Investments

This Isn’t Going to End Well

Part One: Stocks are too Expensive

I.C. Angles Investment Post

The stock market is too expensive. This is what valuation methods that have been proven to work are showing. And at some point prices will decline significantly, in order for stocks to become fairly priced. Expensive valuations are just one reason, the current bull market is likely to end particularly badly, with a price decline that could very easily surpass either of the last two major bear markets. Given how high valuations have currently risen, a fall in the stock market of well over 50 percent is a very real possibility.

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Worth Reading (or viewing) 8.17.14

Recently in December I discussed that despite remaining a reluctant bull on the stock market, there are real reasons to fear a 1987 type scenario of a market crash. This is why I have recommended retail investors hold a significant cash position for over a year now despite stocks marching higher. Apparently I have some good company when it comes to this concern….

In this link, Passport Capital Founder and Chief Investing Officer John Burbank discusses his outlook for the markets and his concerns about a 1987 replay on Bloomberg TV’s ” Market Makers.”

Bloomberg8.14

 

 

 

 

 

In addition the most recent regulatory filing from Soros Fund Management reveals that the investment vehicle of legendary investor George Soros has increased its S&P 500 put option position to $2.2 billion or 17 percent of assets under management. In other words, they remain long on stocks, but at the same time have increased their investment in securities that will rise in value if the stock market were to crash.

 

Worth Reading 8.1.14

A perfect supplement to my post from yesterday, covering how valuation metrics point to a major market decline in the future, is today’s McClellan Market Report article, “A Scary Valuation Indicator” that includes the below chart using a blend of the Cyclically Adjusted P/E ratio and Moody’s Baa yield to predict market tops, with the implication we are much closer to a major top than away from one.

CAPE-Baa-July2014

Source: McClellan Financial

 

 

 

A High Flying Market

I.C. Angles Investment Post…

The stock market continues to move higher, and there is no reason to bet otherwise, as long as it continues to hold support at its 125-day simple moving average. On the other hand, given underlying fundamentals, including increasingly expensive valuations, hedging your bets a bit, holding some cash and preparing for when key support fails is also a smart move. In other words, my basic outlook remains unchanged, while this bull market and economic recovery both get longer in the tooth and statistically more likely to end, as stocks keep rising.

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Worth Reading 5.25.14

One of my favorite websites is Advisor Perspective’s dshort.com from which all of the following recent May articles originated. They are all worth a quick read.

“Bulls Gaining Ground” presents a balanced bullish argument for the near future of the stock market.

“How Long is Long Term” is a good overview of how returns historically occur in the stock market in contrast to the perceptions of most and why returns in the future may disappoint.

“Corporate Profits and Market Crashes” explores what I believe  is one of the most important issues in the current stock market in regards to the ominous implications of current record corporate profits.

“Economic Recovery Analysis” explores negative characteristics of the current economic recovery, which I believe strengthen the case that this secular bear market is unfortunately not yet over.

 

Listen to the Market

I.C. Angles Investment Post…

A good stock market analyst looks for reasons a rising market could fall and a falling market could rise. On that note I have found and written about many reasons why this bull market could reverse. I have even gone so far as to declare risks of a bear market are rising. And I believe stock market returns over the next 3-5 years are likely to be poor. But I have not declared a bear market imminent or urged adopting a defensive portfolio posture. The reason for that is simple. I have been listening to this market and so far it has been saying stocks will keep rising. That might be changing as the market struggles to make meaningful gains since the Fed announced its exit from QE. But so far the benefit of doubt needs to be given to the bulls, as this market has managed to make higher highs. The price action remains positive, and buyers have been stepping in where they should to keep it that way.

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Three Warning Signs

I.C. Angles Investment Post…

As the stock market struggles to make new highs, investors are increasingly complacent despite worrisome developments. Yet, the U.S. stock market itself is looking increasingly shaky. Worrisome signs are also growing around the U.S. housing sector critical to America’s economy and China’s economy, which has been an engine of growth for the global economy. Although the price action of this stock market remains healthy enough to justify holding a substantial amount of stocks in a long-term portfolio, this does not justify complacency or in my view significant stock exposure for investors with shorter-term time horizons, particularly in light of growing bearish signs.

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Reading on the Unwinding Carry Trade

I.C. Angles Investment Post…

After testing its 125-day moving average the stock market has gone on to eek out a new high in February. My own views remain unchanged and I continue to be concerned about several issues, including monetary policy and associated malinvestments, particularly in China, which pose significant risks to the global economy. On that note Zero Hedge recently ran an article well worth a read that contained a lengthy excerpt from Bank of America Merrill Lynch Global Research, focusing on these very topics that I have been blogging about for some time, with data I have not presented before. For those inclined on learning more about implications of the global carry trade that links Fed money creation with Chinese bad debt here is a quick link to “The Pig in the Python is about to be Expelled.” Although a good read my own opinion does differ somewhat in that I don’t believe tapering or continuing to push money into Chinese credit markets is a matter of choice, as postulated. Per my October post on China “The Clock is Ticking” arguing that Chinese return on capital is deteriorating to the point where it no longer generates growth, as well as my earlier commentary on the Fed, including “The Party is Over“, where I have commented that monetary policy is similarly realizing diminishing or even negative returns, I believe a reversal in economic fortune is now a matter of time, regardless of the monetary choices made.

A Scarier Looking Market

I.C. Angles Investment Post…

Unwilling to yet call a bear market, I have nevertheless become increasingly negative on this bull market. But despite a rough January, the stock market, as measured by the S&P 500, remains above its 125-day moving average—a level it has held for over a year. As such it would still be premature to call the current bull market over. But it’s not too early to examine why a meaningful move down with a breach of important technical levels, such as the 125-day, will be a reason to adopt a defensive posture, rather than “buy the dip” as so many are already advocating. In the spirit of my first “A Scary Looking Market” post I’ve included some new charts that argue against many of the currently popular bullish arguments. There is good reason to believe that optimism for the ability of the Federal Reserve through monetary policy to engineer strong economic growth is misplaced. Also unlikely to be realized is the hope that stock price multiples will grow further in a Great Rotation of investors moving from cash and bonds into stocks.

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