Results 301–324 of 324 found.
Declaring Victory at Halftime
Present overvalued, overbought, overbullish, rising-yield conditions fall within a tiny percentage of market history that is associated with dismal market outcomes, on average. Its true that we've observed extreme conditions since about March 2012 with little resolution aside from short-term declines. But the S&P 500 remains only a few percent from its March 2012 high, and if history is any guide, the extension of these unfavorable conditions is not likely to reduce the depth of the market loss that can be expected to resolve them.
The Good Without The Awful
Generally speaking, the very best times to be long are when a market decline to reasonable or depressed valuations is followed by an early improvement in market internals (breadth, leadership, positive divergences, price-volume behavior, and so forth). This is a version of a general principle: bullish investors should look for uniformly positive trends to be coupled with an absence of particularly hostile features such as overvalued, overbought, overbullish conditions. Put simply, we are looking for the good without the awful.
Aspirin for a Broken Femur
The Federal Reserve under Bernanke is like a bad doctor facing a patient with a broken femur. Being both unable and unwilling to restructure the broken bone, he announces that he will keep shoving aspirin down the patient's throat until the bone heals.
Secular Bear Markets - Volatility Without Return
There is enormous risk, in my view, in the temptation to accept zero interest rates and low single-digit prospective market returns as an enduring characteristic of the financial markets while ignoring the unsustainable distortions that have produced this environment.
Presently, on the basis of smooth fundamentals such as revenues, book values, dividends and cyclically-adjusted earnings, the S&P 500 is somewhere between 40-70% above pre-bubble valuation norms, depending on the measure. That's about the same point they reached at the beginning of the 1965-1982 secular bear period, as well as the 1987 peak.
Little Dutch Boy
In the Mary Mapes Dodge book titled Hans Brinker, there is a fictional story within the story of a little Dutch boy who, on his way to school, notices a hole in the dyke. Having nothing else to fix the leak, he plugs the hole with his finger and stays there through the night until workers come to repair it. We are now into the fourth year of efforts to print trillions of little Dutch boys out of dollars and euros in order to stop a tide from crashing through a fundamentally damaged dyke. All of this has bought time, but no workers have arrived, and no real repairs have been done.
Stream of Anecdotes
Analysts who interpret economic data as a stream of unconnected anecdotes are likely to find recent data encouraging, and will easily dismiss any concern about a U.S. recession on that basis. For our part, the internals of the economic picture new orders, backlogs, real income growth, and even the employment components of prominent economic surveys continue to deteriorate. Based on dozens of economic variables and methods that account for leading/lagging relationships (e.g. unobserved components estimates) our view remains that the U.S. economy has already entered a recession.
Distinction Without a Difference
In recent weeks, market conditions have fallen into a cluster of historical instances that have been associated with average market losses approaching -50% at an annualized rate. Of course, such conditions don't generally persist for more than several weeks the general outcome is a hard initial decline and then a transition to a less severe average rate of market weakness (the word "average" is important as the individual outcomes certainly aren't uniformly negative on a week-to-week basis).
The Data-Generating Process
For anyone who works to infer information from a broad range of evidence, one of the important aspects of the job is to think carefully about the structure of the data what is sometimes called the "data-generating process." Data doesn't just drop from the sky or out of a computer. It is generated by some process, and for any sort of data, it is critical to understand how that process works. In the financial markets, the data-generating process is often very misunderstood.
I've long been fascinated by the parallels between Chess and finance. Years ago, I asked Tsagaan Battsetseg, a highly ranked world chess champion, what runs through her mind most frequently during matches. She answered with two questions "What is the opportunity?" and "What is threatened?" At present, I remain convinced that the key opportunity lies in closing down exposure to risk.
Examine the points in history that the Shiller P/E has been above 18, the S&P 500 has been within 2% of a 4-year high, 60% above a 4-year low, and more than 8% above its 52-week average, advisory bulls have exceeded 45%, with bears less than 27%, and the 10-year Treasury yield has been above its level of 20-weeks prior. While there are numerous similar ways to define an "overvalued, overbought, overbullish, rising-yields" syndrome, there are five small clusters of this one in the post-war record.
Leap of Faith
Both the economy and the financial markets will do fine in the longer-term, but to imagine that there will not first be major challenges and disruptions is a leap of faith and a leap over a century of economic and financial history that screams otherwise.
Eating the Future
Every security on Earth works like this. The higher the price you pay for a given set of expected future cash flows, the lower your prospective future rate of return. Higher prices essentially take from future prospective returns and add to past returns. Conversely, lower prices take from past returns and add to future prospective returns.
As of Friday, our estimates of prospective return/risk for the S&P 500 have dropped to the single lowest point we've observed in a century of data. There is no way to view this as something other than a warning, but it's also a warning that I don't want to overstate. This is an extreme data point, but there has been no abrupt change; no sudden event; no major catalyst. We are no more defensive today than we were a week ago, because conditions have been in the most negative 0.5% of the data for months.
Moderate losses may be a necessary feature of risk-taking, but deep losses are erasers. A typical bear market erases over half of the preceding bull market advance. It is easy to forget - particularly during late-stage bull markets - how strongly this impacts full-cycle returns.
A broad array of observable evidence suggests extraordinary strains in Europe, and abrupt though expected deterioration in U.S. economic activity. The Federal Reserve certainly has policy options, but those options have no material transmission mechanism to the real economy.
Results 301–324 of 324 found.