Secular Bull?

[bmichaud]

In February of this year, the venerable market research firm Ned Davis Research issued a reported entitled "A New Era", suggesting that we were entering a period of prolonged equity outperformance over bonds....while also suggesting that we potentially entered a new secular bull market beginning in March 2009. Ten days ago NDR issued a follow-up report citing increased evidence that we are indeed in a secular bull market. While admitting traditional valuation metrics would indicate otherwise, they primarily look to the market action since the March 2009 bottom versus other secular bull market beginnings - long story short, length of time and average gains since March 2009 look nothing like secular bears, thus if it quacks like a duck it likely is a duck.

 

Other considerations:

 

- Jeff Saut, very good market strategist from Raymond James, believes there is a very high likelihood we are in a secular bull

- Buffett believes stocks are more or less fairly valued

 

This means:

 

- John Hussman will likely be out of business within a couple of years

- GMO's credibility regarding asset class projected returns is gone

 

I realize bottoms-up stock picking should not worry about the broad market, but as Sanjeev has demonstrated with a 45% cash position, bottoms-up stock pickers do worry about the broad market. As such, if we are in a secular bull then this has huge implications for defensive positioning. If we are indeed in a secular bull and Buffett is right that the market is fairly valued, then I think that means the margin mean-reversion story is dead and the current S&P 500 earnings power of around $100 per share (GAAP, not operating), should be viewed as "normal", if you will. In a secular bull market, markets run up to well over 20X, say 25X, which means 2,500 on the S&P 500, or 47% higher from 1,700....

 

Heretofore I've been a big bear, believing we are in a secular bear market, so I am fully aware that this very post may be signalling the top of a market I've long since fought. But given the intellectual weight behind a NDR/Saut/Buffett view that we are in a secular bull/stocks are fairly priced at worst, I really need to reconsider my position.

 

Curious what the board thinks, especially Sanjeev since he is in 45% cash....

[gary17]

I think if there is a correction unlikely to be the kind we saw in 08/09. I think a lot of people are fearful of that , I am too, but logic tells me a correction is not likely going to take 40 or 50 percent off .  So while being invested I think just prep for a way to find cash when we have a 20 percent correction or just ride it out... We went through 09 ok I think we can ride out future waves.

 

This is like this whole fear of Syria because of recent memory of Iraq

[Palantir]

I don't believe there is a strong or persuasive argument for a bear market. I believe as long as monetary stimulus happens, equities will perform well, and if monetary stimulus is pulled, it is because there are strong expectations of economic growth, in either case both are bullish.

 

 

[longlake95]

This is how I gauge where we are in the bull/bear cycle. Ya, it's simple, but that's why I like it: the 4 stages.

 

Templeton: "Bull-markets are born on pessimism (1), grow on skepticism(2), mature on optimism(3) and die on euphoria.(4)"

 

stage  1 was 2009-2010, stage 2 2011- now, maybe we are close to starting stage 3 - I'm not sure. But stage 3 could last a while when it does come. There will be corrections along the way, there always are, it's just normal filling and back filling.

It gives us value guys opportunity - nothing more.

 

LL

 

 

[watsa_is_a_randian_hero]

I think using the word "secular" to describe a bull or bear market is just a fancy way to put a story ex post facto around period of time stocks went up or down.

 

Just pay attention to the overall P/E level of the market and macroeconomic risks (such as debt loads). 

[enoch01]

I don't believe there is a strong or persuasive argument for a bear market. I believe as long as monetary stimulus happens, equities will perform well, and if monetary stimulus is pulled, it is because there are strong expectations of economic growth, in either case both are bullish.

 

It does seem like more people are saying that stocks have reached what looks like a permanently high plateau.

[Guest wellmont]

I don't know what value labeling a market provides. Labeling makes you look backwards. It is about what has happened so far. investing is about what happens in the future. Labeling something wrong, or rather, having a wrong approach to investing, can be value destroying. It's best to just go bottoms up and buy cheap stocks, and sell expensive ones.

[Partner24]

My wife is stuck with a collective product with her employer. I can't pick individual stocks, so I mostly choose between asset classes (stocks, bonds, etc.). Today I have moved to 100% cash. I'll wait for a correction before going back to stocks. Maybe the stock market will go up 30%, 40% or more before that, I don't know, but I'm not comfortable with the actual levels of stock prices as a whole.

 

Regarding my personal portfolio, it's another story. The universe of stocks is so wide, if the price of an individual stock make sense, I buy despite the macro things.

 

 

 

[goldfinger]

Buffett: "We are having a hard time finding anything to buy."

Witmer: "A bit of a bubble in stocks"

 

Things aren't cheap. Could stocks correct by more than 20% (cyclical bear): absolutely especially given interest rates volatility, relationships in between earnings and deficits and additional concerns about many economies of the world.

[DamienC]

Dear all,

W. Buffet also said that the market was fairly valued in the spring of 2007. I think the main difference between the bubble we had in 2000 and what we had in 2007 and now is that everything is overvalued now (you can look at median pe, median PB, median PS,...) while in 2000 the overvaluation was concentrated in the TMT sector. It was the day the Nasdaq made a high that Berkshire made a low.

 

In 2007 we warned people who were trying to find refuge by allocating their money to value manager thinking they could weather the downturn. This time it is not different. The best stock value stock pickers will get crushed too. Cash is the only refuge if you can not take directional bets. The worst today are small cap stocks. The Russell 2000 will have a negative real total return in the coming 10 years (only the path is unknown)

 

Here is a comment we sent today partly related to the subject

 

"In June 2007 we showed a graph to various institutional clients saying that the market was likely to experience 2 very deep corrections in the ensuing 10 years.

 

Having refrained from sending them in the past few years, we now  feel compelled to send you those charts again.

 

 

The probability of the nominal and real index to fall into the blue line in the next 10 years is... 100% (if we get rampant inflation the nominal index might escape this fate but...).

 

Historically once the market has reached the current level of overvaluation, it has experienced at least 2  >40% correction in the following 10 years.

 

And please forget about new permanently higher margins because of this and that, we have written extensively on this in the past, no mean reversion, no capitalism.

 

 

Does all of this have any predictive power for the performance during the next 3-6 months? Not really until the market gets:

 

-overbought (you can use the distance from the 200 days moving average, the proximity of the upper Bollinger Band using daily, weekly and monthly granularity,... you could even use, if you want to get fancy, T. DeMark weekly sequential count).

-overbullish (surveys, positioning, deirvatives activity,...).

-non-uniform (breadth divergences in the AD cumulative line, Up volume down volume cumulative line, breadth dispersion with relatively high number of new highs AND new lows and rate sensitive issues failing to follow the markets).

 

Valuation are also informative when a trend filter is added. When the cyclical trend turns down (you can use the 40 weeks moving average, the 10 month moving average,...) and valuation are high the market experience its worse performance.

 

Here is a table from M. Faber where he defines trend as the market above of below its 10 month moving average and the market as expensive when its CAPE is above 17 and cheap when below  (table in attachment).

 

 

As a remainder, our cyclical models are still defining the current move as a cyclical bull markets but valuation are at nose-bleed levels and we are witnessing many divergences usually associated with a dying cyclical bull market. The problem is that the markets are not behaving freely with the Fed intervening (with QE and speeches every time the markets falls buy a couple of percent). It would be funny if it wasn't for the long-term consequences it will have.

 

So could the market continue to climb from here? Could we have the start of an exponential up move? Does the Fed think it can avoid the damage its behavior will cause in the future?, the answers to these questions is yes, yes and yes.

 

“First, if the bubble were to deflate on its own, would the effect on the economy be exceedingly large? Second, is it unlikely that the Fed could mitigate the consequences? Third, is monetary policy the best tool to use to deflate a house-price bubble? My answers to these questions in the shortest possible form are, ‘no,’ ‘no,’ and ‘no.’” Who said that at the end of 2005?... J. Yellen (we agree with the third yes but given that they are intervening to prop up the markets when the legislators are asleep or behaving like children in a school yard, they should do the same when markets are too high without any legislative reaction)

 

To conclude we are in a very strange world where the short-term fate of the markets are in the hands of a bunch of unpredictable people (J. Yellen is pretty predictable though) and where valuation have reached levels where even QE is having less and less effects.

 

On a medium to longer-term basis the markets fundamental will prevail and valuation ratios will, at least reverse to the mean whatever the Fed does.

 

Wednesday night, feeling nauseous after another confirmation of the length the Fed is ready to go to prove that their theory is right (and when did an economic theory succeed when applied in reality? It can't because of REFLEXIVITY), we re-read "The Case against the Fed" from  M. Rothbard. We are now re-reading "The Alchemy of Finance" from G. Soros and the Fed should do it especially when the forward are from one of their (ex) own (well he worked in the same institutions but is, to put it mildly, a class of its own)

 

Kind regards,

 

Damien"

Markets_Value.pdf

[CorpRaider]

You called the top with this thread.  Kudos!  Just kidding.

[TwoCitiesCapital]

I don't believe there is a strong or persuasive argument for a bear market. I believe as long as monetary stimulus happens, equities will perform well, and if monetary stimulus is pulled, it is because there are strong expectations of economic growth, in either case both are bullish.

 

Someone forgot to tell Japan that for the first several years they did stimulus..

This is how I gauge where we are in the bull/bear cycle. Ya, it's simple, but that's why I like it: the 4 stages.

 

Templeton: "Bull-markets are born on pessimism (1), grow on skepticism(2), mature on optimism(3) and die on euphoria.(4)"

 

stage  1 was 2009-2010, stage 2 2011- now, maybe we are close to starting stage 3 - I'm not sure. But stage 3 could last a while when it does come. There will be corrections along the way, there always are, it's just normal filling and back filling.

It gives us value guys opportunity - nothing more.

 

LL

 

 

 

People weren't terribly optimistic in 2007 from what I recall. Not pessimistic but I don't think they were optimistic either. Then again, I was just getting into stocks at that point so maybe I missed something.

 

[goldfinger]

People weren't terribly optimistic in 2007 from what I recall. Not pessimistic but I don't think they were optimistic either. Then again, I was just getting into stocks at that point so maybe I missed something.

 

They were very bullish and Buffett was saying that the market is not cheap but he was not calling a bubble a bit like today. Everybody was finding reasons for why the market has more upside and we can see very similar behavioral patterns today. I am not implying we are going to crash like in 2007 but...

[CorpRaider]

Yeah, stock fund flows are matching levels in 2007 as well, aren't they?

[bmichaud]

As of today, NDR's global balanced account model is 65% equities, a 10% overweight.

 

The bottom line is that as long as central bank policies remain accomodative globally, supporting continued improvement in the economic outlook, global equities, and emerging markets in particular - will be likely to maintain their uptrends over the rest of the year and into 2014.

[fareastwarriors]

Investors pile on record debt to buy stocks at record highs

 

http://www.cnbc.com/id/101136515

 

Margin levels, or the amount borrowed to purchase securities, hit a record $401 billion in September, according to NYSE Euronext figures released this week. The monthly increase of 4.78 percent was also the largest gain since January.

[bmichaud]

http://www.cnbc.com/id/101142283

 

Is the contrarian move to go against the headlines that keep saying it's time to be "contrarian"?

[Valuebo]

http://www.cnbc.com/id/101142283

 

Is the contrarian move to go against the headlines that keep saying it's time to be "contrarian"?

 

 

Good point. Lately that is all you hear from media, value investors on twitter, etc. I don't disagree with what most are saying but if we end up with a new bear market soon, it will be the most anticipated bear market ever! I was too young in 1999-2000 and before to witness irrational exuberance in the market but something tells me most in the investing community were not screaming that the market top was near. Or maybe I just happen to stumble on all the contrarian stories and follow all the best investors on Twitter! Not saying they are wrong. There just seem to be a lot of smart market timers lately.

[fareastwarriors]

Weitz to Yacktman Hold Cash as Managers Find Few Bargains

 

http://www.bloomberg.com/news/2013-10-25/weitz-to-yacktman-hold-cash-as-managers-find-few-bargains.html

[Cardboard]

You will not get now the kind of frenzy as in 1999 - early 2000 or almost everyone being on the same side of the boat since memories from the following crash and the more recent one in 08-09 remain too fresh.

 

When to get out now will be a lot more difficult to assess but, we must be getting close with the kind of move that we are seeing today in Amazon, NFLX over the past few days, TSLA, Twitter IPO, IPO's that double on first day, etc. I look at many charts each day and there are a ton in parabolic ascent: tech, non-tech, industrials, etc. Fear seems certainly absent.

 

What is very unfortunate is that if a crash occurs or a bear market starts, most and close to all stocks will be taken down. That goes also for mine that remain undervalued on a relative and absolute basis. To sell them now in the anticipation of a bear does not seem like a sound strategy and has certainly not worked out for those who have moved heavily to cash earlier this year or even last year. Puts have not worked out either.

 

The more experience I gain, the more I think that the only worthwhile strategy is to keep a cool head, take profits when you get close to fair value on individual securities and be ready to sell cheap stocks for cheaper ones if the opportunity presents itself.

 

Cardboard

[no_free_lunch]

Is the market's crashes really that much about market sentiment?  I mean the 08/09 crash was the result of a financial meltdown.  In retrospect it was clearly exaggerated but the crash was based on the financial problems, not that we had run out of buyers for equities.  In 11 it was fear of a european depression as well as continued problems in the US.  Again overblown but there was a real world trigger.  The only period I have witnessed where the market pulled back significantly on it's own was in 2000 and 2001 (before september 11).  There the market had just gotten so overbought that there was a significant pullback on what I thought was fairly mild economic issues.  That was the only time I have really anything like it and the market was just crazy expensive, companies like IBM and INTC were going for 40-50 PE.

 

So basically, I guess I am just saying not to base your opinion on how many people are bullish, or bearish, or contrarian, or contrarian-contrarian, etc.    As Cardboard said, just buy when the risk reward makes sense.

[Valuebo]

Investors pile on record debt to buy stocks at record highs

 

http://www.cnbc.com/id/101136515

 

Margin levels, or the amount borrowed to purchase securities, hit a record $401 billion in September, according to NYSE Euronext figures released this week. The monthly increase of 4.78 percent was also the largest gain since January.

 

Really liked this post here: http://philosophicaleconomics.wordpress.com/2013/10/25/margin-debt/

 

Again shows how we are hardwired to see paterns everywhere while they might in fact not really be there.

[Guest hellsten]

Really liked this post here: http://philosophicaleconomics.wordpress.com/2013/10/25/margin-debt/

 

Again shows how we are hardwired to see paterns everywhere while they might in fact not really be there.

 

Nice article. I'm reading George Soros' book on reflexivity and now I'm seeing his theories in action everywhere :D

[CorpRaider]

Hellsten, which one is that?  The collection of essays?

[Guest hellsten]

Hellsten, which one is that?  The collection of essays?

 

The revised version published in 2003:

http://www.amazon.com/Alchemy-Finance-Wiley-Investment-Classics/dp/0471445495