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Tales From The Future (tftf). I picked my nickname because many advisors and investors claim they can predict the future of the (stock) markets and somehow pick the winners. I don't. I usually do not engage in short-term trading and myopic analysis (quarter by quarter, without looking at the big... More
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  • Five Reasons Why The US And Other Major Stock Markets Could Soon Top Out... 9 comments
    Jul 26, 2014 2:38 PM

    I know, I know. I have written about a top nearing since the autumn of 2013 when I drastically reduced my long exposure. Yet most stock markets around the world kept going up (although at a slower pace).

    Here are once again three time-proven indicators why US (and many other stock markets who bottoned out in late 2008 and early 2009) might soon top out in my opinion...

    • Shiller P/E (1) above 26 at the moment
    • Market Value vs Nominal GDP (2) around 125% at the moment
    • Lack of market corrections above 10% in recent years (3)

    Figures (1) and (2) can easily be reviewed with daily updated numbers on sites like gurufocus.com. Both numbers are near all time-highs in mid-2014...

    (1) www.gurufocus.com/sector_shiller_pe.php

    (2) www.gurufocus.com/stock-market-valuations.php

    I would like to focus on (3) for a short while now...

    The Bigger they Come the Harder they Fall

    The S&P500 has now gone nearly 800 days since a correction of more than 10 percent - the "meaningful" level for many analysts. The more extended the market becomes, the larger the eventual decline may be. Over the last 50 years, the longer the time between market corrections, the steeper the drop once the correction does occur.(...)

    In his famous speech, [former Fed Chairman William McChesney] Martin preceded his punch bowl comment by saying, on behalf of the Fed, "…precautionary action to prevent inflationary excesses is bound to have some onerous effects…". The flipside -- a lack of precautionary action by the Fed -- will have its own set of consequences in time. It is very difficult to say when exactly these will happen, but near-term indicators suggest the hangover won't hit while you're relaxing at the beach this summer.

    Source: www.zerohedge.com/news/2014-07-25/bigger...

    There are also two other indicators I already discussed in earlier Instablogs:

    • Net money outflows in bad credit risks (China, USA) growing and more shadow banking and credit crumblings in China
    • FED exit (or least public announcements suggesting an exit) from easy monetary policy and moving (rising) interest rate levels

    Now, before you sell everything right away next Monday:

    Keep in mind bull markets can keep going longer than many anticipate, they can even go parabolic as the cycle ends; for example the Shiller P/E was above 40 back in 1999-2000 and TMC/GDP was near 150% for a short while in March 2000. The following drop in 2001-2002 however did once again prove what I quoted above...

    The Bigger they Come the Harder they Fall

    I would advise all investors to at least add trailing stops to their long positions as of 2014-2015 and be extra careful with levered and high-beta stocks this late in the cycle.

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  • Tales From The Future
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    Author’s reply » We should of course not forget why stocks rose for so long...low yields and investors beig forced to buy stocks "thanks" to the FED:


    "That is the critical issue investors are facing here. By maintaining interest rates at artificially low levels for over five and a half years, the Fed has effectively driven yields on nearly all fixed income products to historical lows. The reach for yield has entered the desperation phase in recent months as investors have grown tired of waiting for the Fed to raise interest rates.


    From Treasuries to mortgage-backed securities to investment grade bonds to high yield bonds, yields on average have never been lower. The current yield on the iShares Core U.S. Aggregate Bond ETF ($AGG), which is designed to approximate the total U.S. bond market, is 2.0%."


    26 Jul 2014, 05:42 PM Reply Like
  • Tales From The Future
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    Author’s reply » I really enourage all readers to follow the link above, it has a good discussion on the ZIRP environment and the dilemma the FED faces...


    "5) Can’t valuations remain high and yields low for the next seven years?


    They could, but I would ask what probability you are assigning to that outcome and what your expected return from stocks and bonds would be in that scenario. If average bond yields are still 2.0% seven years from now, can you make the case that bond returns will be much higher than 2% in that scenario? Similarly, if the CAPE is at 26 seven years from now, can you make the case for strong equity returns based on earnings growth alone when nominal GDP is currently running at between 3-4%? The “permanently high plateau” theory has rarely been a good strategy for long-term investors."




    Also see the forward returns based on CAPE levels:




    To reiterate, CAPE is above 25 at the moment and may be nearing 30...
    4 Aug 2014, 04:48 PM Reply Like
  • Tales From The Future
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    Author’s reply » Regarding reason four (high yield and general credit jitters and bubble in China), see for example...










    I wrote about China's Minsky moment back in May:




    To read a counter-argument, read for example here:


    7 Aug 2014, 12:04 AM Reply Like
  • Tales From The Future
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    Author’s reply » It is not just China and the US, however, where first cracks appear. High yield debt is still growing and rising to new heighs in Europe...


    "On the subject of junk debt, in the first two quarters of 2014, European high yield bond issuance outstripped U.S. issuance for the first time in history, with 77% of the total represented by Greece, Ireland, Italy, Portugal, and Spain. This issuance has been enabled by the “reach for yield” provoked by zero interest rate policy. The discomfort of investors with zero interest rates allows weak borrowers – in the words of the Financial Times – “to harness strong investor demand.” Meanwhile, Bloomberg reports that pension funds, squeezed for sources of safe return, have been abandoning their investment grade policies to invest in higher yielding junk bonds. Rather than thinking in terms of valuation and risk, they are focused on the carry they hope to earn because the default environment seems "benign" at the moment. This is just the housing bubble replicated in a different class of securities. It will end badly."




    "As a market cycle completes and a bull market gives way to a bear market, you’ll notice an increasing tendency for negative day-to-day news stories to be associated with market “reactions” that seem completely out of proportion. The key to understanding these reactions, as I observed at the 2007 peak, is to recognize that abrupt market weakness is generally the result of low risk premiums being pressed higher.


    Low and expanding risk premiums are at the root of nearly every abrupt market loss."




    Also see: http://bloom.bg/1vvJvhp
    10 Aug 2014, 09:48 PM Reply Like
  • Tales From The Future
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    Author’s reply » Finally, concerning criticism.


    Some people argue that looking at the Shiller P/E ratio is


    A) either useless..




    Or B) not sufficient on its own, i.e. when not factoring in bond prices/yields..




    "One of the biggest perils of using the level of PE ratios as an indicator of stock market pricing, as we have in the last section, is that it ignores the level of interest rates. If interest rates are lower, PE ratios should be higher and ignoring that relationship will lead us to conclude far too frequently (and erroneously) that stocks are over priced in low-interest rate environments. The link between PE ratios and interest rates is best illustrated by looking at how the EP ratio (the inverse of the PE ratio) moves with the T.Bond rate over time."




    (Others argue corporate bonds are a better indicator than T.bonds, but let's not get into this discussion).


    Very technical discussion (PDF) on bond yields and stock market P/E as correction indicators here:




    Summary: The Shiller P/E is just one indicator, that's why I listed four others in my article. No indicator is fool- proof, especially not in complex systems like stock markets with human emotions involved.


    Regardless of valid criticism discussed in this comment, I think it's quite useful - especially because interest rates are kept artifcially low since 2008 (no real market prices because of global central-bank ZIRP).
    10 Aug 2014, 10:41 PM Reply Like
  • Tales From The Future
    , contributor
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    Author’s reply » Indicator four (rising outflows in high-yield bonds) is discussed in this article:


    "The final problem could also come from a “Black Swan” event such as the collapse of a bond fund due to liquidity problems. When a bond fund is hit by large redemption requests from investors, it sells its most liquid assets first to raise cash. That leaves the fund with bonds that are hard to sell in a market with few buyers, falling prices and investors wanting their money back.


    The number of buyers in the high- yield bond market has also dried up as most banks have greatly reduced or even shut down their fixed-income dealing operations during the past five years. This has created a terrible lack of liquidity in bond markets, making prices extremely volatile.


    The credit market usually leads the equity market during turning points, as happened when credit markets cracked first in 2008.


    The flood of money coming out of the US high-yield bond market is only a tremor at the moment, but the financial markets have been so distorted by government meddling and unable to price risk correctly that it could have far- reaching consequences."




    Allow me to repeat the key for indicator four once again from the quote because I deem it so important:


    "The credit market usually leads the equity market during turning points, as happened when credit markets cracked first in 2008."


    PS: On a global level, this flight to safety out of junk bonds often coincides with falls in EM currencies versus the USD:


    "The average cost of options betting on a decline in Brazil’s real, Indonesia’s rupiah, South Africa’s rand, Turkey’s lira and India’s rupee has jumped to the highest level in almost five months, data compiled by Bloomberg show. That follows an emerging-market boom that placed them among the top 10 best performers of the world’s 31 most-traded currencies in the past six months.


    The increased anxiety about developing-nation currencies comes as U.S. preparations to lift interest rates threaten to draw investment away from riskier assets. Morgan Stanley coined the phrase “fragile five” in August 2013 to describe the currencies, which are particularly vulnerable because of their dependence on foreign investment to fund current-account deficits."


    15 Aug 2014, 04:26 AM Reply Like
  • Tales From The Future
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    Author’s reply » And more on China credit and cleanups here:


    "China's bank cleanup is gaining momentum.


    This month, the country's four largest state-owned lenders have started raising a planned $73 billion in debt and equity to beef up reserves. That tally is expected to jump to more than $300 billion in the next five years, according to the banking regulator. The fundraising, along with a number of so-called bad banks being set up by provinces, is aimed at clearing up the pile of nonperforming loans sitting on the banks' books.


    It is one of most determined efforts ever by Beijing to restore health to the financial system, which is straining from a credit binge in recent years."
    "In addition, China has given the green light to five local governments to set up asset-management companies, or so-called bad banks, that will buy nonperforming loans from local lenders, helping them to clean up their balance sheets"
    "Growth in new bank lending fell sharply in July (2014), down to 385.2 billion yuan from June's 1.08 trillion yuan. That is a sign that bankers are increasingly wary of lending to risky companies, despite a combination of spending moves in April designed to rev up China's economic engine."


    17 Aug 2014, 10:15 PM Reply Like
  • Tales From The Future
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    Author’s reply » Some additional interesting bearish indicators as of mid-2014 are discussed here:




    Especially interesting: Total assets invested in equity mutual funds and ETFs compared to the total assets invested in money market funds (chart from Sentimentrader).
    22 Aug 2014, 01:32 PM Reply Like
  • Tales From The Future
    , contributor
    Comments (7608) | Send Message
    Author’s reply » A good summary on the bull market cycle in one graph and number: 2000...


    "This (US) bull market is 2000 days old - the S&P 2000 on the 2000th Day of the Bull Market"




    How much longer?
    28 Aug 2014, 07:51 AM Reply Like
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