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Mania

“The United States stock market looks very expensive right now. The CAPE ratio, a stock-price measure I helped develop — is hovering at a worrisome level…. above 25, a level that has been surpassed since 1881 in only three previous periods: the years clustered around 1929, 1999 and 2007. Major market drops followed those peaks.” -Robert J. Shiller, Nobel Prize-Winning Economist and Author of “Irrational Exuberance”

Popular response: the CAPE ratio is flawed and valuations don’t matter anyway; stocks are only worth what someone else is willing to pay.

“George Soros Just Made A Huge Bet That US Stocks Might Fall” -Business Insider

Popular response: he’s not betting stocks are going lower; it’s just a hedge against his long exposure.

“Yellen’s [recent] comments suggest, and I agree, that we are in an asset bubble.” -Carl Icahn

Popular response: 1999 was a bubble; this isn’t a bubble.

Rationalize. Rationalize. Rationalize.

Time and time again investors flat out deny what’s staring them dead in the face: stocks are extremely overvalued and at risk of yet another major decline. The last time I can remember investors rationalizing bearish data points as much as they are today was during the height of the internet bubble. ‘P/E’s don’t matter any more; it’s a new economy,’ was the battle cry back then. Today it’s, ‘it’s impossible to value a stock or the market,’ and ‘this is nothing like the internet bubble.’

To an outsider, someone who has nothing to do with the markets, the logical fallacies must be painfully obvious.

Criticizing the CAPE is a classic straw man. Tobin’s Q Ratio, a valuation measure used by the Fed, along with Buffett’s favorite yardstick, total market capitazliation relative to GNP, both confirm that the stock market is extremely overvalued, using three totally unrelated valuation methods. Another thing the bulls fail to mention is that these three measures are highly correlated to future 10-year returns for stocks and suggest the potential risk at this point is far greater than the potential reward. These are just facts!

And comparing today’s market to the internet bubble is a clear Red Herring. Just because today’s market is not exactly like that of 1999 doesn’t prove that we’re not in a bubble today. In fact, it’s totally irrelevant. Today’s market should be judged on the full measure of the data available to us. And just like Shiller says, there have only been a very rare number of times stocks have been this overvalued: 1929, 1999 and 2007. These are just facts!

Then we get into the Ad Hominem attacks. ‘Shiller’s just a professor; he’s not a market practitioner so he doesn’t know what he’s talking about’ or ‘Soros and Icahn are just like all the other hedge fund big wigs out there using the media to make short-term profits; you can’t read anything into what they do or say,’ not to mention the attacks on John Hussman that completely ignore the merits of his research on its own.

I get it. It’s extremely difficult to listen to reason when the madness of the crowd is simply deafening. At the end of the day, though, it’s all just a huge sign that investors are desperate to believe, to keep hope alive that 30%-per-year profits can happen again this year and the next.

So if you didn’t know what a mania was before now, just take a look at the financial blogs and social media sites. The rationalization is everywhere. And it may be the best indicator of all that we are, indeed, in the midst of yet another bubble.

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goldentouch2
Posts

King Midas And The Media

I tweeted this yesterday because Buffett invests for the full cycle. His outperformance usually comes during bear markets (for a variety of reasons including the quality of the companies he’s invested in, the “margin of safety” he demands from his purchases and the fact that he keeps some significant powder dry to take advantage “fear”).

During bull markets he just hopes to keep pace but during the final euphoric phase of bull runs he tends to lag (again for similar reasons including his focus is on larger, more established companies rather than the young, high-flyers that typically soar during these periods; the “margin of safety” he demands is simply not available when valuations are stretched and his growing cash position becomes a performance anchor).

Long story short, his underperformance during the later stages of bull runs is something the world’s greatest investor consciously tolerates in order to be in position to take advantage of the flipside of the cycle. Still, the media loves to rib him for it – every time. So I was curious to see if it could be quantified as a contrarian indicator.

Thank you, Jason Goepfert! Jason ran a scan of headlines related to Warren Buffett ‘losing his touch’ and found:

Sure enough, spikes in these stories tended to occur near market turning points, including near the peaks in 2000 and 2008, the trough in 2002 and lesser intermediate-term corrections in 2010 and 2012.

Screen Shot 2014-08-16 at 9.23.50 AMHowever, aside from the Forbes article I tweeted yesterday we aren’t seeing much of a confluence of these sorts of stories in the media… yet. But I’m sure Jason will let us know if and when they do start to pile up.

For more of these kinds of sentiment studies check out SentimenTrader.com where Jason regularly publishes some superb work.

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Investing, Markets, Posts

Check Out My Latest Article For The Huffington Post

I recently wrote an article for the Huffington Post titled, “Here’s Why Intelligent Investors Are Avoiding Stocks Right Now.” Here’s a teaser:

The stock market had an awesome year last year, rising roughly 35 percent. Many investors, inspired by the market’s strength, have now decided they want to get in on the gains. However, now is not the ideal time to put money to work in stocks. In fact, it’s a horrible time to do so…

Read the full story at huffingtonpost.com

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Investing, Markets

Investors Are Once Again Ignoring All The Red Flags And Setting Themselves Up For Failure

We’re currently witnessing an incredibly fascinating time in the financial markets. All kinds of people and media outlets are now talking about heightened risk in the stock market and I haven’t seen any real case made against it (just a LOT of logical fallacies). Still, investors keep pouring money in and the market keeps heading higher. It’s as if they’re laying down in front of a speeding locomotive, tying themselves to the tracks with their own greed.

Here are the 8 things we can all agree (based on their popularity in the press and lack of rebuttle) will doom investments made in the stock market today:

  1. Quantitative Easing is losing its efficacy and creating major imbalances. Ray Dalio recently argued that QE is now beginning to suffer from its own success in boosting asset prices. At the same time, the general public is realizing the whole program, by relying on the “wealth effect” to boost the economy, disproportionately benefits the rich while they see little or no benefit at all.
  2. But the Fed can’t stop or even taper QE without major repercussions in the financial markets. If QE’s greatest accomplishment has been boosting the economy via the wealth effect, it stands to reason that removing or even reducing it will have the opposite effect.
  3. Hence, the Fed is trapped. Richard Koo can’t find anyone to dispute this.
  4. Still, it can’t “print money” forever. At the current pace, the Fed is printing $1 trillion of new money every year and then spending much of that buying treasury bonds, essentially monetizing the debt. Even the Fed admits this cannot go on for long.
  5. Yet stocks are priced as though they will. Based on numerous metrics, including Warren Buffett’s favorite valuation metric, stocks are valued significantly higher than they have typically been in the past. In other words, very little risk is priced into the market at current levels.
  6. And investors are clearly optimistic about future returns. Why else would they pour record amounts of money into equity funds and use record amounts of leverage to boot?
  7. Even though they are guaranteed to be mediocre at best. Investment returns are based on the price you pay. Because prices are relatively high today future returns from current stock prices are reasonably estimated at 0-4% over the next decade.
  8. All of which means many investors are doomed to be let down. With potential “reward” in the low single digits and potential “risk” being 40-55% to the downside it seems investors have once again set themselves up for failure.

Isn’t it absolutely amazing how this happens time and time again?

Chart of the Day:

Oil has been a very good signal for stocks so far this year and it just took a pretty nasty tumble:

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