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Are we entering the final stage of the bull market?


twacowfca
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A non event happened this week.  A number of companies reported mark to market losses on their portfolios that lowered book value per share.  Normally, such fluctuations should be ignored as being merely noise, but a few companies took hits to their portfolio value greater than they experienced during the financial crisis because they reached into the most risky depths of the debt markets.  Allstate, in particular took a massive hit of $2.7 B on their portfolio MTM value compared to their statutory surplus of $17B.  They have started to repair their balance sheet by issuing preferred stock.

 

To the best of recollection, not one analyst on their earnings call mentioned that gaping hole as they went along with management's spin of drawing attention to their somewhat improved net earnings.

 

Has anyone else on the board noticed a suspension of critical thinking among the investing community in particular areas? 

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Guest wellmont

Two factors affecting this market are

-Low gas prices

-A loose monetary policy by the Fed..

either of them run out and the market will adjust accordingly..otherwise no..

 

gas prices are right where they were 2 years ago and the market it way up. not seeing the correlation....

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Two factors affecting this market are

-Low gas prices

-A loose monetary policy by the Fed..

either of them run out and the market will adjust accordingly..otherwise no..

 

gas prices are right where they were 2 years ago and the market it way up. not seeing the correlation....

 

I think he's referring to gas prices being a tax on consumer. I agree with vinvestor2010 that gas prices influences economic growth by probably as much as construction, but I can't say gas prices have a influences on asset prices. Overall economy and stock market have poor correlations...

 

BeerBaron

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non event? yea, that's the question du jour. all bad news vis a vie the market seems to be a non event. suppose it all depends whether the bond rout has legs & continues to defy logic in the face of a weak global economy still struggling mightily under the auspices of scared central banks to throw off the specter of deflation. but its certainly been a non media event thus far for equities of the financial persuasion. seems to me that this is an area where losses hide in plain sight at first but is dismissed & rationalized away, so that it might grow & fester til its ready to unleash full-out contagion. bond gurus like gross & gundlach have had to eat some humble pie. could their stock market counter parts be next? or can Bernanke & co ratchet up QE-ternity to an even higher level & save the day of reckoning for yet another day? liquidity still flows in abundance as evidenced by growth in the monetary base, so we can still rest assured the fed is on our side    ;)

 

https://research.stlouisfed.org/fred2/graph/?id=WSBASE

 

is the monetary base losing its allure for you, twa? haven't seen you post on it for a while.

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non event? yea, that's the question du jour. all bad news vis a vie the market seems to be a non event. suppose it all depends whether the bond rout has legs & continues to defy logic in the face of a weak global economy still struggling mightily under the auspices of scared central banks to throw off the specter of deflation. but its certainly been a non media event thus far for equities of the financial persuasion. seems to me that this is an area where losses hide in plain sight at first but is dismissed & rationalized away, so that it might grow & fester til its ready to unleash full-out contagion. bond gurus like gross & gundlach have had to eat some humble pie. could their stock market counter parts be next? or can Bernanke & co ratchet up QE-ternity to an even higher level & save the day of reckoning for yet another day? liquidity still flows in abundance as evidenced by growth in the monetary base, so we can still rest assured the fed is on our side    ;)

 

https://research.stlouisfed.org/fred2/graph/?id=WSBASE

 

is the monetary base losing its allure for you, twa? haven't seen you post on it for a while.

 

By no means.  We check it every week.  It's still on a tear as shown in the graph.  A significant amount is finally finding an exit into M2, the main economy.  When the tap finally gets turned down. . . Watch out!

 

Please note the big (for then) uptick right before Y2K.  Greenspan thought it was a good idea to put liquidity into the system because of the scare stories approaching the end of millennium.  When that proved to be unnecessary, the withdrawal of that stimulus by early 2000 tipped the market  into it's big slide.

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non event? yea, that's the question du jour. all bad news vis a vie the market seems to be a non event. suppose it all depends whether the bond rout has legs & continues to defy logic in the face of a weak global economy still struggling mightily under the auspices of scared central banks to throw off the specter of deflation. but its certainly been a non media event thus far for equities of the financial persuasion. seems to me that this is an area where losses hide in plain sight at first but is dismissed & rationalized away, so that it might grow & fester til its ready to unleash full-out contagion. bond gurus like gross & gundlach have had to eat some humble pie. could their stock market counter parts be next? or can Bernanke & co ratchet up QE-ternity to an even higher level & save the day of reckoning for yet another day? liquidity still flows in abundance as evidenced by growth in the monetary base, so we can still rest assured the fed is on our side    ;)

 

https://research.stlouisfed.org/fred2/graph/?id=WSBASE

 

is the monetary base losing its allure for you, twa? haven't seen you post on it for a while.

 

By no means.  We check it every week.  It's still on a tear as shown in the graph.  A significant amount is finally finding an exit into M2, the main economy.  When the tap finally gets turned down. . . Watch out!

 

Please note the big (for then) uptick right before Y2K.  Greenspan thought it was a good idea to put liquidity into the system because of the scare stories approaching the end of millennium.  When that proved to be unnecessary, the withdrawal of that stimulus by early 2000 tipped the market  into it's big slide.

 

Two questions, twacowfca:

 

1) If a significant amount of liquidity is finally finding its way to the real economy, why isn't velocity picking up? As of May 2013 the Core PCE Index was revisiting its lowest point, therefore velocity must be still slowing, not picking up. Also as of March 2013 the M2 money multiplier was at its lowest level since 2008… what has changed in the meantime?

 

2) I understand that it is never pleasant to withdraw any kind of stimulus… but what are we supposed to do, if that stimulus doesn’t work? It is 5 years now we have been continuously fed by the largest stimulus in human financial history… result: velocity of money isn’t picking up, real GDP growth isn’t picking up, employment (aside from governmental statistics: they don’t take into consideration the participation rate, which is still dropping) isn’t picking up, the real median household income isn’t picking up, the personal saving rate isn’t picking up. When will enough be enough? How many more years will it take us to realize if something is truly working, or vice versa should be cast aside as a failed experiment?

 

In the meantime assets prices are soaring… And I strongly fear that assets prices are a self fulfilling prophecy: when they become too detached from any real economic sense, they will fall back down, whatever policy is in place… then, it will become almost impossible to fight deflation…

 

giofranchi

 

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Another consideration is what is the normal level of prices compared to cash flows in the low inflation world we are in now.  I think we all agree that there is still more debt to work through that we be deflationary and it has been so far successfully offset by increasing the money supply.  According to Gary Schilling we are about 50% through this, so we have another 5 years to go.  If this continues for another 5 years, then I think asset prices are not expensive but cheap compared to other assets.  In addition sentiment, is not crazy for stocks this is shown in where the money has gone is: its bonds ($1.4 trillion since 2000 versus $0 to stocks). 

 

In my mind equity valuation begins with inflation.  If we expect inflation, then both stocks and LT bonds will do terrible.  If we expect deflation, bonds due well and stocks poorly.  If little or no inflation, then stocks will do well (except in times of high enthusiasm).  The one question you need to ask is what would you invest in today if conditions are going to stay the same way for 5 years.  I would say equities.  Now that would change if sentiment and a prolonged shift of funds into stocks occurred but we are not there yet.

 

As a historical analog we can look at the UK during the 1930s.  The stock market at its high was 33% higher in 1936 than it was in 1929.  In real pounds it was up 45%.  If we apply this to 2007 values (45% real increase with 10% inflation since 2007) we get 2,426 on the S&P.

 

Cheap stocks are becoming harder to fins but this bull may have a few more stampedes left before it get mauled by the bears.

 

Packer

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As a historical analog we can look at the UK during the 1930s.  The stock market at its high was 33% higher in 1936 than it was in 1929.  In real pounds it was up 45%.  If we apply this to 2007 values (45% real increase with 10% inflation since 2007) we get 2,426 on the S&P.

 

It might be… Anyway, Mr. Shilling puts the sustainable earning power of the S&P500 at 80 (and he sees it bottoming at a 10x multiple: he puts the S&P500 bottom at 800). If the S&P500 gets to 2,426, it will have reached a multiple of 2,426 / 80 = 30x…

I know it might happen… and your reasoning about the great rotation makes sense… being cautious doesn’t mean I will be hurt by such an occurrence… on the contrary, I will thrive! It just means I won’t thrive as much as you! ;)

 

giofranchi

 

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You are correct.  An inconsistency I find in both Schillings and FFH's scenarios is they both seem to include low interest rates, low inflation and lower stock prices.  The lower P/Es are in times of high inflation which required high interest rates to cure.  If Schilling is predicting lower interest rates why is he using a P/E from higher interest rate times??  In addition, he appears to be predicting a 50% decline in earnings (current S&P 500 earnings are 120).  For comparison in 2008 to 2009, earnings declined from 100 to 65 or 35%.  So by implication, his scenario has a worse crash than 2008 in terms of earnings and P/Es associated with high inflation.  What is going to cause this???

 

Packer

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You are correct.  An inconsistency I find in both Schillings and FFH's scenarios is they both seem to include low interest rates, low inflation and lower stock prices.  The lower P/Es are in times of high inflation which required high interest rates to cure.  If Schilling is predicting lower interest rates why is he using a P/E from higher interest rate times??  In addition, he appears to be predicting a 50% decline in earnings (current S&P 500 earnings are 120).  For comparison in 2008 to 2009, earnings declined from 100 to 65 or 35%.  So by implication, his scenario has a worse crash than 2008 in terms of earnings and P/Es associated with high inflation.  What is going to cause this???

 

Packer

 

Well, low PEs might be caused both by inflation and by deflation…

 

Current 12 month real EPS for the S&P500 are 88:

 

http://www.multpl.com/s-p-500-earnings/

 

I think Mr. Shilling is putting a multiple on that number. And he is not thinking about a single episode or market swoon.

 

giofranchi

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This is another source should TTM earnings closer to 110 in the source below:

 

http://www.factset.com/websitefiles/PDFs/earningsinsight/earningsinsight_8.2.13

 

I think the difference is in operating earnings closer to 110 and reported earnings closer to 88.  I think  the difference is reported includes non-recurring costs while operating does not.

 

Packer

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You are correct.  An inconsistency I find in both Schillings and FFH's scenarios is they both seem to include low interest rates, low inflation and lower stock prices.  The lower P/Es are in times of high inflation which required high interest rates to cure.  If Schilling is predicting lower interest rates why is he using a P/E from higher interest rate times??  In addition, he appears to be predicting a 50% decline in earnings (current S&P 500 earnings are 120).  For comparison in 2008 to 2009, earnings declined from 100 to 65 or 35%.  So by implication, his scenario has a worse crash than 2008 in terms of earnings and P/Es associated with high inflation.  What is going to cause this???

 

Packer

 

 

The issue is that low inflation can quickly become deflation.  Deflation is a nasty beast that drives both low interest rates AND low P/Es.  The best work that I've seen on this was done by Ed Easterling.  A nice little summary of how this works can be found at:

 

http://www.crestmontresearch.com/docs/Financial-Physics-Presentation.pdf

 

Cheers,

 

SJ

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I think the bear market has just turned to a bull market.  This sounds strange but we haven't come anywhere near passing the previous high of 1563 on the S&P.  We are at 1709 which is 9% higher but in the interim we have had inflation.  For arguments sake lets say 2.5% per year over 6 years.  That gives us 1810 or so. 

 

In the traditional stock market/economic cycle the markets precede economic recovery.  Stimulus is normally used by governments to get things going again through various means such as printing money, extending benefits, government contracts etc.  In the present case we had a 1/50 or 1/100 year event which was very deep and protracted.  We are just coming out of iit now.  What we are seeing is an amplified version of the normal cycle. 

 

If you pull up a stock market/bond market cyclical chart most have financials rallying (due to cheap money) off the bottom of the bear.  This is followed by economic expansion, and the rallying of non- financials.  This episode is very drawn out.  Financials are finally rallying.  The subsequent bull will be long lasting (with corrections along the way of course).

 

Twacowcfa, Are not some of the mark to mark adjustments due to losses on bonds.  I haven't looked in detail but this is certainly contributing to insurers.  Also adjustments to DVAs is having some effect.

 

Overlaying all of this is a vigorous period of creative destruction which just complicates market valuations. 

 

All that being said I am not finding any compelling values out there.  This time around I am avoiding moving down the quality curve so it may be my problem rather than a market problem.

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We hold a similar view to Uccmal, & cite the on-going discussion on tapering - it would not be occurring at all unless central bankers were confident they were near the end of the global recession. There are compelling values, but in the growth stocks....

 

And keep in mind that the refinanced cigar butts are going to act very like growth stocks when the global economy comes back, but with much less risk. ie: If they have not failed yet then they are probably not going to.

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Sharper,

 

Since when have central bankers ever nailed the turn in an economic cycle? They have undershot growth for the last four years - why would they be right now?

 

Al,

 

What data would you point to that would indicate we have exited or are about to exit the deleveraging cycle? Debt to income levels have come down globally and here in the US but nowhere near where they were at the beginning of the 30-year debt cycle. It's pretty well documented that growth is stimied when sent levels are where they are - I don't see where the growth is going to come from.

 

Regardless, markets are pricing in above average growth let alone sub par growth, if one still believes in the mean reverting nature of profit margins.

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Guest wellmont

I think we are at the beginning of a multiyear epic bull market that will make everybody lots of money.

 

What evidence do I have? None, just a hunch, much like those who say the market is due for a decline.  ;)

 

so the bull market is not 4.5 years old already? it's just "the beginning?" hmmm. Party on Garth.

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I think we are at the beginning of a multiyear epic bull market that will make everybody lots of money.

 

What evidence do I have? None, just a hunch, much like those who say the market is due for a decline.  ;)

 

so the bull market is not 4.5 years old already? it's just "the beginning?" hmmm. Party on Garth.

 

Game on!!  8)

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We have more cash today than ever before in our funds.  Either I'm very wrong, or some on here are going to be. 

 

I was fully invested in 2008/2009, selling stuff at 7 times earnings to buy stuff at 3-4 times earnings...and I rode that up over the last four years, slowly building cash in the funds.  People were telling me I was crazy buying WFC at $9, BAC at $5 and BRKB at $68...because the financial world was ending and we were going to see Great Depression 2, even though the S&P's P/E was about at 8.  Guess what?  They were wrong.

 

Now I'm being told that we are in the midst of a prolonged bull market, where people are willing to pay S&P's P/E of 22, because we are in a low-interest rate environment, and that federal governments know what they are doing even though they have precariously increased their debt levels to ridiculous levels over the last four years.  Somehow corporate earnings, which are at historic levels, are going to continue to go up, even though governments have this massive discrepancy between revenues and expenses, especially debt servicing.  Where is the margin of safety in this?  The fantasy is that an energy-independent United States, along with a recovering economy, will be enough.  I don't think so.

 

You guys don't get our annual reports, since it only goes to our partners, but on the inside cover we've always had this quote which is from Berkshire's 2006 Annual Report: 

 

Over time, markets will do extraordinary, even bizarre, things.  A single, big mistake could wipe out a long string of successes.  We therefore need someone genetically programmed to recognize and avoid serious risks, including those never before encountered.  Certain perils that lurk in investment strategies cannot be spotted by use of the models commonly employed today by financial institutions.

 

Temperament is also important.  Independent thinking, emotional stability, and a keen understanding of both human and institutional behavior is vital to long-term investment success.  I’ve seen a lot of very smart people who have lacked these virtues.

 

I think it's probably the greatest quote I've ever seen when referencing how investment manager's have to have a completely unique way of understanding risk and to be able to think independently.  I think this quote is as important today, as it was in 2006.  Cheers!

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I am 100 times less smart than Al but I do not see why it is so obvious we are  in a new secular bull market!

First there is nothing "as usual" in the current recovery. This is the weakest recovery in US history except the great depression and GDP numbers keep on getting revised to the downside quarter after quarter. Then you get continuously declining household income, still unprecedented public and household levels of debt, higher taxes and future lower stimulus when consumers already have decreased saving levels from an already low level, declining money velocity etc, etc, etc... I think there is a lot of hope baked into the cake right now but that's about it. And now we get China slowing at best... :-[

I have a lot of cash right now!

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We have more cash today than ever before in our funds.  Either I'm very wrong, or some on here are going to be.

 

I was fully invested in 2008/2009, selling stuff at 7 times earnings to buy stuff at 3-4 times earnings...and I rode that up over the last four years, slowly building cash in the funds.  People were telling me I was crazy buying WFC at $9, BAC at $5 and BRKB at $68...because the financial world was ending and we were going to see Great Depression 2, even though the S&P's P/E was about at 8.  Guess what?  They were wrong.

 

Now I'm being told that we are in the midst of a prolonged bull market, where people are willing to pay S&P's P/E of 22, because we are in a low-interest rate environment, and that federal governments know what they are doing even though they have precariously increased their debt levels to ridiculous levels over the last four years.  Somehow corporate earnings, which are at historic levels, are going to continue to go up, even though governments have this massive discrepancy between revenues and expenses, especially debt servicing.  Where is the margin of safety in this?  The fantasy is that an energy-independent United States, along with a recovering economy, will be enough.  I don't think so.

 

You guys don't get our annual reports, since it only goes to our partners, but on the inside cover we've always had this quote which is from Berkshire's 2006 Annual Report:

 

Over time, markets will do extraordinary, even bizarre, things.  A single, big mistake could wipe out a long string of successes.  We therefore need someone genetically programmed to recognize and avoid serious risks, including those never before encountered.  Certain perils that lurk in investment strategies cannot be spotted by use of the models commonly employed today by financial institutions.   

   

Temperament is also important.  Independent thinking, emotional stability, and a keen understanding of both human and institutional behavior is vital to long-term investment success.  I’ve seen a lot of very smart people who have lacked these virtues.   

 

I think it's probably the greatest quote I've ever seen when referencing how investment manager's have to have a completely unique way of understanding risk and to be able to think independently.  I think this quote is as important today, as it was in 2006.  Cheers!

 

You know what Sanjeev, I really learned from you along the years quietly. You have an extraordinarily balanced mind!

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We have more cash today than ever before in our funds.  Either I'm very wrong, or some on here are going to be. 

 

I was fully invested in 2008/2009, selling stuff at 7 times earnings to buy stuff at 3-4 times earnings...and I rode that up over the last four years, slowly building cash in the funds.  People were telling me I was crazy buying WFC at $9, BAC at $5 and BRKB at $68...because the financial world was ending and we were going to see Great Depression 2, even though the S&P's P/E was about at 8.  Guess what?  They were wrong.

 

Now I'm being told that we are in the midst of a prolonged bull market, where people are willing to pay S&P's P/E of 22, because we are in a low-interest rate environment, and that federal governments know what they are doing even though they have precariously increased their debt levels to ridiculous levels over the last four years.  Somehow corporate earnings, which are at historic levels, are going to continue to go up, even though governments have this massive discrepancy between revenues and expenses, especially debt servicing.  Where is the margin of safety in this?  The fantasy is that an energy-independent United States, along with a recovering economy, will be enough.  I don't think so.

 

You guys don't get our annual reports, since it only goes to our partners, but on the inside cover we've always had this quote which is from Berkshire's 2006 Annual Report: 

 

Over time, markets will do extraordinary, even bizarre, things.  A single, big mistake could wipe out a long string of successes.  We therefore need someone genetically programmed to recognize and avoid serious risks, including those never before encountered.  Certain perils that lurk in investment strategies cannot be spotted by use of the models commonly employed today by financial institutions.

 

Temperament is also important.  Independent thinking, emotional stability, and a keen understanding of both human and institutional behavior is vital to long-term investment success.  I’ve seen a lot of very smart people who have lacked these virtues.

 

I think it's probably the greatest quote I've ever seen when referencing how investment manager's have to have a completely unique way of understanding risk and to be able to think independently.  I think this quote is as important today, as it was in 2006.  Cheers!

 

+1 (market insights and quote)

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