And on a related note to yesterday’s discussions:

I think Mike Santoli strikes just the right tone in his Streetwise column this weekend in Barron’s.

My headline above is misleading; the NYT page one is not really a contrary indicator. However, in light of the rising evidence of economic improvement, it presents an opportunity — it might be a prudent time, in Mike’s words, to “consider what possible upsets could bring this party to an end.”

Here’s Barron’s:

“NOW THAT THE FRONT PAGE OF THE NEW YORK TIMES (as of Friday) has gotten wise to the reality of an economic recovery, and the stock market has persisted in mocking the bears daily with blithe afternoon rallies, and the mood among active investors has brightened considerably, it might be time to entertain what could upset the market’s seemingly positive setup.

Thinking about possible bolts from the blue isn’t the same as predicting a nasty turn in the markets. The stock market is ripe for a rest or retreat, but otherwise in decent shape. Such are moments when the prudent wonder what could upend things. . . A China slowdown, or worse, is a standard force majeure clause among bullish observers. None is evident just now, but the China Entrepreneurs Confidence Index has risen toward levels that, in the past, preceded Chinese market pullbacks. The rest of the world likely wouldn’t take any crack in Chinese stocks in stride.

On the domestic front, investor attitudes have gotten sunnier, as investors appear to be getting squeezed into stocks. The big question is what to make of the persistent love being shown to bond mutual funds. On one level, money flows into bond funds are proof of an abiding lack of excitement toward stocks, while helping to keep the crucial credit markets strong. But to what degree is the public’s bingeing on corporate debt implicitly the same as rushing into stocks? Both moves are contingent upon improving profits, tame interest rates and calm markets.

Just because the optimists retain the benefit of the doubt doesn’t mean they shouldn’t challenge their own assumptions.”  (emphasis added)

Let’s get more specific:

• 2011 corporate-earnings forecasts for Standard & Poor 500 are > $95. For all of 2010, its < $80.  If that is correct, market are not unreasonably valued.

• Note, however, that Wall Street analysts are too optimistic at the top of the cycle and too pessimistic at the bottom.  I am not sure where we are at the moment, so I have a hard time figuring out whether to discount the numbers as too bullish or too bearish.

• Also of note: Anticipated earnings increases are coming disproportionately from energy and financials. These tend to be low earnings multiple sectors –meaning don’t expect market gains to be similar to earnings gains percentage wise.

• Last, the median stock’s current 12-month-forward earnings-growth forecast is above 15% now — hence, expectations are getting aggressive.

These are just more pieces of the puzzle — earnings improvements are important, as is recognizing when anticipation catches up to and passes likely earnings gains. When expectations reach unreasonable levels, we are set up for the big disappointment.

We are not there yet, but this is an important sentiment issue worth watching . . .


Force Majeure
Barron’s APRIL 12, 2010

Category: Contrary Indicators, Psychology, Valuation

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

20 Responses to “Front Page NYT Contrary Indicator ?”

  1. michaelismoe says:

    ” Anticipated earnings increases are coming disproportionately from energy and financials.”

    So as long as we have zero interest rates and $100/barrel oil then all is well!

  2. dad29 says:

    I’m surprised he didn’t mention the price of petroleum as an ‘upset’ factor.

  3. constantnormal says:

    Consumer confidence numbers might tend to make one believe that the earnings “recovery” is exceedingly fragile.

    And while retail sales are improving, they are (clearly) doing so at the expense of savings and investment. That does not support a strong recovery in the stock markets. In fact, if one looks at the volume numbers along with the prices, the picture isn’t quite so rosy.

    It’s a pretty exclusive party.

    A chart of stock prices normalized by aggregate leverage might be interesting, if one could come up with the data to derive it.

  4. chomen says:

    What’s the S&P price/earnings ratio, Barry? 26? And what’s the historical p/e mean? 19? Are we overvalued? By how much? More than 25%?

    So…stocks should be purchased?

  5. perra says:

    Reg. a potential China slowdown, just read the following in the Shanghai Daily:

    “Cai Hui, 47, a businessman from Fuzhou in Fujian Province, marveled at how house prices rocketed in south China’s Hainan Province after the central government announced Hainan was to become a global tourist resort.
    He bought an apartment at 3,500 yuan (US$512) per square meter in Jiusuoxin District in Ledong County at the end of last year and sold it at about 10,000 yuan per square meter at the end of January, pocketing about 600,000 yuan in merely a month, almost double the money he spent.”

    I guess I should stop bragging about my March ’09 investment in SLG…

  6. catman says:

    NYT hasnt quite sunk to the level of the contrary indicator, but in many ways they are working on it. Re yesterdays list it strikes me the most of the kvetching that’s gone on here in the last year speaks directly to the point about macro vs. market divergence. The macros are sure they have done the analysis and are right about the state of the economy. Meanwhile the market ignores them. The egotism of being right is a very expensive form of self deception.

  7. constantnormal says:

    Nobody seems to be bothered by leverage, we seem to have accepted it as a quite normal thing for the financial industry at large to operate with leverage upwards of 20% …

    The thing is, when one of these financial-suicide-bombers inadvertently triggers their toxic asset vest, it will occur over a weekend, and by the time the exchanges open on Monday (assuming that happens), the market values will be diminished significantly. That is the risk born by all the participants in the markets.

    Thank the Gods of Investment that we have a wise and vigilant regulatory mechanism watching over us …

    I hate to keep beating the excessive-leverage-is-a-bad-thing drum, but it is. You can look at pretty much every significant economic collapse in history as a case of leverage gone wild, and no lasting stability ensued until constraints were imposed upon the ability to use leverage.

    A little leverage is A Good Thing, and while a Lotta Leverage “feels” good, in reality it is building momentum to deliver a soul-shattering blow. Eventually, the supports that are leveraged against give way, and the machinery all flies apart in a most impressive display. No good way exists to predict exactly when the failure will occur.

  8. dead hobo says:

    So long and thanks for all the electrons.

  9. Boots or Hearts says:

    From what I have absorbed anecdotally, I expect 2010 losses at at least a couple very well known financials to be on par with 2009. Purely my opinion.

  10. franklin411 says:

    How do you explain the sustained rebound in state sales and income tax revenues? California is in its 4th straight month of better-than-expected tax revenue. We took in >4% more revenue than projected, for a total of $2.3 billion. The City of Los Angeles thought it was going to have to basically shut down operations starting Monday due to a budget shortfall, but it turned out that they took in tens of millions of dollars more in tax receipts than expected.

  11. thetanman says:

    Even deep in the dank, chigger infested piney woods of Alabama things are hopping:

    The traffic is so bad that I don’t go anywhere from 3pm to about 7pm. They’re even building new bank branches! We’ve have a couple of shopping centers under construction, the university is building a 10k capacity basketball arena. And basketball is a redheaded step child around here. Waffle Houses are springing up like mushrooms, and a bridge building company just put up a giant warehouse. Houses are being built again and the local feed and seed relocated from it s dusty, dilapidated old building into a brand new facility. There’s green Deere equipment parked everywhere. I tried to talk her out of it, but my sister is building a two story lake house. Our business s doing better than ever and we rented everything the earliest we ever have. And rents are up too! My nephew even got his job back.

    You don’t have any idea how amazing that is! It must be near a top: the hilljacks are stirring again!

  12. chomen:
    They do matter, just not right now. Why? Because the government is backstopping everything. We’ll see what happens once the supports go away.

  13. thetanman says:

    I even saw my hero yesterday: A shirtless, tattooed fat guy smoking while riding a Harley. He must have been wearing the tiniest helmet allowed by law-it looked like a black beenie.

  14. thetanman says:

    Could it be that risk premiums are being adjusted to the new reality of bailouts at any price. The market is skyrocketing on not only improved fundamentals, but the backing of governments all over the World, that things will be backstopped if necessary. Even to the point that everything explodes in a flash. And then it won’t matter, so why not ride the bullet train to possible Nirvana. A lot of the things done over the last 3 years would have been unthinkable before. Now we know we either rally together or poof! They are going to the wall, and taking us with them. Like I’ve said before, its the government debt bubble and its bigger than any in history, and it will last for years. It makes dotcom look like a pimple and the housing bubble look like a molehill.

  15. thetanman says:

    It seems appropriate that I have to go put pure horseshit on my marigolds. They grow like crazy.

  16. xSiliconValleyEE says:

    BR: I like your analytical and data driven approach to the economy and the markets. It’s refreshing, in contrast to so much of the pushing of one’s views based on one’s political and philosophical predilections, that is so prevalent in the media and in the comment streams. And, thank you for your post in early Feb, asking (suggesting) that the market was technically bottoming. That was a very profitable post, giving me courage to get long quickly, even though emotions told me otherwise.

    I can’t wrap my head around the macro of S&P earnings going to $95 (wow), therefore the market is cheap. To a large extent, the earnings improvement is driven by financial companies (banks) and energy companies, therefore, buy the market as a whole – which is what iI can’t wrap my head around. I believe the rally is to the point where you have to look at the market on an individual sector basis, and an individual company basis, to provide better gains and safety going forward. There are some companies whose valuation has gotten frothy, especially in some speculative/loved ones, whereas others have very sane or cheap valuations given their expected earnings in the relatively near future- such as many banks, industrial companies, cash-flush tech companies, and maybe higher-dividend energy companies.

    I know it’s “populist” to deride future earning projections as untrustworthy. But one needs to look at the probabilities of the earnings projections being true for an individual company or sector, and the distribution of the earnings projections based on what events could cause the earnings projections to be off. All given the best available economic, industry, and company data. And compare that to the historical P/E ratios that individual industries trade off of, while evaluating possible gains vs. potential losses, and making changes in your portfolio as the probabilities change.

    Right now, the data is seriously bullish for many sectors, such as illustrated in the “Retail, Jobs Suggest Stronger Recovery” post. yesterday. This is to be expected a year after both the fiscal and monetary spigots were turned WIDE open. I just wish our government knew how to get this fiscal and monetary stimulus into the real middle-class economy, instead of leaving it just “trickle-down” from the big banks and financial sector, with the extremely crappy loan growth and incredibly low velocity of money going on. But the liquidity is real!

    In this rally, it took something like 3 weeks for the DOW to hit 8K, a couple of more months to hit 9K, about 4 more months to hit 10K, and 6 more months for it to hit 11K. The generic market advance may be slowing, but, the incredible liquidity is still full throttle ahead, on both the fiscal or monetary side. And the liquidity has to go somewhere, which is in my imho, into assets, such as into the market.

  17. Marcus Aurelius says:

    We’re in a bubble (don’t forget to hold your nose and mouth closed and exhale when it bursts, or the sudden pressure change will make your eyes pop out).

  18. Graphite says:

    The thing is, when one of these financial-suicide-bombers inadvertently triggers their toxic asset vest, it will occur over a weekend, and by the time the exchanges open on Monday (assuming that happens), the market values will be diminished significantly.

    As the geniuses at LTCM eventually found out, “liquidity” is an illusion. It’s never there when you really need it.

    99.9% of the time when people use the word “liquidity” they really mean “confidence,” which is not something controlled by the numbers and dials on Ben Bernanke’s printing press (which, by the way, has been slowing considerably over recent months).

  19. philipat says:

    Many small investors also do not understand how bond FUNDS work and believe that the coupon is secure. Reality of course is that a bond fund must mark to market all its holdings at the close of business each day (Unlike the banks with asset values!!). As soon as interest rates turn, which they must, these bond funds will get clobbered just like equities. No safe coupon there. Of course, if you want the coupon, you buy the bonds themselves, but that is not as easy for the small investor as buying a fund.

  20. xSiliconValleyEE says:

    Actually, in my previous comment, i meant “liquidity” as money sloshing around in the money supply. I haven’t looked at the latest data and projections for M1 and M2, but even though Bernanke is withdrawing the extraordinary facilities which he used to save our economy, both the fiscal policy spigot and monetary policy spigot are wide open, which have to be increasing M1 and M2. And, the velocity of money has to be increasing from the incredibly low levels of a year ago. M*V is what I’m referring to as “liquidity”.

    There is a fiscal policy of $1 Trillion dollars per year difference between spending and taxes. For the monetary policy, the Fed is conducting open market operations that keep the short term interest rates well under 1%, while long term interest rates are 4% and over. Wow!

    As anyone who has taken a college level economics class has learned, M*V = P*Q, where P is the price level, and Q is quantity of product, defined in my old textbook as real Net National Product.

    I, imho, believe this equation is where the Fed has made their biggest mistakes over the past 20 years. The Fed’s mission is to optimize employment and price stability, the “P” in this equation. But, given the flood of low cost imports from China and others, and the very limited Federal definition of “inflation”, which is the first derivative of P, P does not increase anywhere near what the increase in M says it should. So, they continue leaning on the monetary policy accelerator pedal.

    What the very limited federal definition of “inflation” is ignoring is asset price inflation. Or, perhaps, real estate asset price inflation is currently an unspoken goal to get the banks out their bad loans by increasing real estate asset prices. However, stocks and other financial instruments are also “assets”, where liquidity flows to.

    When LTCM and the Thai Baht crisis caused the Fed to panic and hit the monetary policy spigot in ’98, a lot of the liquidity went into the stock market, causing tech stocks to boom. Worse, when Greenspan foolishly believed that the Y2K “problem” could cause worldwide financial upsets, he opened the liquidity floodgates again. This liquidity caused the final few months of speculative frenzy before the crash in March, 2000. And then, early and mid last decade, the liquidity floodgates were left open far too long, causing asset inflation in home prices and stocks. Of which this asset price inflation was ignored, or only considered with an incredibly long time lag, in the Fed’s rate setting decisions.

    My take currently is that with this incredible liquidity due to both the fiscal policy and monetary spigots wide open, we are going to get asset price inflation. The spigots are going to stay open far longer than they should since our government can’t balance spending and taxes without being voted out of office, like the Democrats were voted out in ’94 after doing a small tax increase which was incredibly effective in getting our fiscal policy in order. And the Fed does not officially see asset price inflation in their monetary policy decisions, since they are looking at inflation in product prices that are subject to intense international competition. Asset prices are going to rise, P/E levels are going to rise, which is why I believe, imho, that buying fairly valued, or undervalued companies companies based on future estimated probable earnings is the correct strategy. In other words, use the Fed’s mistakes to your advantage.

    (Note: I only took intro, micro, and macro at college, and it was a number of years ago, so anyone who has taken college level economics classes please feel free to gently correct me on the equations and thought process based on these equations. I find it difficult on this blog to separate who are the people who really understand basic and advanced economics, of which there are many, from the ones blowing smoke based on their political and philosophical biases. Thanks.)