in 2002 - meaning he had thought about this long before the Bubble burst.
The tripling of the initial US QE was also disruptive. The European QE is less visible because of the way they publish data, but the Japanese, the actual inventors of QE, which they called Ryoteki Kinyu Kanwa in March 2001 - twelve years ago...are now coming out of the closet, and then some.
I think Hedge funds are going to leave substantial money on the table here. This is time to be Long Only, and use cash as the hedge. Shorting is suicide in the face of rising Earnings and P/E expansion. One example: Pulte Homes ( which combined with Centex, making it a power house in the low-to-middle housing market) is selling at a TTM P/E of around 30. Toll Brothers, higher-end builder, is selling at 11 times. Do you really want to do what the models say, long TOL, short PHM... I am long both, and JOE.
S&P Target 2000: Air Pocket Ahead - Part IV [View article]
And guess what LTCM (remember them) and Bill Sharpe have in common: three Nobel Prizes in Economic Science...
Reality will ultimately determine whether the risk built into the model is appropriate. I suspect reality is still murkied by the CDS problem, which is very difficult to quantify, even when talking to BIS. But if I am right on Housing - I have a pretty good handle in the US, where I expect a wave of immigration from Europe on top of a regression to the mean -, the employment needle will continue to move and growth will take care, over time, of what's left of the skeletons in the banks' closets. Then what's not needed of the $1.7Tn will trickle down to M1, inflation expectations will revive, so will the Multiplier, all bona fide reasons for the Fed to reverse QE - first slow, then stop, then withdraw. While this may create headline related "corrections", to me these will be dips to be bought because the corollary will be an improvement in the economy and the worldwide financial system. The sooner the better, because stocks are moving up too fast.
S&P Target 2000: Air Pocket Ahead - Part IV [View article]
Mobyss, you are absolutely correct. I personally have looked at a the post WWII period. From 1946, which was a period when earnings troughed due to Post War conversion, to 1949, when there were strikes and a recession, Earnings more than doubled, and as a result the S&P 500 P/E went from 24 to 6, with the S&P 500 itself basically flat at around 20 (not a typo...). It then took until 1957 for the P/E to gradually inch up to 14, and the SnP basically tripled to 60. from then on, until 1974, it hovered in a range of 14 to 23. With the Oil shock, food inflation, and baby boom demand led inflation, it broke down that range to trade between 14 and 7. It took the big Volcker recession of 1981-1982 to bring it back to 14in 1983. While I have seen no explanation for this, I have my own: during that period, financial assets, stocks and bonds alike, were depreciated for fear of structural inflation. Then, after some hesitation, the previous range was restored, with an even higher peak in the Bubble years. Which brings me to the real thing - The Earnings Yield, i.e. the reverse of the P/E, which with the advent of Modern Portfolio Theory in the 60's, is to be compared to the risk-free rate, i.e. the 10-Year Note Yield usually. You can see the historical chart in my article http://seekingalpha.co... . From 1980 or so to 2003, there was a very strong correlation between the two, which checks with the 14 to 28 P/E range of the period, similar to the one from 1957 to 1974. However, this correlation broke down in 2003, and is still broken - a P/E of 16.3 translates into an Earnings Yield of 6.1%, when the 10-Year is at 1.8%. This implies that stocks are extremely cheap, the theory behind my series of articles entitled "S&P Target 1600", which I started writing in October 2011, and which I just upgraded to "S&P Target 2000". The question then becomes why would P/E expand? I am afraid you'll have to read these to get a complete picture, but the first question is "why the 2003 breakdown?". In my opinion, Sarbanes Oxley: it induced the notion that company lied about their earnings - which was true as we found out not only in the Internet Bubble, but also in the 2008 Meltdown - see my book http://bit.ly/rDjanF . This risk perception is very much still in people's mind - actually, in banks' mind as well if one is to figure out why they are holding Excess Reserves of $1.7 Trillion, compared to the $10 Billion or so (not a typo either) they were holding before the Meltdown. Now that the only sector that is capable of moving the employment needle is recovery (Housing) and that people understand QE worked, and will work for Japan too, I think this risk premium will normalize. The breakout last week seems to confirm that - I was a bit hesitant to forecast it, I must admit - I prefer Walls of Worry to exponential spikes.
S&P 500 P/E Ratio [View article]
S&P 500 P/E Ratio [View article]
S&P Target 2000: Air Pocket Ahead - Part IV [View article]
S&P Target 2000: Air Pocket Ahead - Part IV [View article]
S&P Target 2000: Air Pocket Ahead - Part IV [View article]
Debunking Birinyi's 'S&P To 1900' Thesis [View article]
S&P Target 2000: Air Pocket Ahead - Part IV [View article]
I don't believe QE will end before the Multiplier revives, so the first step will be a decrease in growth.
S&P Target 2000: Air Pocket Ahead - Part IV [View article]
Charts are one tool in my tool box. if you care to o back to my other articles, you'll see a lot of other tools that you actually may never have heard of.
S&P Target 2000: Sold To The Gentleman With The Beard - Part III [View article]
S&P Target 2000: Sold To The Gentleman With The Beard - Part III [View article]
S&P Target 2000: Sold To The Gentleman With The Beard - Part III [View article]
There Will Be No European Liquidity Crisis (Part 1) [View article]