• Welcome to Maher's Digital World.

Financial news and stock markets.

Started by scarface, February 26, 2015, 08:28 PM

Previous topic - Next topic

scarface

Tonight I'm going to talk about the s&p 500, which is currently in a kind of "bubble" (I'm just pasting the article of the specialist Proinsias O'Mahony, published yesterday in the Irish Times).

Bubble trouble: how should investors respond?
High prices are sustained as speculators believe they can sell on to ‘greater fool’



Should investors be worried about bubbles? If so, how should they respond? Worrying about excessively high prices might seem misplaced at the moment, given the recent stock market correction. However, high-profile money manager Rob Arnott says some assets â€" cryptocurrencies, technology stocks, perhaps even the broader US stock market â€" remain in bubble territory.

Arnott, who helps manage $205 billion at Research Affiliates, argues in a new paper that investors need a plan on how to deal with these and other bubbles. Should you bet against them? Ignore them? Invest in their antithesis?

Arnott defines a bubble as an asset that offers little chance of any positive return relative to bonds or cash, “using any reasonable projection of expected cash flows”. Instead, high prices are sustained because speculators believe they can sell on to a “greater fool”. For stocks, markets constantly create “single-asset micro-bubbles” like electric car maker Tesla, occasional examples of “extreme mispricing” which require perfect outcomes to justify their lofty valuation multiples. Arnott says Tesla’s market valuation of almost $50 billion can only be justified if most cars are powered by electricity in 10 years; if most of those cars are made by Tesla; if Tesla can make sufficient margin on those cars while maintaining quality control; and if it can raise the necessary capital to cover a $3 billion annual cash drain. Together, this makes for an “unduly optimistic array of assumptions”.

Many other high-profile investors share this scepticism towards Tesla, one of the most shorted stocks on the US market. Those who have bet against the stock include hedge fund manager Jim Chanos, who says Tesla is “worthless” and a “cult stock”, as well as fellow hedge fund manager David Einhorn.

Tesla, Amazon and Netflix are part of the latter’s “bubble basket”, with Einhorn arguing for some time that the appetite for such stocks is “reminiscent of the March 2000 dotcom bubble”. More controversial, perhaps, is Arnott’s claim that the broader US market, led by the largest technology stocks, is in bubble territory. Sector and broad market bubbles are “much rarer” that “micro-bubbles” like Tesla, but the “relentless” and “dramatic” US market gains since 2009 mean valuations “now exceed all historical valuation levels”, barring the late 1990s dotcom craze. Semantics aside, Arnott’s analysis suggests investors should be wary of popular stocks.

Looking at the 10 largest technology stocks in 2000, he notes that “not a single one beat the market” over the next 18 years. At the end of January 2018, the seven largest stocks in the world â€" Alibaba, Alphabet, Amazon, Apple, Facebook, Microsoft, and Tencent â€" were all technology stocks, with Arnott cautioning that no single sector has ever so dominated the global market landscape.

Historical analysis shows that, on average, just two stocks are likely to remain in the top 10 in a decade’s time. If history repeats itself, nine of the current top 10 will underperform over the next decade.

Technology valuations are “not as extreme” as 1999-2000, says Arnott, but the sector is nevertheless in another bubble.
Bet against bubbles?
Arnott admits that “reasonable people may reach the opposite conclusion”. Whatever one’s opinion, all investors should focus on how they might respond to a bubble. You can make a lot of money by betting against bubbles; those who bet against technology stocks in 2000 and bank stocks in 2008 profited handsomely.

He points to the Zimbabwean stock market, which fell 99 per cent in US dollar terms over a three-month period in 2008. Even if you knew in advance that the market was going to collapse, vicious market swings mean you would have lost 50 times your money. An extreme case, no doubt, but other examples abound. In January 2017, tech stocks like Amazon and Netflix “really looked stretched”, sporting sky-high valuation multiples, but they continued to outperform over the following year. Instead of betting against bubbles, Arnott suggests investors simply reduce or eliminate their exposure to bubble assets. Refusing to do so in the hope that you’ll get out in time “resembles picking up nickels in front of a steamroller”, as Sir Isaac Newton discovered during the South Sea bubble in the 18th century.

Newton quickly doubled his money in the South Sea Company but the stock continued to soar after he sold it. Newton gave into temptation and bought back in shortly before it peaked, losing almost his entire life’s savings and prompting him to famously lament that he could “calculate the movement of heavenly bodies, but not the madness of men”.
“Anti-bubbles”
Alternatively, investors can seek out “anti-bubbles” â€" sectors priced at levels “that cannot plausibly deliver” anything other than big returns. He points to bank stocks and junk bonds in early 2009, noting that every failure of a company meant that survivors in that sector had less competition and higher margins. Similarly, the high yields and low valuations sported by value stocks in emerging markets in early 2016 represented an “obvious anti-bubble” in a world of zero-yield bonds and cash.

Anti-bubbles are like market bubbles in that you cannot tell when the cycle will turn. Accordingly, investors require patience and prudence and should average into positions over time, says Arnott. Finally, investors can diversify into assets that are not in bubble territory. Although the S&P 500 is trading at an “extravagant premium” to historic valuations, many developed and emerging markets are cheaper than usual. Bulls try to find many ways to justify high US valuations, but the same arguments apply to European and emerging markets. If low yields in the US justify high valuations, asks Arnott, then why do zero yields in Europe lead to modest valuation multiples? Rotating out of bubbly assets and into cheaper alternatives will help insulate investors “against the next eventual-but-inevitable market downturn”, says Arnott. “Other markets offer better places to take on market risk. Seek them out”.

scarface

Today, I’m going to hold a conference about the American stock markets.


I gathered a few elements taken in recent articles that confirm my opinion: we are probably in front of a big fall of the s&p 500.


First and foremost, let’s talk about the predictions of strategist Rosenberg, who says that the S&P 500 should be 1,000-plus points lower than it is today.



Gluskin Sheff’s David Rosenberg bases his prediction on sluggish U.S. economic growth and overvalued equities.

A reversion to the mean in U.S. stock prices could mean the market will fall by at least 20%, according to David Rosenberg of Gluskin Sheff and Associates, who gave his prediction at the Strategic Investment Conference 2018 in San Diego.
Rosenberg, the chief economist and strategist at Toronto-based Gluskin Sheff, said this is one of the strangest securities-market rallies of all time. That’s because all asset classes have gone up, even ones that are inversely correlated.

Smart money pulls back

The beginning of this year started off great for investors. The S&P 500 Index SPX, +0.17% hit record highs at around 2,750 points, and stocks had their best January since 1987.
As if that was not enough, Rosenberg pointed out, many Wall Street strategists raised their target to 3,000. The media extrapolating record returns only added to the rise in investors’ unreasonable expectations.
However, increasingly more hedge fund managers and billionaire investors who timed the previous crashes are backing out.
One of them is Sam Zell, a billionaire real estate investor, whom Rosenberg says is a “hero” of his. Zell predicted the 2008 financial crisis, eight months early. But, essentially, he was right. Today, his view is that valuations are at record highs.
Then we have Howard Marks, a billionaire American investor who is the co-founder and co-chairman of Oaktree Capital Management. He seconds Zell’s view that valuations are unreasonably high and says the easy money has been made.
“And I don’t always try to seek out corroborating evidence. But there are some serious people out there saying some very serious things about the longevity of the cycle,” said Rosenberg.

Big correction coming

Later at the Strategic Investment Conference, Rosenberg shifted from quoting high-profile investors to showing actual data, which paints the same ominous picture.
For starters, Rosenberg pointed out that only 9% of the time in history have U.S. stocks been so expensive.



Then he showed a table with gross domestic product (GDP) growth figures in the last nine bull rallies. This table reveals a dire trend where each subsequent bull rally in the last 70 years generated less GDP growth. Essentially, that means we are paying more for less growth.



According to Rosenberg’s calculations, the S&P 500 should be at least 1,000 points lower than it is today based on economic growth. In spite of this, equity valuations sit at record highs.

Another historically accurate indicator that predicts the end of bull cycles is household net worth’s share of personal disposable income.
As you can see in the chart below, the last two peaks in this ratio almost perfectly coincided with the dot-com crash and the 2008 financial crisis.


Now the ratio is at the highest level since 1975, which is another sign that reversion is near.
What the Fed thinks
As another strong indicator that recession is around the corner, Rosenberg quoted the Federal Reserve Bank of San Francisco. He pointed out that, having access to tons of research, they themselves admit that equity valuations are so stretched that there will be no returns in the next decade:
“Current valuation ratios for households and businesses are high relative to historical benchmarks … we find that the current price-to-earnings ratio predicts approximately zero growth in real equity prices over the next 10 years.”
Basically, the Fed is giving investors an explicit warning that the market will “mean revert.”
But when we revert, we don’t stop at the mean, warned Rosenberg. He gave an example of how mean reversion in the household net worth/GDP ratio would create a snowball effect.
According to his calculations, if the household net worth/GDP ratio reverted to the mean, savings rates would go from 2% to 6%. As a result, GDP would go down 3%, which would have nasty consequences for the economy and, in turn, stocks.

Monetary regime change

Stretched valuations are not the only problem for the stock market. Rosenberg thinks that new Fed Chairman Jerome Powell marks the end of low interest rates, which will also add pressure to equities.
Even the biggest Fed doves admit that low rates created a heightened risk of asset bubbles and unstable asset inflation. And so, Rosenberg thinks, Powell will be more hawkish than people think.
“He’s [Jerome Powell] talked about risk-taking in the past, he’s talked about frothy financial conditions. He was adamantly against the prolonged period of zero percent interest rates. He was profoundly opposed to the repeated rounds of QE [quantitative easing], and now he’s in charge. So, for people to think he’s only going to go three times this year [raise official interest rates three times], I think he’ll go four. He may go more, depending on the circumstances.”

Rosenberg also thinks Powell won’t cut interest rates, even if we get a 20% sell-off. That’s how determined Powell is to normalize interest rates, according to Rosenberg.
In other words, we are in the middle of the Fed tightening cycle. As history shows, a tightening cycle is almost always followed by a recession.

What’s more, other analysts think the s&p 500 is grossly overvalued.

“The U.S. equity market remains richly valued, particularly relative to European markets,” said Marcus Morris-Eyton, a London-based fund manager at Allianz Global Investors, whose team manages 17.5 billion euros ($21.5 billion). “We continue to see more valuation upside in Europe, where valuations are less stretched and the earnings recovery is less advanced.”
Luca Paolini, chief strategist at Pictet Asset Management, points out that the difference between the price-to-estimated book value of the S&P 500 and the Stoxx Europe 600 remains near a record high. Pictet estimates that such a premium implies U.S. earnings growth to be 6 percentage points higher than in the euro area, which is “totally unrealistic.”

In these conditions, I have targets for the s&p 500 between 2000 and 2200 points (if the s&p 500 was to fall, like during the 1987 crash, it could even go to 1800 points, before a rebound towards 2200).




Currently there are 2 dangers for stocks: the oil price, which keeps climbing. That’s good for oil companies of course, but it could trigger a recession in the US, since it is heavily dependent on oil.

But the main danger comes from the $: that’s what Macquarie Research states:
There is a distinct possibility of a much stronger USD…
Just when the consensus agreed that the US$ has entered LT bear channel, DXY not surprisingly started to appreciate and, as it passes 92, the question is whether we are likely to witness an intense appreciation. This is the key danger facing investors over the next twelve months.
For many years we have been deflationists at heart and indeed we remain so. Our core beliefs are centred on disinflationary pressures that are likely to get stronger over time. These are driven by a combustible mix of technology (and associated dissolution of labour & product markets) and the impact of three decades of over financialization (and associated over capacity & inability to resurrect conventional pricing signals). In simple terms, investors reside in a world of no wages (or eroding pricing power of labour & products) and the need to keep ‘zombies’ alive to avoid contraction of demand. These forces are highly deflationary and public sectors would struggle to offset them.
In this environment, we should theoretically see that the current anomaly of US$ and gold appreciating at the same time turn into a consistent trend while investors also search for more extreme value alternatives, ranging from fine wines, paintings to cryptos. This investor behaviour might become ever more extreme as the public and electorates demand protection and continuity from CBs & fiscal authorities and politics deliver. It would be positive for US$.
… as the Fed destroys liquidity & extreme positioning unwinds
We believe that investors are already starting to witness weaker supply of US$ (~1%-3% clip, half the rate six months ago, caused by contracting monetary base as the Fed reduces its balance sheet) and seeming inability of the US to significantly widen its CA deficits (despite public sector dissaving).

This shortage is amplified by historically high real spreads.

Hence, we are seeing some unwinding of extreme negative positioning against US$. This might get out of control and it is the intensity rather than simply direction that is critical.
There is another factor that always provides a positive undertone for US$: its role as the global store of value and medium of exchange. A reserve currency must satisfy a number of conditions, which currently only the US$ does. It must have large, liquid and free treasury and FX markets. Neither â,¬, Rmb nor Â¥ have these. Reserve currency supplier must also run significant CA deficits to lubricate finance; neither Eurozone, Japan nor China run deficits. Hence, there is always a bid for US$, and only strong reflation or QE could weaken it.
Intense appreciation or depreciation of US$ are deflationary
We maintain that all rapid US$ moves are deflationary. Appreciation works through liquidity and commodity channels to erode growth and make it harder to re-finance US$ foreign debt. However, steep US$ depreciation is equally deflationary as it kills real demand. Hence, neither moves are desirable. Rising US$ is already causing tremors (Argentina, Tukey & Indo); however at this stage these are still moderate.


Since Interest rates keep rising in the US, I have a target for the currency pair â,¬/$ at 1.10, and maybe 1.05. If you are in the Eurozone, I advise you to buy dollars and hold them. It’s another element which is strongly negative for US stocks, because if the $ climbs, it means they should be cheaper. Usually, we find that correlation with Gold: when the $ climbs, gold tumbles.

scarface

I found another interesting article...

Taking The Pulse Of A Weakening Economy
by Charles Hugh Smith

Corporate buybacks provide the key analogy for the economy as a whole.

Central banks have been running a grand experiment for 9 years, and now we're about to find out if it succeeds or fails. For 9 unprecedented years, central banks have pushed the pedal of monetary stimulus to the metal: near-zero interest rates, monumental purchases of bonds, mortgage-backed securities, stocks and corporate bonds, injecting trillions of dollars, yuan, yen and euros into the global financial system, all in the name of promoting a "synchronized global recovery" that in many nations remains the weakest post-World War II recovery on record.

The two goals of this unprecedented stimulus were 1) bringing consumption forward and 2) generating a "wealth effect" as the owners of assets rising in value would translate their perception of feeling wealthier into more borrowing and consumption that would then feed a self-sustaining virtuous cycle of expansion.

The Federal Reserve has finally begun reducing its stimulus programs of near-zero interest rates and bond purchases, the idea being that the "recovery" is now robust enough to continue without the extraordinary monetary stimulus of the past 9 years since the Global Financial Meltdown of 2008-09.

Will the "synchronized global recovery" continue as interest rates rise and central bank assets purchases decline? Policy makers and economists evince confidence as they collectively hold their breath--is the recovery now self-sustaining?

2018 is the first test year. Global assets--stocks, bonds and real estate--remain at levels that are grossly overvalued by traditional measures, and most economies are still expanding modestly. But since the other major central banks have only recently begun to "taper" / reduce their securities purchases, the real test has yet to begin.

The pulses of asset valuations and productive expansion are weakening. Asset valuations are either no longer expanding or are actively falling; markets everywhere feel heavy, as if all they need is one good shove to slip into major declines.

The vaunted "wealth effect" was extremely asymmetric: only those in the top 5% who owned enough assets to experience a meaningful increase in wealth--those who bought assets years before the current bubble expanded, and the relative few households who own roughly 70% of all financial assets--and the few workers and entrepreneurs who benefited from an increasingly "winner take most" expansion.

As a result, the enormous increases in assets had little real effect on the bottom 80% who own few assets, and only modest effects on the "middle class" between the bottom 80% and the top 5%.

Meanwhile, bringing consumption forward has drained the pool of future consumption and creditworthy borrowers. Future consumption now rests on the shaky foundation of marginally qualified buyers and the relatively few young people forming new households who also have high incomes and good credit.

The reality nobody dares acknowledge is that a "recovery" based not on improving productivity and innovation but on cheap credit and an artificially stimulated "wealth effect" was inherently weak, for the stimulus effectively hollowed out the productive economy in favor of the financialized, speculative economy and created perverse incentives to over-borrow and over-spend, stripping future demand to create the illusion of growth in a stagnating economy of rising wealth and power inequality.

A funny thing happens when you borrow from the future to spend more today--the future arrives, and we find the pool has been drained to serve the absurd policy goal of "no recession now, or ever again.

Corporate buybacks provide the key analogy for the economy as a whole: as sales, productivity and profits all stagnate, corporations borrow against future earnings to buy shares back from investors to push share prices higher, creating an illusion of "wealth." But it's all illusion; once the billions in buybacks cease, gravity takes hold and the phantom "wealth" dissipates.

Apple (NASDAQ:AAPL) is simply the latest corporation to announce slowing sales growth and to compensate for this stagnation with a massive $100 billion buyback to prop up shares at their current valuation.

Perhaps these realities are seeping into the margins of the complacent herd. It certainly feels like the "smart money" is selling (distributing) to the complacent herd, which is one lightning strike and thunder clap away from a panicked rush to sell and book 9 years of gains before the synchronized global asset bubbles all pop.

Markets have ignored the tapering of central bank support (asset purchases), but the question remains: is this complacency temporary?



Productivity is the only sustainable source of widespread prosperity, and it's stagnating:


scarface

The US stock market remains expensive. And we have seen that in this market, some stocks are particularly expensive. That's the case for Tesla, snap, and also Netflix (on a lesser extent, we could add Caterpillar, Boeing, Nvidia, Amazon...).
Here is an article that explains why Netflix is expensive: https://www.recode.net/2018/4/24/17258828/netflix-stock-cheap-debt-nflx-pe-ratio-enterprise-value

scarface

#144
Tonight, I'm going to talk about the volatility crossroad: maybe a new bear market is in sight.

Authored by Sven Henrich via NorthmanTrader.com

Hence let me offer some perspective on some of these charts and I want to hone in specifically on volatility, or rather the great dying we’ve just witnessed. In the most recent weeks all fear appears to have left markets again and volatility has compressed to tight intra-day ranges such as we are witnessing today. All this action is rather reminiscent of the low volatility regime market participants had become accustomed to during the artificial liquidity bonanza of 2017.

Are we heading there again and the regular buy every dingle dip mantra takes over again? Or are we rather in the center of a larger storm, witnessing a temporary reprieve from the wily winds of volatility ready to strike again?

Firstly some basic perspective.

We remain in the middle of the range we have seen for the past few months:


Perhaps ironic that volatility and fear has again subsided despite broader markets not showing significant progress from these earlier consolidation phases in the same price ranges.

But perhaps more notable is that this current volatility compression is coming at a very particular technical pivot point:


The chart above shows a long term chart of the $VXO, the original formula of the $VIX. Here we can see a multi year descending trend line that has shown to be precise resistance between 2015 and 2017 and even during its first tag in 2018. The February correction subsequently saw a massive volatility spike breaking above that trend line and $VXO has remained above the trend line throughout.

Technically speaking, for bulls to find comfort in volatility resuming its 2017 type program it needs to break below this trend line. As it is support for now it opens up the possibility that this current volatility compression is a simple technical retest that could result in a major spike yet to come.

Something like this:


Hence volatility is at a major technical crossroad here with neither side having yet proven their case.

And both bullish and bearish considerations have their merit.

But note, that the most recent volatility patterns are forming potential descending wedges. These are bullish patterns if $VIX breaks out above.


The structures of the above volatility charts suggest that markets will make up their minds in the near term.

For now things are quiet. Perhaps too quiet.

scarface

In this video, another specialist is predicting a stock market crash of the US market. And he has interesting arguments: https://www.youtube.com/watch?v=VmNFXi9tLFc


Note that maybe I'm going to release a repack for farcry 4. I know that humbert dislikes FPS, but at least it's happening in the Himalaya with beautiful landscapes.
I didn't like Far Cry 5 (a kind of bad remake of Far Cry 4), there won't be any repack for this one.

scarface

Today, an exceptional conference is available on the forum, with an interview of Michael Greenberger who says that a new financial crisis could be coming.
https://www.youtube.com/watch?v=u9hbJJ2g8p8



Michael Greenberger says unregulated credit default swaps could take down the economyâ€"and taxpayersâ€"again. In 2008 unregulated credit default swaps brought the economy to its knees. Ten years later, they may poised to do so againâ€"unless policymakers reign in the big banks. That’s the call to arms of University of Maryland Law Professor Michael Greenberger, whose new INET Working Paper details how the largest American banks have quietly parked swaps oversees, thus evading the regulations designed to prevent another crisis. Professor Greenberger and INET President Rob Johmson talk about the paper, including how swaps work, the so-called “moral hazard” of banks knowing they can be bailed out by taxpayers, and how politicians in Washington and state capitals can ensure that risky swaps never again take down the economy. As Greenberger argues, despite the rosy picture of the economy painted by politicians and the media, the lurking danger of unregulated swaps is very much real.

scarface

#147
I'm expecting a crack in August on the stock markets. Indeed, the US and European markets are richly valued, and in the US they are even richly valued relative to rates.
That's why the markets are on the edge. A few minutes ago the cac40 declined suddenly by 1%. Beware of the upcoming drop.




Note that sometimes, some users like Vasudev have problems with my game repacks. I must admit they are not 100% reliable. like the repacks of fitgirl and corepack. In fact, since repacks are games which are compressed with "custom-made" compressors, you can't be 100% sure they are going to work. However I test my repacks before releasing them. For the Evil within 2, I warned that the repack was buggy. For the others, you shouldn't have problems though, and if you have problems, start the install again (you may have to uninstall the game before).
Apparently, this one is experiencing problems with one repack. Let's advise him to be patient.
https://www.youtube.com/watch?v=9iX6O5rTl5s

scarface

#148
Tonight, I'm going to talk about the s&p 500.

I'm going to talk about the chart that was already posted on 15 July in this topic.
As seen on this chart, if you are putting your cursor on 25 July, and at 2849 points (they were reached on the futures today), you are on the major top that was indicated...before a fall of the s&p 500. That's my scenario. On the short term the s&p 500 has been bullish indeed.
https://www.tradingview.com/chart/SPX500/fVGPTobf-The-Good-Days-are-Numbered/

The US markets are completely overbought and very expensive (for Amazon, the PER with the forecasted results is 90. For facebook, msft and Google, it is around 30-35).
And it's still thanks to the tech sector that the s&p 500 is climbing.
You can also read the article of that specialist, explaining that the US markets (both stock and real estate markets) are in a bubble.
https://realinvestmentadvice.com/u-s-household-wealth-is-in-a-bubble-part-2/

Note that there have been rumors that Trump was going to ease US-EU trade tensions. How is he going to gather money with his tax cuts, the US is already broke?
After the closing, facebook is declining by 10% in after hours trading.


Here is a video, in French, with a specialist talking about the cac 40
https://www.youtube.com/watch?v=inzc1Fh9st4







scarface

#149
A brief overview of the US stock market:



I'm still bearish. Because overall, stocks are still expensive. Amazon and msft at 900 billion, if we calculate the current forward PER, we have 90 for the former and 40 for the latter.


Also, note that I'm still bullish for the $ against the â,¬, with a target at 1.05 for the â,¬/$ pair.