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Bull Market Just Getting Started?


JEast
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I know a lot of you are sitting on a bunch of cash, but is a Bull Market starting to get a head of steam?  Curious minds want to know.

 

I ask as I noticed that nearly 200 companies are making not just 52-week highs but new all-time highs today.  They are not run by night companies either, but FedEx, Mastercard, Chubb to name a few.  Quite impressive when there are only about 4,000 listed companies we are fighting over.

 

 

Cheers

JEast

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I know a lot of you are sitting on a bunch of cash, but is a Bull Market starting to get a head of steam?  Curious minds want to know.

 

Quite impressive when there are only about 4,000 listed companies we are fighting over.

 

 

Cheers

JEast

 

Only 4,000 listed companies?  I think there are lot more than that....

 

I regularly invest in some pretty small, obscure companies, and I know there are others watching, and I have competition.  Certainly not like what there would be on AMZN, but you would be surprised how many different people are watching small companies.

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There are roughly about 5,000 US listed companies, subject to what one considers listed.  The funny thing is that the Wilshire 5000 has only 4,113? constituents in the index.  The intent of the number is to imply that the supply is small compared to 10 years ago and somewhat getting smaller.

 

Irrespective of the number, is the bull market just getting started?

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You could probably make a pretty convincing case if you pulled together some sentiment stats, examined the fund flows and asset allocations people have on and then compared the performance of whatever index you like with its longer-term performance and argue that a few more years of outperformance might be required to get people off the sideline and get a "return to the mean" over the longer term.

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I can only look at indicators but can't predict:

- a lot of stocks are hitting highs

- debt levels across most of the world are at an extreme

- one really has to look around for an investment opportunity that is cheap

- P/Es are rising but earnings aren't keeping pace

- there are risks in Europe, US, Japan and emerging markets

 

These are not the conditions that I look for when I am looking for a good investment. I will wait for better opportunities when the current buyers become forced sellers.

 

I believe the debt will make things more volatile everytime there is a negative surprise across the world. Thus, one should get really good entry points sometime in the future as long as you have dry powder.

 

Need patience and discipline.

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If you are trying to guess price movements, I would guess they will probably go up more before they go back down, as long as there is no calamitous event to spook everyone.  If there is no such event, you'll get the psychological effect where people are afraid they missed out, so they put more money in, which drives up prices, which leads others to do the same, and so on and so on until it goes the other way.  I think you have to be a special kind of person to play that game though.

 

I am guessing you are asking this question because you are wondering if it is time to take money off the table.  At least I know I have been wondering that.

 

I remember a lot of the first part of the intelligent investor was about current market levels and bond yields.  I wonder what Graham would be writing today?  My guess is he'd be telling us to lean towards stocks since they yielded more, but be prepared for a drop. Looking at Shiller's spreadsheet, the s&p is at 19x the highest earnings it has ever achieved, so a little above 5% earnings yield, and treasury yields are at 2.6%. 

 

One thing he never said was to take money out of stocks and bonds and move it to cash.  I am probably being audacious by going against the master, but one way to look at it is that the lost opportunity cost of sitting in cash is fairly low right now if you are just figuring it by looking at yields.

 

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I can only look at indicators but can't predict:

- a lot of stocks are hitting highs

- debt levels across most of the world are at an extreme

- one really has to look around for an investment opportunity that is cheap

- P/Es are rising but earnings aren't keeping pace

- there are risks in Europe, US, Japan and emerging markets

 

These are not the conditions that I look for when I am looking for a good investment. I will wait for better opportunities when the current buyers become forced sellers.

 

I believe the debt will make things more volatile everytime there is a negative surprise across the world. Thus, one should get really good entry points sometime in the future as long as you have dry powder.

 

Need patience and discipline.

 

Yeah I like to follow the trends in margin debt, but that would probably really only be relevant to the severity of whatever decline is precipitated by an unknown event.  A 5% S&P earnings yield doesn't blow my skirt up...

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Maybe I totally missed the post of a previous point of yours

I am not making any point but just pointing out that there is a tremendous amount of cognitive dissonance everywhere.  On the one hand you have this, and on the other you have that with very compelling arguments on both sides.  Again this is just macro tourism talk anyway and this community (as I see it) are stock pickers, but I find the subject fascinating drama.

 

Earlier this year I questioned folks with high cash levels as a lot of stuff just seemed cheap during that time.  Not so cheap now, maybe, but we still have smart folks in this community that are finding great investment opportunities.  I still see some very, very, cheap stuff out there and all of them have been mentioned here!  If I were starting a brand new portfolio today, I could easily take five/six of these stocks and put 10-20% each and be nearly fully invested presently.

 

If I were to make a point it would be that at this juncture in the market one better be adapting because the natural selection process will possibly be weeding a few folks out in the next few years.  Time of course will tell.

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JEast -

 

What would be the arguments for being bullish (other than short term QE).

 

- profit margins are extremely high.

- interest rates are at historical lows.

- we have QE.

- growth is slow and we have de-leveraging.

- mkts are fairly valued

- govt debt levels are high

- The govts are involved in something they haven't done before.

 

I cant come up with many bullish arguments even though this run up might continue for a while. But, that also happened in 99 and 06.

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JEast -

 

What would be the arguments for being bullish (other than short term QE).

 

- profit margins are extremely high.

- interest rates are at historical lows.

- we have QE.

- growth is slow and we have de-leveraging.

- mkts are fairly valued

- govt debt levels are high

- The govts are involved in something they haven't done before.

 

I cant come up with many bullish arguments even though this run up might continue for a while. But, that also happened in 99 and 06.

 

+1!  Cheers!

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JEast -

 

What would be the arguments for being bullish (other than short term QE).

 

- profit margins are extremely high.

- interest rates are at historical lows.

- we have QE.

- growth is slow and we have de-leveraging.

- mkts are fairly valued

- govt debt levels are high

- The govts are involved in something they haven't done before.

 

I cant come up with many bullish arguments even though this run up might continue for a while. But, that also happened in 99 and 06.

 

+1!  Cheers!

 

+1

 

giofranchi

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Personally I think most people are fighting the last battle/crisis.  As to your specific points:

 

- profit margins are extremely high.

Why can't they continue to stay high given the main contributor to lower profits in the past has been high labor costs/labor shortages.  Do you think we are going to have labor shortages?  I don't think so unless we have a world war or an uncurable plague.

- interest rates are at historical lows.

This is true but we also have low inflation caused by de-leveraging so there is no need for high interest rates

- we have QE.

This is a measure to offset deflation.  Without this and low interest rates we would have deflation.  Hoisington and Prem are right about this but have discounted QE as the response.  Sweden in the depression is the example that folks don't want to pay attention to that where this has worked in the past.

- growth is slow and we have de-leveraging.

This is what we would expect as growth was  brought forward with the debt incurred.  We are about 50% through with this now so we have another 5 years or so to bring debt levels down further.

- mkts are fairly valued

Does this matter for individual stock pickers?  Are you buying the market?

- govt debt levels are high

This is true and something that has to be worked on but in the US this has not crowded out investment to this point

- The govts are involved in something they haven't done before.

What hasn't gov't done before?  QE?  look at Sweden.

 

I cant come up with many bullish arguments even though this run up might continue for a while. But, that also happened in 99 and 06.

 

Bullish arguments:

 

- Large amounts of cash on the sidelines

- High demand for income producing securities

- Safe assets have high prices (low yields)

- Lots of skeptisism in the market (look at what happened to FB IPO)

- Fair number of individual stock selling for discount prices

- Many people cautious on economic outlook

 

Unless these factors change I don't see a bear market.  I could be wrong but just a few observations.

 

Packer

 

 

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Personally I think most people are fighting the last battle/crisis.  As to your specific points:

 

- profit margins are extremely high.

Why can't they continue to stay high given the main contributor to lower profits in the past has been high labor costs/labor shortages.  Do you think we are going to have labor shortages?  I don't think so unless we have a world war or an uncurable plague.

- interest rates are at historical lows.

This is true but we also have low inflation caused by de-leveraging so there is no need for high interest rates

- we have QE.

This is a measure to offset deflation.  Without this and low interest rates we would have deflation.  Hoisington and Prem are right about this but have discounted QE as the response.  Sweden in the depression is the example that folks don't want to pay attention to that where this has worked in the past.

- growth is slow and we have de-leveraging.

This is what we would expect as growth was  brought forward with the debt incurred.  We are about 50% through with this now so we have another 5 years or so to bring debt levels down further.

- mkts are fairly valued

Does this matter for individual stock pickers?  Are you buying the market?

- govt debt levels are high

This is true and something that has to be worked on but in the US this has not crowded out investment to this point

- The govts are involved in something they haven't done before.

What hasn't gov't done before?  QE?  look at Sweden.

 

I cant come up with many bullish arguments even though this run up might continue for a while. But, that also happened in 99 and 06.

 

Bullish arguments:

 

- Large amounts of cash on the sidelines

- High demand for income producing securities

- Safe assets have high prices (low yields)

- Lots of skeptisism in the market (look at what happened to FB IPO)

- Fair number of individual stock selling for discount prices

- Many people cautious on economic outlook

 

Unless these factors change I don't see a bear market.  I could be wrong but just a few observations.

 

Packer

 

Very good opposing view.

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Personally I think most people are fighting the last battle/crisis.  As to your specific points:

 

- profit margins are extremely high.

Why can't they continue to stay high given the main contributor to lower profits in the past has been high labor costs/labor shortages.  Do you think we are going to have labor shortages?  I don't think so unless we have a world war or an uncurable plague.

- interest rates are at historical lows.

This is true but we also have low inflation caused by de-leveraging so there is no need for high interest rates

- we have QE.

This is a measure to offset deflation.  Without this and low interest rates we would have deflation.  Hoisington and Prem are right about this but have discounted QE as the response.  Sweden in the depression is the example that folks don't want to pay attention to that where this has worked in the past.

- growth is slow and we have de-leveraging.

This is what we would expect as growth was  brought forward with the debt incurred.  We are about 50% through with this now so we have another 5 years or so to bring debt levels down further.

- mkts are fairly valued

Does this matter for individual stock pickers?  Are you buying the market?

- govt debt levels are high

This is true and something that has to be worked on but in the US this has not crowded out investment to this point

- The govts are involved in something they haven't done before.

What hasn't gov't done before?  QE?  look at Sweden.

 

I cant come up with many bullish arguments even though this run up might continue for a while. But, that also happened in 99 and 06.

 

Bullish arguments:

 

- Large amounts of cash on the sidelines

- High demand for income producing securities

- Safe assets have high prices (low yields)

- Lots of skeptisism in the market (look at what happened to FB IPO)

- Fair number of individual stock selling for discount prices

- Many people cautious on economic outlook

 

Unless these factors change I don't see a bear market.  I could be wrong but just a few observations.

 

Packer

 

Very good opposing view.

 

I think we cannot ask for “black or white” in this kind of market. Instead, we must learn to accept so many shades of gray… So, the most important thing, imo, is to constantly ask yourself: what if I am wrong? And make sure you have a strategy that will be profitable in that case too. Completely out of the market? Certainly not! Fully invested? Well, I don’t like that either. Where in between? It is up to each of us to decide.

 

What I don’t like about the comparison with Sweden in the ‘30s follows: if we agree that QE induces people to buy stocks, because in a deleveraging banks flooded with liquidity, instead of lending out more funds, use those same funds to buy stocks, well then we also should agree that it is very different if Sweden alone is down this path, or if the whole developed world follows suit. If everyone is buying stocks, sooner or later prices will become completely out of whack with real and sustainable earnings. At that point deflation will be almost inevitable…

 

What’s the likelihood of a stock market crash next year?

 

Robert Rodriguez:

It’s impossible to forecast, but I can tell you that the course we’re on is non-sustainable. It’s very much like blowing up a balloon. You blow it up and — Ahh, hasn’t popped. You blow it up some more — Ahh, we’re still good. It hasn’t popped. And then you finally hit that moment, and — bang! There it goes. That’s how financial crises typically happen. When we face the next crisis, liquidity will be very limited, and price reactions will be quite sharper.

 

giofranchi

 

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Personally I think most people are fighting the last battle/crisis.  As to your specific points:

 

- profit margins are extremely high.

Why can't they continue to stay high given the main contributor to lower profits in the past has been high labor costs/labor shortages.  Do you think we are going to have labor shortages?  I don't think so unless we have a world war or an uncurable plague.

- interest rates are at historical lows.

This is true but we also have low inflation caused by de-leveraging so there is no need for high interest rates

- we have QE.

This is a measure to offset deflation.  Without this and low interest rates we would have deflation.  Hoisington and Prem are right about this but have discounted QE as the response.  Sweden in the depression is the example that folks don't want to pay attention to that where this has worked in the past.

- growth is slow and we have de-leveraging.

This is what we would expect as growth was  brought forward with the debt incurred.  We are about 50% through with this now so we have another 5 years or so to bring debt levels down further.

- mkts are fairly valued

Does this matter for individual stock pickers?  Are you buying the market?

- govt debt levels are high

This is true and something that has to be worked on but in the US this has not crowded out investment to this point

- The govts are involved in something they haven't done before.

What hasn't gov't done before?  QE?  look at Sweden.

 

I cant come up with many bullish arguments even though this run up might continue for a while. But, that also happened in 99 and 06.

 

Bullish arguments:

 

- Large amounts of cash on the sidelines

- High demand for income producing securities

- Safe assets have high prices (low yields)

- Lots of skeptisism in the market (look at what happened to FB IPO)

- Fair number of individual stock selling for discount prices

- Many people cautious on economic outlook

 

Unless these factors change I don't see a bear market.  I could be wrong but just a few observations.

 

Packer

 

 

 

 

Very good opposing view.

 

Mr. Market has undergone a personality change.  He's steady Freddy.  Maybe he's on lithium and his true character will come out before long.  For now he shrugs off things that used to make him fearful or overly exuberant and keeps plodding along up the hill more like an ox than a bull.

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I am not sure I agree that QE induces stock buying in practice.  In theory that is the case but what has happened is people have purchased more bonds versus stocks.  Just look at the fund flows for the last five years and the spread between bond yields and dividend yields.  My observation is that Sweden was able to stop deflation with massive printing of money.  This makes sense as the debt incurred was paid off in cheaper kroner.  The deflation folks don't seem to have noticed this.  They all go back to examples where the money supply was fixed oe declining (gold standard) - depression, 1890s, etc..  In Japan the chnaged thier policy back and forth so I think this is a bad exmaple also.

 

Packer       

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I am not sure I agree that QE induces stock buying in practice.  In theory that is the case but what has happened is people have purchased more bonds versus stocks.  Just look at the fund flows for the last five years and the spread between bond yields and dividend yields.

 

Well, by definition in a deleveraging debts must be contained and get gradually reduced… So, if still a lot of people are purchasing bonds, that is basically the reason why it will take another 5 years for this process to be over! Surely we cannot cure debt problems with more debt. The logical conclusion is there will be only one place left to park all those newly created funds: the stock market. If I am not wrong, this is also what Mr. Tepper, one of the greatest bull out there, has said many times.

 

giofranchi

 

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Personally I think most people are fighting the last battle/crisis.  As to your specific points:

 

- profit margins are extremely high.

Why can't they continue to stay high given the main contributor to lower profits in the past has been high labor costs/labor shortages.  Do you think we are going to have labor shortages?  I don't think so unless we have a world war or an uncurable plague.

 

... ... ...

 

Packer

 

I don't really have a bone to pick here, but I thought I would play devils advocate.

 

Right now the economy is not operating at full employment, so very little thought is given to the possibility of labor shortages. But if the economy were operating at full employment where would the marginal worker come from. Retirement ages have been pushed out dramatically in the US, bc older people cannot afford to leave the workforce. They will have to retire eventually. Over the past 100 years we have seen a lot of female workers enter the labor force... the so-called "quiet revolution."  According to BLS, of the 123mm females over 16 about 59% were in the labor force. If I recall correctly the female labor force participation rate peaked in 2000 and has been gradually declining since. Immigration to the United States has been slowing. So where does the marginal worker come from?  My conjecture is that if the economy were to surprise to the upside you would not only see employment come back quickly, but you might also find the marginal worker missing.

 

Just food for thought - not sure if I completely agree with the argument, but it was fun to think about.

 

Elijah

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I agree with your conclusion but the flow to stocks has only just begun (the flow of funds tells us that) that is why I think in the short/intermediate term therw will be a tailwind for stocks.

 

Packer

 

I agree, but when I see danger, I usually want to start proceeding with caution… rather than to make an attempt at timing the exact moment that danger will materialize. So I am invested right now, even heavily, but not fully.

 

giofranchi

 

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