Embracing Risk, or Expensive Stocks?
Two articles in today’s WSJ seem to be battling each other:
By Most Measures, Stocks No Longer Look Cheap:
While the rebound was a relief for battered stock investors, it complicated matters for those still trying to decide whether to get in or add new holdings. Higher prices have made stocks less of a screaming buy by several valuation measures.
For example, based on the last 12 months of operating earnings, the S&P 500 was changing hands late last week at a price-to-earnings ratio of 14.7, according to Morgan Stanley. That is still below the average trailing P/E of 17 for the last 25 years but up sharply from 10.5 in February.
Looking ahead to expected earnings for the next year, the story is less compelling for buying stocks. The S&P 500 was at a forward P/E of 14.5 late last week compared with a 25-year average of 15, according to the Morgan Stanley data. But many investors are reluctant to put too much weight on the forward P/E ratio during a period of significant uncertainty about the earnings outlook.
Versus this article:
Investors are aggressively piling back into markets shunned as too risky just a few weeks ago — driving up stocks in the developing world and raising concerns that the euphoria may be overdone.
As fears of a deepening global recession are pushed aside by expectations of recovery, investors have rediscovered their appetite for risk in places ranging from Brazil and China to Russia. Brazil’s Bovespa stock index is up 75% since its October lows, and across the emerging-market world, stocks are up 50% since the beginning of March, according to the MSCI Emerging Markets index, which tracks 23 markets.
Interesting contrast . . . Meanwhile, Dow off 135, S&P down 1.5%, Nasdaw barely negative, down a point.
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May 11th, 2009 at 10:38 am
One other:
Analysts Turning Bearish on S&P 500 After 14% Rally (Bloomberg)
http://www.bloomberg.com/apps/news?pid=20601087&sid=algJ_1hrRxrE&
May 11th, 2009 at 10:43 am
One of my indicators is so overbought that you have to go back to the dot.bomb days to see a similar reading. http://www.bushongbusiness.com/opinion.html
May 11th, 2009 at 10:49 am
Mannwich, Leftback, Benn22 and others – what do you guys think of this strategy?
http://collegestock.com/blog/short-selling-fas-faz-direxion-stock-downward-spiral/
I have been playing some of the 3x inverse ETF’s into this rally which has been painful, but what I have noticed is that while they go down big time during these rally’s, the 3x long side (FAS for example) doesn’t go up nearly as much. I think this may be a winning trade 99% of the time. Let me know your thoughts.
May 11th, 2009 at 10:56 am
Jdamon,
try borrowing those things to Short them, should tell you much about that Trade..
May 11th, 2009 at 11:07 am
Personally I think it is nothing put a trader’s attempted push to 200 mda and a 1 year long line because everyone and their brother is a “trader” now… I’m 95% cash, 5% long and wouldn’t touch an equity at these prices. There’s no value here given the less than 10 year fundamentals. If the market is 6 months forward looking (as we’re all so tired of hearing about) than the most profitable trade is the one where the market is not going to recover in the second half from all these green shoots. Get the stock prices high now with hope and then profit the short. Everyone is hanging their hats on a 2nd half recovery… from what? Comps?
May 11th, 2009 at 11:17 am
Mark E,
I heard they are difficult to find/borrow. Has that been your experience as well? The guys that are able to locate and short them seem to be making out like bandits. All these 3x inverese funds are going to zero eventually aren’t they?
May 11th, 2009 at 11:19 am
On a related note – who the eff is STILL buying the NAZ at these levels? Maybe I’m wrong, but I think that’s ridiculous. Is this the late ’90′s again?
May 11th, 2009 at 11:25 am
Re: the short the 3X ETFs. Clearly that would work in the long term, in a theoretical, academic sense. So clearly that it can’t work. Nothing’s that easy, especially for the little guy.
As pointed out, can you borrow them? And if so, for how long?
What happens when you short it (either one) and it spikes by 100% or more. Can you stand the heat? What if those shares then get recalled? You’re screwed.
If you’re holding it when it pays out distributions, you’re screwed.
I’m sure there are some other problems.
If it’s too good to be true, it probably is. I don’t want to find out the hard way what the unforeseen downside is. It’s probably big as everything associated with these things is amplified.
May 11th, 2009 at 11:37 am
Jdamon,
I keep hearing, “Can’t locate”/”It’ll Cost you”
better off fading the Calls for the Synthetic Short. the Cover is a simple “Buy the underlying” + you’ll get paid more at the inception..
and, yes, those ‘levered ETFs’ seem to have Structural flaws.
and, as Onlooker points out, Stay Alert, Tight Stops are your best friend..
May 11th, 2009 at 11:38 am
The value trade seems to have shifted away from equities and into much-despised Treasuries, as I suggested last week, don’t fight the Fed, get into the trade ahead of the Fed:
http://www.bloomberg.com/apps/news?pid=20603037&sid=aF6zZkk7cA4s&refer=home
I bet we see the news flow turn negative – now that they want to stabilize long rates. Don’t yell “FIRE”….. !!
Jdamon33: day and swing trades only for those 3 x pups. The SEF is interesting – inverse but unleveraged.
May 11th, 2009 at 11:43 am
My biggest mistake here was to think that we (human kind) wouldn’t be susceptible to the same kind of market psychology that existed during ’29-’32 when there were such huge rallies in the midst of such dismal economic conditions. I thought it must have been due to a lack of good, reliable, timely information. People were much more isolated than we are now and vulnerable to rumor and other misinformation.
Well, apparently not. We’re just really good at denial and self delusion. We have tons of information at our fingertips now clearly outlining just how bad things are and will be for the foreseeable future. Yet our arrogance and sense of exceptionalism leads us to believe it that the data could not possibly be telling us the truth. Somehow we’ll pull another rabbit out of the hat. And it’s not just Americans. The same holds true to some extent all around the world.
Of course that thinking also helps to justify our continued course of action in stealing wealth from future generations. We’ve pulled a decade or more of demand into the present over the last couple of decades through debt driven consumption, and now we want to pull more to ease our pain. Does that not break down at some point? I know we tell ourselves that a future generation will find some font of great productivity and catch up. That’s just immoral rationalization for our own bad behavior.
May 11th, 2009 at 11:45 am
Right on cue eh LB? The confluence of factors and events right now is fascinating. There’s going to be some very interesting history written on what we’re living through, that’s for sure.
May 11th, 2009 at 11:50 am
Leftback, I do still wonder if there isn’t money for both (equities and bonds). add commodities in there as well. i just looked at a yearly chart of the $crb, it has formed a strong base over the last 5-6 months… p&f indicates a bullish price to 300, altho it looks a bit overbot to me right here. it’s too bad i’m not at that hard assets conference in nyc right now, i might be learning something… anyway, trying to keep my bearish bias and my inflation bias in check.
May 11th, 2009 at 11:57 am
Here’s your summer stimulus:
http://www.cnbc.com/id/30682967
GM CEO: Bankrupty Likely, Firm May Leave Detroit
I guess my only comment on this is: Sure seems like we poured a lot of money down this rat hole…..
May 11th, 2009 at 12:09 pm
A clear sign of economic demise, Playboy’s earnings:
“Domestic TV revenue fell to $13.3 million from $16.5 million while the company’s print/digital unit saw revenue fall 26% to $26.1 million. Magazine revenue was down 16% to $13.5 million on weakening circulation and ad sales.
And things are not looking up in print anytime soon: Playboy said it expects to report a 39% decline in revenue for its eponymous magazine in the current quarter.
Licensing, which has been one of the company’s few bright spots in recent years, was also feeling the pressure as revenue fell to $9.3 million from $10.5 million. That reflects “the effects of the global economic slowdown and the resulting downturn in royalties from Europe compared to the prior year,” the company said. ”
12:04 PM ET 5/11/09 | Dow Jones
May 11th, 2009 at 12:13 pm
@Bruce N Tennessee
Franklin is looking at this on the bright side…
He sees all those displaced UAW workers getting “census taker” jobs to count the half dozen or so of people who still remain in Detroit…
And since Granholm won’t have anyone left to govern in her state, Obama will nominate her to the Supreme Court…
May 11th, 2009 at 12:29 pm
http://market-ticker.org/archives/1030-The-Economic-Tsunami-Is-Curling-Over.html
May 11th, 2009 at 12:30 pm
http://finance.yahoo.com/tech-ticker/article/244597/Merrill‘s-Rosenberg-Goodbye-Thank-You-Yes-It’s-Just-a-Sucker’s-Rally?tickers=xlf,dia,spy,%5Eixic?sec=topStories&pos=9&asset=&ccode=
Merrill’s Rosenberg: Goodbye, Thank You, Yes It’s Just a Sucker’s Rally
some of the same things that we talked about last week…
May 11th, 2009 at 1:00 pm
A question and a follow-up for Morgan Stanley:
Why are you relying on “operating earnings?”
As “operating earnings” have proven to wildly unreliable predictors of future earnings and, (gasp) may even be an attempt by management to defraud potential investors, is your firm merely (a) replete with a bunch of really big dupes who are only marginally negligent in regards to your responsibilities of due diligence for your clients or (b) outright perpetuators of a fraudulent Ponzi scheme?
Really, how can these “smart set” types have any credibility left?
May 11th, 2009 at 1:04 pm
@Karen said: “it’s too bad i’m not at that hard assets conference in nyc”
Indeed, since you are such a huge fan of hard assets. Gold, crude, and the like. A pause here, I think, for CRB.
May 11th, 2009 at 1:08 pm
the Paperback is catching a little bid
http://quotes.ino.com/chart/?s=NYBOT_DX&t=f
it’ll go higher if ‘equities’ get trounced, ‘bonds’ get bid..
May 11th, 2009 at 1:08 pm
@cvienne
And then she can require all new cars sold in America to have a tamper-resistant/evident GPS real time tracking/memory logging unit installed at the factory. The operating earnings of Garmin may approach infinity and those earnings (projected future operating earnings!) could be used securitze a CDO from AIG FP to rebuild Detroit. Of course, the smartest move would be to buy Goldman Sachs as they will own the CDS on this fraudulent CDO and, when it craters, they will be in high clover. You see, franklin is having a positive effect on me.
May 11th, 2009 at 1:09 pm
A HARD ASSET is good to find…
May 11th, 2009 at 1:11 pm
@Cursive
Franklin hasn’t chimed in in a while…He must be off creating some “nano-GDP” & “nano-operating earnings”…
May 11th, 2009 at 1:14 pm
@MEH: the Paperback is catching a little bid
http://quotes.ino.com/chart/?s=NYBOT_DX&t=f
it’ll go higher if ‘equities’ get trounced, ‘bonds’ get bid..
Indeed, my friend, and if crude sells off, pics o’ Geo. Wash., will be in even greater demand..
Verily, This: JPY:EUR is our Trade for the Week.
May 11th, 2009 at 1:18 pm
@cvienne
As some here have posited before, it would more likely involve a nanny than a nano. I would not doubt, though, that deep within the bowels of GS, Abbie Joseph Cohen is working on a special white paper with the working title, “nano-operating earnings”. She is probalby more full of glee, at working on this seminal piece, than Liz Taylor in “National Velvet”.
May 11th, 2009 at 1:24 pm
Jdamon33 @ 11:17
“I heard they are difficult to borrow… The guys that are able to locate and short them seem to be making out like bandits”.
I don’t know if they’re difficult to borrow or not. But I do know that the short interest in these is virtually non-existent. So if they are difficult to borrow, it can hardly be because of too many people shorting them. It may also be the case that the closer they get to zero, the less favorable the risk/reward ratio. Then of course there are the dividends to watch out for.
Nevertheless, I’m sufficiently intrigued by the whole thing to try shorting them at some point.
May 11th, 2009 at 1:28 pm
cv-
get w/ the NewSpeak, it’s GNR-GDP…genetics, nano-tech, robotics
see: http://clusty.com/search?input-form=clusty-simple&v%3Asources=webplus&query=GNR+genetics+nano-tech+robotics
Kurzweil is a minor diety in those circles..
and see: Our most powerful 21st-century technologies – robotics, genetic engineering, and nanotech – are threatening to make humans an endangered species.
By Bill Joy
From the moment I became involved in the creation of new technologies, their ethical dimensions have concerned me, but it was only in the autumn of 1998 that I became anxiously aware of how great are the dangers facing us in the 21st century. I can date the onset of my unease to the day I met Ray Kurzweil, the deservedly famous inventor of the first reading machine for the blind and many other amazing things.
Ray and I were both speakers at George Gilder’s Telecosm conference, and I encountered him by chance in the bar of the hotel after both our sessions were over. I was sitting with John Searle, a Berkeley philosopher who studies consciousness. While we were talking, Ray approached and a conversation began, the subject of which haunts me to this day….
ht tp://www.wired.com/wired/archive/8.04/joy_pr.html
for insight into why SUNW/JAVA was kneecapped, and, subsequently sold to ORCL for a song..
Cursive,
this: “can require all new cars sold in America to have a tamper-resistant/evident GPS real time tracking/memory logging unit installed at the factory.”
in a couple of different ways, is already happening– http://waw.wardsauto.com/searchresults/?terms=EU+GPS&sort=d
go w/ some other search terms to see other facets..
and, if anyone is familiar w/ IBM’s History during WW II, it’ll put their new ‘ad campaign’ into better focus..
May 11th, 2009 at 1:38 pm
@DL
It is intriguing, I’m just wary that it’s a mine just waiting to be stepped on. Something will blow that trade up, I’m convinced of it. Nothing’s so easy.
May 11th, 2009 at 1:50 pm
It’s like shorting the VIX. Could easily blow up in your face. Play small, limit risk, protect capital….
May 11th, 2009 at 1:55 pm
@Jdamon,
I pretty much agree with what lefty and Mark already said.
I’ve never tried but I heard the same as mark did, hard to borrow.
I haven’t yet used any of the 3x etf’s but if I were it’d only be for trades as LB said.
For my own account I was just looking at using SH. If I want added leverage I could always buy some of it on margin. I can control everything better that way. Or, as Mark might tell you, just use options.
May 11th, 2009 at 1:56 pm
@Hoffer
Hey, do you think that if Chrysler had gone to “fully automated” ROBOTICS years ago and did away with the UAW altogether, then the ROBOTS themselves would be standing in front of the hedge funds who were higher up in the capital structure?
Would the robots own 55% of Chrysler now?
May 11th, 2009 at 2:12 pm
karen,
I’m wondering if there is enough cash for all those as well. Or will all that cash continue to pay down debts?
Right now, I’m thinking though that when this bear is finally over, the desire to be out of equity and in cash and cash only will be at more than just decade highs. Have you seen a chart of equity exposure via the investors allocation survey? It never recovered after the 2000-2002 bear market and now it’s at decade lows. Now think about what Grantham said about the psychology of a loss of 20T in perceived wealth.
If we get another big leg down, which I certainly believe we will, it will pull even more people out of the market and I think they will stay out far after the real bottom is finally put in, assuming that was NOT on 3/9. I think in the fullness of time all this “cash on the sidelines” chatter is just another green CHUTE.
You had it right a week or two ago when you started mentioning dividends being key moving forward. That investment strategy has hardly been talked about for a long time now. People will eventually stop worrying about trying to catch the bottom in C or BAC or whatever b/c “someone at work doubled their money in it”
On another note, I still think people are a little dizzy from this rally and retail thinks things are in fact getting better. I’ve broken down the idea of what “better” means for a few people this past weekend, the reactions were really something to see.
One thing that could really help thrust these emotions to the downside and produce volatility is the current action in pensions. This was mentioned here and there over the last few weeks but stuff is really starting to happen now. I’ve heard of a few advisors that have clients that have just recently had fairly large reductions in current pension payouts. On top of this, several large companies in my area, like DuPont for example, have basically frozen pension accounts. State employees in DE are taking an 8% cut in pay across the board, they are all thinking the pensions are getting hit next which will have an immediate impact on any spending they will or now will not do. Now DE, as most are aware is TINY. Think about the impact of say, …CALPERS!!!
This is a negative for sentiment moving forward and is certainly worth watching closely. Couple this with the realization that things aren’t getting better, they are just less bad, and that could be a rough go when all the clueless catch on. Something extreme could be in the works there.
If I were heavy in the market right now I’d certainly want a plan B.
May 11th, 2009 at 2:16 pm
I’ve been really busy today but does anyone have a bead on what’s happening in the NAS today?
I made notes that lately the rally there has really seemed to have lost steam and very recently the general outperformance on the higher beta NAS had reversed as it was then underperforming the DOW and SPX lately. I was taking this as an early bearish signal despite my shorter term outlook for the SPX to continue on up to 1k.
Just curious what is moving that if anyone has any ideas. Tech cycle is over in a couple of weeks.
May 11th, 2009 at 2:19 pm
Not 3/9, 3/6* = “LB Bottom”, perhaps yet to become – one of the most famous Bottoms In Investment History.
Peep think this was a Super 1987, unable to contemplate a 1930s, or even a 1974, let alone a Lost Decade.
Alas. My tears runneth over for the poor unwashed hedgies and fund of fundies who will soon be forced, forced, to accept the miserable pittance of 1 and 10, as the days of their 2 and 20 birthright appear to be numbered:
http://www.nakedcapitalism.com/2009/05/hedge-funds-cutting-fees.html
That translates to a 50% decrease in Lamborghini sales in Fraudfield County. The horror, the horror….
May 11th, 2009 at 2:28 pm
damn!, BR just put up a post of exactly what I was talking about with the cash allocation. Barry, do you want to hire me to work for you?
lefty,
my bad, 3/6. And yeah, I really feel bad for the 1 and 10 crowd. They will really be hurting now.
May 11th, 2009 at 2:32 pm
@ben22
You took the words right out of my mouth…
I was about to POST (on that newer thread) that I didn’t put much faith into that ISS graph…
Perhaps in typical scenarios it was a good indicator, but in this GO AROUND I feel (as you seem to feel), that the ‘famous’ CASH ON THE SIDELINES, is in the process of being extracted out on a permanent basis to pay massive amounts of debt…
I agree also that technically this market could go to 1k sometime over the summer, but that it would most likely occur in LOW VOLUME which means it was just a few players trying to score a home run and get out…
May 11th, 2009 at 2:44 pm
Investor sentiment doesn’t have a lot of influence when the market is being run from GS prop trading desk….
The only CASH ON THE SIDELINES is what you could be saving with Geico.
May 11th, 2009 at 2:45 pm
cvienne,
yep, that’s pretty much exactly what I’m saying. I’m still very short term bullish as I think people are still trying to get into this rally but it is clearly getting tired. All the stuff I was looking for a few weeks back is getting closer. There is a simple attitude towards cash right now which is “I might not be making a lot, but it’s not going down”
For some that look a little harder they might say, why am I paying 20% interest on this credit card when I’ve got money in the bank earning 1%. Lets pay that debt off.
I’m still watching for this stuff among other things:
Increased levels of bulls, bulls will get as high as they were in October 2007 before this rally is over.
Headlines that state new bull market has arrived or that the government saved us and has done enough. Franklin411 will write most of these in his new job as White House policy reporter.
A lack of the calls for a near term pullback. See the cover of this weeks Barron’s on the left by Santoli “Why Everyone Wants a Pullback” currently, as the AAII shows, especially short term, still lots of skeptics which should push the market higher.
Statements that Nouriel Roubini and the like are all idiots, they missed the turn, and now have no idea what they are talking about.
Then last, it should get harder and harder to keep average people out of bank stocks. Right now, it still very easy to talk the average Joe out of putting money into C or BAC. That should change as this rally gets closer to a peak.
May 11th, 2009 at 2:46 pm
is it bad or good that when I see Geico I automatically think of that song now….
I know your watchin me…..
c’mon, I know you have all seen those commercials.
May 11th, 2009 at 2:59 pm
ben22: All logical concepts, re: continuation of the rally to 200 DMA or SPX 1000, even.
But – look at what Mr Bond is telling you today. Smart money… building. FIRE … crowded theatre.
Playing one day at a time here – but expecting a pronounced move lower soon to the 50 DMA.
40 trading days since the LB Lows is already a long long trip into the Land of Make-Believe.
May 11th, 2009 at 3:13 pm
@LB,
I hear ya.
Mr. Bond usually gets it right was one of the better rules on that recent post, imo. Did you sell your TBT? I thought I saw you were long that a few weeks back. Has been a big winner so far this year.
I think though, that’s the best you can do right now, play it one day at a time. We all know lots of reasons why we should correct here but that’s why we are probably all wrong.
I took a hard look again at the SPX and DOW charts for April over the weekend. All the gains came in a few days at the beg. and end of the month. So I’m not sure, it was almost like that sideways movement during April achieved in time what we didn’t get in price. Perhaps we’ll get the same on the way to 1,000.
Time will tell, as always, use stops.
May 11th, 2009 at 3:27 pm
Stayed in TBT but bought long bonds – for a trade – last week. Play what you see.
May 11th, 2009 at 4:28 pm
‘We’re just really good at denial and self delusion’
Spot on !
Now you know the reason why majority lost 40-50% in 2008 but apparently they didn’t or don’t want get the message!
May 11th, 2009 at 5:07 pm
@FromLori
I read your link about the “The Economic Tsunami Is Curling Over” and in particular California sales tax revenue dropping 51% in April year on year.
Can this be true? Seems awfully high?
Can sales in California be down more than 50% in a year?? Doesn’t seem right.
May 11th, 2009 at 9:07 pm
I can’t imagine anyone out there is lending leveraged or short etfs anymore, the decay is huge and based on a mathematical flaw (or is it a feature?) in their construction. The can pay off when things move linearly in the right direction, but any sort of volatility eats away their value by design.