Perspective on a Never Ending Bull Market
by The Curmudgeon
The latest Barron's cover says it all: BULL TREAT. This is the third Big Bull on a Barron's cover in the last six months!
The CURMUDGEON previously commented on Barron's April 22, 2013 Gloating Bull on a Pogo Stick cover in a post titled: Euphoric Bullish Sentiment on Wall Street Contrasts With Economic Pessimism on Main Street!
In case you missed it, here's the gloating bull on Barron's Sept 2, 2013 cover- Fall Forecast: Sunny.
We're not surprised to see yet another bull on Barron's cover this week. Maybe there will be one next month too? The market has been incredibly resilient, with a unique ability to discount and celebrate the same event multiple times. For example, the market rallied before AND after the end of U.S. government shutdown and threats of a debt ceiling default. The event was discounted before being resolved and celebrated for several days afterwards. That's not the way markets are supposed to work!
Market Analysts and Big Money Poll Managers are Saying:
In this Saturday's Barron's cover story, Robert Turner,
Chairman of Turner Investments in Berwyn, Pa., calls this "the most
joyless" bull market in history, given the doubts attendant to every point
rise in the Dow. But you won't find much hand-wringing in his office, as he
expects strength in corporate fundamentals to persist. Why not?
We only have the weakest economic recovery since WWII accompanied by
slowing profit growth and potentially rising long term interest rates.
Barron's Big Money poll managers view the stock market as
the best place for your money over the next 12 months—and the next five years
too! On a near-term basis, 80% expect equities to outperform all other asset
classes, while 6% favor cash, and 6% like real estate. About half of the managers think the U.S. will
be the best-performing market in the next 12 months; 24% say European equities
will shine brightest as the Continent emerges from a multiyear slump; and 8%
are putting their money on Japan. Many managers expect emerging markets to do
best over five years, outperforming the U.S., a reflection of the rapid growth
of developing economies.
Norman Conley, CEO of JAG Capital Management in St. Louis,
sees revenue growth as a key to lifting sectors. "There is only so much
you can achieve from balance-sheet machinations, and the markets are slowly starting
to recognize that," he says. And
this is one of the numerous fundamental problems The CURMUDGEON has been
harping on for months, calling attention
that almost all of the after tax profit growth has come from cost
cutting, overseas sales where the US $'s are not repatriated (and hence not
taxed, e.g. Apple), and accounting shenanigans/gimmicks! There's been very little increase in top line
Bears are an Endangered Species:
Just 8% of Big Money poll respondents describe themselves
as bearish about the outlook for stocks through next June. Nearly one in four
is neutral, up from 19% in the spring. The bears expect the Dow to close the
year at about 14,450, and drop to 14,016 by next June. They see the S&P 500
falling to 1609 by year end and 1561 by mid-2014, and the Nasdaq trading at about 3400 in nine months, 13%
below its current level.
Most bears say the bull market's fate is tied to future
Fed moves to curb quantitative easing, as its bond-buying program is known. The
Fed has been purchasing bonds to drive down interest rates and stimulate
Jason Brady, manager of the Thornburg Strategic Income fund, says that accommodative Fed policy has pushed money into risky assets, artificially inflating stock prices. If corporate earnings falter and the Fed starts to taper, the rationale for current prices will be undermined
What About Valuations?
market valuations and earnings growth now irrelevant to this aging bull market?
The S&P 500 is currently selling at
19.89 times earnings, near the high end of its historical range.
The more revealing Shiller PE Ratio is currently at 24.95- higher than at any time between 1929 and 1996, but well below its 1999 dotcom peak of 44.2.
In the last few
years the market's rise has been primarily due to expansion of P/E ratios. How long can that go on? Citi equity analyst Tobias M Levkovich wrote in an Oct 19th note to clients:
"Multiple P/E expansion has occurred already so
some fear that it cannot get much better. With valuation having expanded, given
that the S&P 500 has appreciated by roughly 20% relative to a 5%-6%
earnings gain this year, there is anxiety that further enhancement is
improbable especially with the potential for higher bond yields in the next
couple of years. Yet, such a perspective
also assumes a resumption of inflation that is not showing up in any of the
A New Tech
Bubble Takes Shape
market sectors are getting very pricey.
Many pros believe the surge in Internet and social media stocks is taking
on the appearance of the dotcom bubble in 1999. The biggest global Internet company-Google
(GOOG) closed at $1011.41 on Friday - up +122.61 or 13.80% on the day! Facebook has rallied sharply and Twitter's
IPO -with an expected valuation north of $12B- is expected to raise investors’
animal spirits. Doesn't matter that
Twitter lost $65 million in the last quarter -its biggest quarterly shortfall
since at least the start of 2011.
Sunday's NY Times, Nobel Prize winner Robert Shiller was asked by
columnist Jeff Sommer if there are (financial market)
bubbles. He replied: "Yes, they
happen all the time. Most of the action in the aggregate stock market is
bubbles. That wouldn’t be as true for individual stocks, but it’s true for the
For more on the new tech bubble, here's a video on The Nasdaq ‘Echo-Bubble’ of 2013.
Immune to Bad News:
Barron’s Ben Levisohn in The Houdini Market Wriggles Free of Bad News
Yet Again. “There
has been the flash crash, the Greek default drama, the U.S. debt-ceiling
debacle, the Standard & Poor’s credit-rating downgrade of the U.S., the
sequester, the great taper scare, and more. Each we were told could have
ushered in a new bear market. Instead, the S&P 500 squirmed out of the
traps and headed higher. And for its latest trick, the market had to avoid the
double whammy of a government shutdown and a potential default.”
doubted the market’s ability to wriggle free. They pulled $5.2 billion out of
U.S. equity funds in the week ending on Oct. 9, according to the Investment
Company Institute; the amount was more than the withdrawal in any single month
this year. Last Wednesday, however,
Republicans and Democrats agreed on a deal to reopen the government and raise
the debt ceiling, and the stock market surged higher. By the end of the
showdown, the S&P 500 had gained 2.4% and finished last week at a new
all-time high of 1,744.5, despite high-profile earnings
misses from companies such as Goldman Sachs, IBM, and United
The weight of
the evidence clearly indicates that the market is no longer driven by earnings
growth, valuations, or other fundamental metrics and is not intimidated by
lower economic growth (like this year) due to a dysfunctional federal
U.S. Dollar could be a Wild Card:
Very few financial journalists have called attention to the US dollar as having an impact on the stock market or world economy. The US $ index closed Friday below its long term support of 80. What if it breaks down from there?
If foreign central banks and international investors sell dollars, the U.S. Treasury would have to pay higher interest rates to attract foreign buyers of T-notes and T-bonds. That would have a huge negative impact on the mortgage and real estate markets. Higher debt service costs would increase the budget deficit and national debt. The U.S. would also lose the insurance value of a currency that automatically strengthens when something goes wrong (whether at home or abroad).
John Auther's wrote in this weekend's Financial Times (subscription required): "Immediately after the (debt default) resolution, Treasury yields fell while the U.S. dollar dropped sharply. That is partly because the dollar acts as a haven, even when the U.S. is itself the centre of the risks arousing concern. It also reflects the growing unpopularity of the dollar. Foreigners would prefer to hold less of it."
"This can be seen in both words and deeds. Flows from foreign investors into U.S. stocks have been declining for months. Meanwhile, China has reduced the pace of its U.S. $ reserve accumulation since the 2011 debt ceiling crisis. If the Chinese news agency Xinhua can publish a piece proposing a “new international reserve currency that is to be created to replace the dominant US dollar,” then something is afoot. Selling dollars en masse would be self-defeating – but diversifying into other currencies looks appealing."
Richard Russell wrote in last week's Dow Theory Letters: "If the dollar breaks down it will be of great concern to all creditors of the U.S."
Sperandeo commented on
the implications of a sustained U.S. dollar decline:
Dollar Index has declined from July 9th 2013 intermediate high of 84.79 to the
October 18th current minor low of 79.61. The key price levels are the July 2001
at 121.02 (the all-time high), and the 70.68 October 2009 low (the 73 year low
of 46.23 was in December 1940).
The dollar is
the world's reserve currency. As a result, all countries may hold a percent of
reserves in dollars against their (demand) loans. [The author notes that most emerging market
debt/loans are denominated in US $'s.]
If the U.S. dollar declines sharply, the loans would have to be recalled
or more $ reserves would be needed. Such
actions could cause the world economy to collapse. In an attempt to prevent such a scenario, the
Fed would be forced to raise short term interest rates, and stop printing money
(i.e. end QE). That would almost
certainly trigger a deep recession.
U.S. dollar decline has a material Impact on world stability. A break below 70.68 technically speaking
would be critical. If the dollar index declines to 60.00, for example, the
world could go into depression. On the
other hand, printing more $’s to support the greenback might result in
hyperinflation. Clearly, a no win
Recently, China has called for an end of the dollar as the world's reserve currency. They want a "de-Americanized world." No surprise, as China own $1.3 trillion of a declining asset which has no effective yield (i.e. T- Bills yield 3 bps). If China sells their dollar holdings, it would be a real threat to the global economy.
Unlike export oriented Japan, the Fed does not want a deep decline in the U.S. dollar for the above reasons. This is why life will not be boring in the years ahead."
The CURMDGEON is perplexed, astonished, and bewildered by the current U.S. equity market. We have never quite seen anything like it in over 45 years of being an active market participant. That's because of the total decoupling between the market and the real economy. The one thing we are sure of is that most "professional" money managers are underestimating the risks and erroneously believe that they'll be able to sell their long positions (to whom?) before any serious market decline. Good luck!
Till next time.....................
Curmudgeon is a retired investment professional. He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996. He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.