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It is time to get Very BULLISH !


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https://www.frbatlanta.org/cqer/research/gdpnow.aspx?panel=1

 

Latest forecast — February 5, 2016

 

The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2016 is 2.2 percent on February 5, up from 1.2 percent on February 1. After this morning's employment report from the U.S. Bureau of Labor Statistics, the forecast for real consumer spending growth increased from 2.5 percent to 3.0 percent and the forecast for real gross private domestic investment growth increased from -0.4 percent to 2.1 percent.

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Gun to my head, I think SDS does pretty well over the next several months. 

 

BTW: SDS is a flawed instrument for expressing a long term negative view on the S&P 500. It works for very short term views...

"ProShares UltraShort S&P500 (the Fund) seeks daily investment results that correspond to twice (200%) the inverse (opposite) of the daily performance of the S&P 500 (the Index)."

 

I think a year from now, SDS could be down very substantially. 20 + %

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Overwhelming amount of negativity:)

 

We are shorting SDS and VXX today. I believe these will yield excellent long term results.

 

Don't get too negative...it clouds your thinking

 

There's not enough negativity yet. This thread is an example.

 

 

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I understand how they decay but also understand these things get you killed on a short when they compound the other way over short periods of time.

 

Go look at investment grade credit spreads, they're blowing out.  Either stocks go down or bonds start going up.  Equity markets are still pretty optimistic at these prices but hey anything can happen.

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Warning: I don't spend a lot of time watching macro indicators so this a very simple, if not simplistic, take.

 

I expect this to probably end up as the longest expansionary cycle in US history. Cycles tend to run longer after deeper contractions, and you would expect this to be especially the case if growth coming out of that contraction is anemic, as it has been. It will still take a long time to get to a point where the economy has overcapacity and needs to contract. Fed will be accommodative as long as needed, and I expect a boost from fiscal policy in the coming years. Who can seriously say that the American (or European) economy is overheating right now? How can you not be bullish when you see how much under-utilized capacity there is in European economies? A little bit of a slowdown for America should be expected, oil and gas is getting hit, strong dollar is probably hurting exporters...but this is not going to lead to a recession. Participating in the financial markets gets people to think the economy is really a more volatile and unstable system than it actually is. The sign that we should be truly fearful of is excess...and I just don't see it in the developed economies, households have deleveraged dramatically, fiscal policy has been austere across many countries, there's still slack in labor market (even in America when you factor in participation rate), corporations still seem to be very careful in making investments to add capacity, and don't see it in financial markets either after this recent correction, as at such low rates, equities should be trading at a much higher multiple.

 

I'm reminded of what Tepper said a few months ago. He implied that 1) there will be volatility because of a drawdown in reserves, so lot of money will be coming out of the system (from China, oil economies, EMs etc), 2) margins will start to get pressured for many US corporations because of the strong dollar and wage pressures from a tightening labor market, and 3) multiples will need to come down to reflect the slower growth in EMs. I think that is basically what is happening right now. The first point has nothing to do with the real economy, though the resulting volatility in financial markets would end up leading to increased risk aversion (I think we are seeing this). The second point is not so good for corporate profits but good for real economy (the wage pressure part). The third point (slower EM growth) is not ideal, but is not enough of an issue to have a big impact on an economy as big and diverse as America's.

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Overwhelming amount of negativity:)

 

We are shorting SDS and VXX today. I believe these will yield excellent long term results.

 

Don't get too negative...it clouds your thinking

 

Bill Gross suggested a similar trade on Friday on CNBC, structured slightly differently. If you believe the central banks will play good cop, bad cop and allow a certain range of volatility, his plan was to trade volatility around the 10 year treasury bond.

 

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Overwhelming amount of negativity:)

 

We are shorting SDS and VXX today. I believe these will yield excellent long term results.

 

Don't get too negative...it clouds your thinking

 

There's not enough negativity yet. This thread is an example.

 

Exactly.

 

Warning: I don't spend a lot of time watching macro indicators so this a very simple, if not simplistic, take.

 

I expect this to probably end up as the longest expansionary cycle in US history.

 

Alright, I'll bite.

 

Cycles tend to run longer after deeper contractions, and you would expect this to be especially the case if growth coming out of that contraction is anemic, as it has been. It will still take a long time to get to a point where the economy has overcapacity and needs to contract. Fed will be accommodative as long as needed, and I expect a boost from fiscal policy in the coming years. Who can seriously say that the American (or European) economy is overheating right now?

 

Agreed on cycles and this one has already been longer than most. Economically speaking, I don't expect the U.S. to fall off a cliff, but I do expect U.S. equities to fall off a cliff. The last cycle for U.S. equity prices wasn't really that deep considering the end-point was the long-term average and NOT below it. Further, it wasn't anywhere close to where it would need to be to put longer term valuation metrics anywhere near where prior secular bull markets have started.

 

How can you not be bullish when you see how much under-utilized capacity there is in European economies?

Because that excess capacity is indicative of a demand problem and the very real potential for a deflationary cycle - not good for equities either.

 

A little bit of a slowdown for America should be expected, oil and gas is getting hit, strong dollar is probably hurting exporters...but this is not going to lead to a recession. Participating in the financial markets gets people to think the economy is really a more volatile and unstable system than it actually is.
Agreed on your last point, but I do expect a recession. The majority of the growth in U.S. GDP since the crisis has been in shale states - you remove that growth which has been crippled and the paltry GDP figures look even worse before you even consider a contraction in those states. Further, U.S. consumers aren't spending that windfall as is evident from the increase in the savings rate. Deleveraging continues and the growth rate going forward will be lower than the low figures we were already seeing.

 

 

The sign that we should be truly fearful of is excess...and I just don't see it in the developed economies,

You mean like all that excess capacity you mentioned above?

 

household have deleveraged dramatically, fiscal policy has been austere across many countries, there's still slack in labor market (even in America when you factor in participation rate),

No deleveraging took place - it was simply shifted onto public balance sheets instead of private balance sheets. Sure, that lowers the interest burden, but it doesn't actually result in a deleveraging and the policy for most everyone has been to increase this burden over past several years. Corporations have also re-levered in the buyback craze that defined the last 18-24 months.

 

corporations still seem to be very careful in making investments to add capacity,

Yes, because of the overcapacity and demand problem mentioned above. Still deflationary.

 

and don't see it in financial markets either after this recent correction, as at such low rates, equities should be trading at a much higher multiple.

U.S. equity valuations are still basically near the most extreme levels they've seen in the history of the U.S. equity markets. There are sub-sectors that appear to be getting more attractive, but that is because the profits are threatened in this type of environment so they may not be real deals yet. Any long-term valuation metric still showing that we have much, much further to go to the downside before the excess in the financial markets is wiped out. Further, while I understand the logic and reasoning behind comparing equity multiples to interest rates, the truth is that they're really not that correlated. When did equities hit their lowest multiple - in the midst of the great depression and what were interest rates at then? What about in the depths of the 2008/2009 GFC? What about in any recession. While the levels should be comparable, history suggests that it's more the direction in interest rates/inflation that direct the equity market and not the absolute level of interest rates. Use this knowledge to your advantage.

 

I'm reminded of what Tepper said a few months ago. He implied that 1) there will be volatility because of a drawdown in reserves, so lot of money will be coming out of the system (from China, oil economies, EMs etc), 2) margins will start to get pressured for many US corporations because of the strong dollar and wage pressures from a tightening labor market, and 3) multiples will need to come down to reflect the slower growth in EMs. I think that is basically what is happening right now. The first point has nothing to do with the real economy, though the resulting volatility in financial markets would end up leading to increased risk aversion (I think we are seeing this). The second point is not so good for corporate profits but good for real economy (the wage pressure part). The third point (slower EM growth) is not ideal, but is not enough of an issue to have a big impact on an economy as big and diverse as America's.

 

None of what impacts the "real economy" matters because equity markets are actually largely uncorrelated from the real economy in the short-to-medium term. Average equity returns in years with negative GDP growth rates are actually higher than average returns in years with positive growth rates. Go figure. The one thing that matters the most and trumps all other considerations has continued to be the value you buy the equities at - if equities are good value, then buy them. If they're not, then sell them. You can basically ignore what the "real economy" is doing in those scenarios. Equities are, and have been, expensive and a small decline that takes us back to mid-2014 levels hasn't really changed that much.

 

"The market" doesn't seem especially cheap to me based on CAPE, Tobin's Q, Trailing P/S, P/B, etc...

 

+1. Exactly. Nowhere near the bottom of this cycle.

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If you guys think people are bearish on the U.S. market, come on up to Canada. We have:

 

1. An economy dependent on oil and natural resources. It it's a commodity that matters, it's down and down hard.

2. A gigantic housing bubble which nobody denies. The only argument is how bad the carnage will be when it pops.

3. U.S. hedge funds are so bearish on our economy that "short Canada" was basically a meme.

4. A banking system people are convinced is going to collapse. (See #3)

5. A currency that's off ~25% over the last year.

 

And so on.

 

 

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Interesting because even in this thread negativity abounds...

 

Don't make me change my opinion, man...  :-X  8)

 

There's not enough negativity yet. This thread is an example.

 

On serious note, I don't care much about negativity. I am long only. I keep buying. When I run out of cash I will stop. Period. GL.

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I think it is too early to turn bullish at this point on the market as a whole. Based on what I have been seeing, it feels like the stocks that many hedge funds were shorting for a number of years (FAST, CSCO, FCX) are outperforming the hedge fund hotels (like MU, VRX, etc.). This is an oversimplification, but some hedge funds must be getting redemptions or margin calls, and are pulling back on their long positions and short positions, hence many of the outperformers in the market are the bottom of the proverbial barrel (in the collective market's mind) and many of the most beaten up names are those that hedge funds love and admire. I don't think we are very close to the end of this phenomenon.

 

http://online.wsj.com/mdc/public/page/2_3062-nasdaqshort-highlites.html

http://online.wsj.com/mdc/public/page/2_3062-nyseshort-highlites.html

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Warning: I don't spend a lot of time watching macro indicators so this a very simple, if not simplistic, take.

 

I expect this to probably end up as the longest expansionary cycle in US history. Cycles tend to run longer after deeper contractions, and you would expect this to be especially the case if growth coming out of that contraction is anemic, as it has been. It will still take a long time to get to a point where the economy has overcapacity and needs to contract. Fed will be accommodative as long as needed, and I expect a boost from fiscal policy in the coming years. Who can seriously say that the American (or European) economy is overheating right now? How can you not be bullish when you see how much under-utilized capacity there is in European economies? A little bit of a slowdown for America should be expected, oil and gas is getting hit, strong dollar is probably hurting exporters...but this is not going to lead to a recession. Participating in the financial markets gets people to think the economy is really a more volatile and unstable system than it actually is. The sign that we should be truly fearful of is excess...and I just don't see it in the developed economies, households have deleveraged dramatically, fiscal policy has been austere across many countries, there's still slack in labor market (even in America when you factor in participation rate), corporations still seem to be very careful in making investments to add capacity, and don't see it in financial markets either after this recent correction, as at such low rates, equities should be trading at a much higher multiple.

 

I'm reminded of what Tepper said a few months ago. He implied that 1) there will be volatility because of a drawdown in reserves, so lot of money will be coming out of the system (from China, oil economies, EMs etc), 2) margins will start to get pressured for many US corporations because of the strong dollar and wage pressures from a tightening labor market, and 3) multiples will need to come down to reflect the slower growth in EMs. I think that is basically what is happening right now. The first point has nothing to do with the real economy, though the resulting volatility in financial markets would end up leading to increased risk aversion (I think we are seeing this). The second point is not so good for corporate profits but good for real economy (the wage pressure part). The third point (slower EM growth) is not ideal, but is not enough of an issue to have a big impact on an economy as big and diverse as America's.

 

I'd highly recommend to you: http://www.economicprinciples.org/

Watch it a few times and think again about cycles. Maybe Tepper and some other value investors should watch it, too.

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Overwhelming amount of negativity:)

 

We are shorting SDS and VXX today. I believe these will yield excellent long term results.

 

Don't get too negative...it clouds your thinking

 

There's not enough negativity yet. This thread is an example.

 

Exactly.

 

Warning: I don't spend a lot of time watching macro indicators so this a very simple, if not simplistic, take.

 

I expect this to probably end up as the longest expansionary cycle in US history.

 

Alright, I'll bite.

 

Cycles tend to run longer after deeper contractions, and you would expect this to be especially the case if growth coming out of that contraction is anemic, as it has been. It will still take a long time to get to a point where the economy has overcapacity and needs to contract. Fed will be accommodative as long as needed, and I expect a boost from fiscal policy in the coming years. Who can seriously say that the American (or European) economy is overheating right now?

 

Agreed on cycles and this one has already been longer than most. Economically speaking, I don't expect the U.S. to fall off a cliff, but I do expect U.S. equities to fall off a cliff. The last cycle for U.S. equity prices wasn't really that deep considering the end-point was the long-term average and NOT below it. Further, it wasn't anywhere close to where it would need to be to put longer term valuation metrics anywhere near where prior secular bull markets have started.

 

How can you not be bullish when you see how much under-utilized capacity there is in European economies?

Because that excess capacity is indicative of a demand problem and the very real potential for a deflationary cycle - not good for equities either.

 

A little bit of a slowdown for America should be expected, oil and gas is getting hit, strong dollar is probably hurting exporters...but this is not going to lead to a recession. Participating in the financial markets gets people to think the economy is really a more volatile and unstable system than it actually is.
Agreed on your last point, but I do expect a recession. The majority of the growth in U.S. GDP since the crisis has been in shale states - you remove that growth which has been crippled and the paltry GDP figures look even worse before you even consider a contraction in those states. Further, U.S. consumers aren't spending that windfall as is evident from the increase in the savings rate. Deleveraging continues and the growth rate going forward will be lower than the low figures we were already seeing.

 

 

The sign that we should be truly fearful of is excess...and I just don't see it in the developed economies,

You mean like all that excess capacity you mentioned above?

 

household have deleveraged dramatically, fiscal policy has been austere across many countries, there's still slack in labor market (even in America when you factor in participation rate),

No deleveraging took place - it was simply shifted onto public balance sheets instead of private balance sheets. Sure, that lowers the interest burden, but it doesn't actually result in a deleveraging and the policy for most everyone has been to increase this burden over past several years. Corporations have also re-levered in the buyback craze that defined the last 18-24 months.

 

corporations still seem to be very careful in making investments to add capacity,

Yes, because of the overcapacity and demand problem mentioned above. Still deflationary.

 

and don't see it in financial markets either after this recent correction, as at such low rates, equities should be trading at a much higher multiple.

U.S. equity valuations are still basically near the most extreme levels they've seen in the history of the U.S. equity markets. There are sub-sectors that appear to be getting more attractive, but that is because the profits are threatened in this type of environment so they may not be real deals yet. Any long-term valuation metric still showing that we have much, much further to go to the downside before the excess in the financial markets is wiped out. Further, while I understand the logic and reasoning behind comparing equity multiples to interest rates, the truth is that they're really not that correlated. When did equities hit their lowest multiple - in the midst of the great depression and what were interest rates at then? What about in the depths of the 2008/2009 GFC? What about in any recession. While the levels should be comparable, history suggests that it's more the direction in interest rates/inflation that direct the equity market and not the absolute level of interest rates. Use this knowledge to your advantage.

 

I'm reminded of what Tepper said a few months ago. He implied that 1) there will be volatility because of a drawdown in reserves, so lot of money will be coming out of the system (from China, oil economies, EMs etc), 2) margins will start to get pressured for many US corporations because of the strong dollar and wage pressures from a tightening labor market, and 3) multiples will need to come down to reflect the slower growth in EMs. I think that is basically what is happening right now. The first point has nothing to do with the real economy, though the resulting volatility in financial markets would end up leading to increased risk aversion (I think we are seeing this). The second point is not so good for corporate profits but good for real economy (the wage pressure part). The third point (slower EM growth) is not ideal, but is not enough of an issue to have a big impact on an economy as big and diverse as America's.

 

None of what impacts the "real economy" matters because equity markets are actually largely uncorrelated from the real economy in the short-to-medium term. Average equity returns in years with negative GDP growth rates are actually higher than average returns in years with positive growth rates. Go figure. The one thing that matters the most and trumps all other considerations has continued to be the value you buy the equities at - if equities are good value, then buy them. If they're not, then sell them. You can basically ignore what the "real economy" is doing in those scenarios. Equities are, and have been, expensive and a small decline that takes us back to mid-2014 levels hasn't really changed that much.

 

"The market" doesn't seem especially cheap to me based on CAPE, Tobin's Q, Trailing P/S, P/B, etc...

 

+1. Exactly. Nowhere near the bottom of this cycle.

 

What he said :) Some of us have been waiting a long time for the technical vindication in some of the more resilient sectors.  Always remember: internationally there is more money tied up in oil-and-energy assets than you can possibly imagine.  Saudi Aramco is/ was conceivably worth as much as 10T, and that's just one NOC.  The governments/ companies/ banks/ families that own these assets are large and take time to really start gasping, but when they do we all bleed together since you sell last that which is most dear.  The severity of the bear market in commodities gives a good indicator of what is to come.  The good news is at some point the money flowing out of financial assets around the world will have to go somewhere (apart from the central banks from whence it came), and physical assets will find their feet again (but probably not until valuations are substantially lower - perhaps 60-80%).  The Fed is spent, and the world's central banks which might launch QE3 are too fragmented and divisive to take any action that would sustain valuations in the next 12-24 months, if ever.  While I'm not sure, this year is shaping up to look a lot like 1974.  I'm not sure which part is sadder, seeing a bunch of brokers on the streets because their firms downsized or seeing a bunch of old people working at Walmart because their 401ks and IRAs (pitched as a surrogate for pension plans) are inadequate.  What I do know is Ray Dalio is probably feeling right at home right now, and Bridgewater along with a handful of other macro funds may be in for some excellent years.

 

Good luck,

Graham

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