Over the past few weeks, I have been trying to push back against the usual contingent of bears. In particular, I have argued that this bull cycle is not yet over, markets are not in bubble and that people have been sitting for too long in way too much cash.

John Coumarianos of the Institutional Imperative is a prudent value guy. He wonders aloud in a recent blog post if I am too bullish?. He raises a number of interesting points via (mostly) valid criticisms.

I am not a rampaging bull, but if I come across that way to a reasonable guy such as John, then I am probably miscommunicating my thoughts. I am going to use his critique as a jumping off point to clarify some ideas and positions. I know that nuance and subtly are not necessarily my strong suits — nor the Internet’s, for that matter — but I will avoid all hyperbole in this discussion, click-throughs be damned.


Continued here

Category: Apprenticed Investor, Cognitive Foibles, Investing, Sentiment

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.

26 Responses to “Am I Too Bullish?”

  1. rd says:

    Yes and no.

    1. The US stock market does not make up most of the stock market capitalization in the world. Much of the rest of the rest fo the world appears to be fairly valued to undervalued. So a diversified portfolio is using the ongoing gains in the US stock market to rebalance into the rest of the world which appears to have much greater grwoth potential over the next decade. Similarly, stock gains would be used purchase bonds which would help cushion the next drop.

    2. The US economy has been in the doldrums for a number of years now. It certainly has not been over-heated, so there is still quite a bit of room for the economy to expand if it is so inclined. An expanding economy should drive more disposable income and more corporate revenue which would drive rising earnings and stock prices.

    3. The falling deficit means that the probability of the money supply and inflation exploding due to ZIRP, QE etc. is declining. This reduces the potential for a nasty interest rate spike that would probably bring the economy and stocks to a screeching halt.

    4. However, the internal economic and market factors could turn south at any time. It would not take much to tip them both over into a recession/correction. Valuation measures, such as CAPE, Q, market cap to GDP, etc. are all at very high levels and margin debt is very high so hints of a recession could drop the market 25% or more very quickly. We would probably have 6 months to a year “”warning” with a declining A-D line etc. which doesn’t appear to have started yet, but could start at any time.

    I will continue to plug along with my stock/bond mix with international stock diversification and keep rebalancing it. We live in interesting times.

  2. gloeschi says:

    “Wall of worry”, “Most hated rally”, etc. ETF’s don’t care what people think about their investments. Most institutional equity PM’s have no choice but being (almost) fully invested. The few retailers who *could* try to time the market won’t move the needle. Point is: the entire behavioral stuff is not very helpful. In the long run (10, better 20 or 30 years) valuation still matters. But who has an investment horizon that long? Or which professional money manager is still in his job in 30 years?

  3. wdevauld says:

    ‘Continued here’ link is broken

  4. jacobh says:

    Hi Barry,

    You do realize that 2 of the 15 metrics ML uses in their analysis are S&P vs Gold and S&P vs WTI Crude?
    These metrics seem to be as volatile as a sailor’s moodswings when drunk. So maybe Gold and WTI are not good benchmarks to value the market against.

    • Smokefoot says:

      2 of the other metrics are based on forward earnings, which have a terrible record at turning points. I wish ML had used a list of reliable valuation methods rather than everything they could think of.

  5. george lomost says:

    If by bullish you mean that stocks are the only game in town and because the Fed can only point to higher equity prices as proof that their policies work, they will continue to do their damnest to keep prices going up, then no. You are making a perfectly rational decision. And as a money manager your job is to make money and only that.

    If by bullish you mean that the lot of most of your fellow Americans will improve in the next couple of years then yes, you are too bullish. Consider this:

    Boeing and Caterpillar, even as they have record profits, are demanding wage concessions for “management flexibility” so that they can keep record margins even if they lose sales. During the days of the former Soviet Union there was a saying “they pretend to pay us and we pretend to work.” Some day it may happen here though not any time soon.

  6. BennyProfane says:

    Love how your “Stories from 1999″ in the morning links section puts things into perspective.

    I just finished The Age of Oversupply http://www.amazon.com/The-Age-Oversupply-Overcoming-Challenge/dp/1591845963 which has convinced me that profits will be solid for some time as labor costs will stay very low and drop for the next decade or two. That and other factors will keep inflation non existent, and interest rates will be zero for a very long time.

  7. wally says:

    Perhaps you worry too much about whether you are “too bullish”.

  8. VennData says:

    But the Retail trends Oscilloscope indicator is flashing Red! Red! Red!

    And I’m a Scorpious and my moon is in the eleventh house and Jupiter is aligned with Mars!

    Plus historically, almost half the time markets go down!


    • VennData says:

      CORRECTION: Wait until today’s over. Missed it by a day. But tomorrow, i swear the market will crash.

  9. wilczewski says:

    I’m a little skeptical about the “lots of cash on the sidelines” argument. I think a lot of wealthy investors are holding cash because bonds offer a very low real yield and they don’t want to get steamrolled by a tapering Fed. Looking at investor bond flows it’s pretty clear that many people think on a risk/reward basis bonds are a bad investment. So if I expect the Fed to raise rates, why not hold cash and wait? With low inflation and little opportunity cost why not hold cash? I’m getting an option to invest in a better market at a very low cost. I may be missing out on the stock market but I’m not looking to invest my money in the stock market – I’m waiting for the bond market. My hypothesis is that this “cash on the sidelines” actually puts a floor on the bond market once the Fed starts tapering and not a floor on the stock market.

  10. b_thunder says:

    Those “affluent investors” who are “sitting on $6 trillion dollars and as much as 50 percent cash in their portfolios was about investor psychology” – is it about their psychology or is it the $3 trillion worth of Treasuries and MBS that they’ve “flipped” at the very top of the bond market to the Fed? BTW, the Fed’s balance sheet is up the same $3 trillion since pre-QE time.
    But unlike “average Joes” in 1999 and 2007, they’re not jumping in for that last 1/8th of this “bull market.” HNW individuals are, by definition, better/smarter investors than the average 401k schmuck. No matter how the “wolves” of Wall St try to entice the HNW crowd to jump in and become the new bag-holders, it ain’t happening! There’s no way HNWIs will reduce their cash to 2-3% as “some” asset managers would like them to, and that must be driving the latter group totally crazy!

    I personally like to see what the best of the best are doing: Seth Klarman is ok with 25% in cash, Buffett is ok with all-time high $49B in cash. I’m ok with my super-high cash position too.

  11. Livermore Shimervore says:

    Pardone moi, but isn’t there an index that tells you what % of the S&P are at or near their 52 week high?

    These days, no matter the market, I look at what has been the traditional performance gain and how far above or below that band we are now. With regard to equities, I would have the center of that band equal to the average earnings of S&P, over a 10 year period for sake of including Chinese manufacturing (the game changer that make pre 2000 numbers ‘no longer applicable’).

    But really what we need is a “Pelligrini”. A chart that says how far we have to fall to get to the usual average — with this level of earnings. And then overlay over the usual duration of bullish earnigns cycle. If we’re in the nosebleeds, as Paolo deciphered on Paulson’s chart w/ regard to housing, then well errrr we’re in nosebleeds and any additional risk needs to be taken with the house’s money, time to trail out the winnings.

  12. MidlifeNocrisis says:

    I mean no disrespect or derision towards anyone, but after reading the exchange; “Perhaps you worry too much about whether you are too bullish”, and then “Yes, that’s what the Headline reads”, I just could not help myself.

    I literally burst out laughing and have to say the smile is still on my face. Hope you guys have a great day!

  13. Moss says:

    It all depends.. secular Bull or cyclical Bull within secular Bear. I suspect that a secular Bull is upon us.
    No way we see 25% in 2014 but should beat bonds and cash.

  14. carchamp1 says:

    “I am not a rampaging bull, but if I come across that way…”

    You haven’t been. Not even close. You’re not miscommunicating anything. He must be reading your posts with his collapsing dollar/Fed induced hyper-inflation/end of days eyeglasses. He needs a new prescription.

  15. 4whatitsworth says:

    Are you too Bullish? In my view yes, US Stocks are now expensive and your article on how much cash you should have was ill timed.

    I do agree with this “I continue to see signs that sentiment has gotten frothy. We are long overdue or a 10 percent to 20 percent correction. But I do not see any market internals suggesting that this bull market is over. Perhaps that discussion is worthy of a column unto itself.”

    My current strategy is to let some cash accumulate and wait for the 10-20% pull back. In my view the chance of the US market going down 10% before it goes up 10% is high. I definitely do not want to buy on the peaks with hopes for a long term outcome right now.

    With your influence I have been nervously increasing my exposure to Europe and Emerging Markets however it feels very speculative at the moment. I think and hope you are right here.

    • I don’t think the average person should run cash in their portfolio.

      If they need a slug of cash reserves, open a money market account

      • dark1p says:

        I think you’re correct in many respects, not a rampaging bull. But if people didn’t have the bejeesus scared out of them four, five years ago — and decide to keep a (maybe big) chunk of money in a money market fund or cash — then they weren’t paying attention. The lesson there was, yes, you can lose money in the world stock markets or bonds or real estate or, more recently, metals. If you’re saying that everyone has to reach the point where they forget that lesson and go all-in once again before the bull market ends…well, that seems to say that we have many years to go, and I don’t think that is necessarily true.

        As we were in 1929, 1987, 1999, perhaps 2008, we are in uncharted territory. You are a much better student of what signs appeared at what juncture than I’ll ever be. But when territory is uncharted, I get nervous, because what showed clues in the past (even if it was uncharted at the time) may or may not work the next time. You know how the markets just love to do that–just when you have it down and know what to do when you see certain signs, kaboom. It doesn’t do the same thing.

        That may sound like a variation of “it’s different this time,” but as the chart you ran not long ago showed, as an example, supposed overvaluation and undervaluation do not fit neatly where expected at market tops and bottoms in the bigger picture. There are a lot of maybes and assumptions at work where our historically respected fundamentalist metrics are concerned. I forget who said it, but I like “We don’t crash when we’re overbought, we crash when we’re oversold” as a reminder that prudence isn’t a bad thing and that we don’t see too many things until we can do it in hindsight.

  16. DiggidyDan says:

    I still have a decent amount of cash right now because of future uncertainty in job outlook. (to be honest, it’s in “high” yield ~2% MM and short term CD’s right now, not really cash). I think this is still a big factor for people to hold a lot of “cash.” They aren’t necessarily afraid of another stock market crash, per se, but rather afraid of economic crash associated with job losses as we experienced 5 years ago. Your portfolio can go down, and it’s not the end of the world, but if your portfolio goes down, and you lose your job and you need to liquidate holdings at exactly the wrong time just to get by, then it’s a big deal. Lot’s of overlevered folks got caught with their pants down in just this type of situation, so they are wary of having it happen again.

    I did buy some stock back in 2008 and some in the end of 2009 and 2010. Although I was scared to death in early 2009 and missed the absolute bottom, good advice from smart people like you convinced me that I would rather make money than try to be right. Lately I have just let it ride and not put more in lately. As the market got more pricey, and I couldn’t find as many bargains, I started to set aside the extra cash building an emergency fund to 12 months salary. (although I am thinking about dropping into miners and commodities producers right now). Thge 401k, on the other hand, is constantly buying about 80% equities in mostly emerging market fund and small caps every 2 weeks. I can’t touch that money for 30 years, so I just let it auto-allocate without worrying about trying to time it.

    Is your “cash holdings” data broken out into individual brokerage accounts vs. retirement accounts? I would think peoples holdings differ depending upon what the purpose of the account is!

  17. nofoulsontheplayground says:

    2014 is the scheduled time for the mid-cycle low of the 4-year US presidential election cycle.

    Rather than mark a huge drop like 2002, a better historic interpretation of this important cycle low would be one that lasts for 2-years. Typically in a secular bull, it will be a low that is left behind for good. In a secular bear, that will not necessarily be the case.

    The 1987 low is one that confounds this cycle, with most saying it just came late, whatever that interpretation means.

    2016-2018 looms large for the longer term cycles. Many of us have doubts the secular bear ended in 2009. However, as investors, we manage risk, follow trends, and remain watchful for indicators that have foretold the exercise of caution in the past.

    In the short term, this means we are in a seasonably strong period for another 2-1/2 weeks or so right now.