Posts filed under “Cycles”

Investment Cycle for Equities and Corporate Bonds

David Merkel has a very interesting post up on where about how maximizing enhancing yield on fixed income investments.

Within that post is a very interesting discussion on who the equity/credit cycle works:

1. After a washout, valuations are low and momentum is lousy. People/Institutions are scared to death of equities and any instruments with credit exposure. Only rebalancers and deep value players are buying here. There might even be some sales from leveraged players forced by regulators, margin desks, or “Risk control” desks. Liquidity is at a premium.

2. But eventually momentum flattens, and yield spreads for the survivors begin to tighten. Equities may have rallied some, but the move is widely disbelieved. This is usually a good time to buy; even if you do get faked out, and momentum takes another leg down, valuation levels are pretty good, so the net isn’t far below you.

3. Slowly, but persistently the equity market rallies. Momentum is strong. The credit markets are quicker, with spreads tightening to normal-ish levels. Bit-by-bit valuations rise until the markets are fairly valued.

4. Momentum remains strong. Credit spreads are tight. Valuations are high, and most value-type players have reduced their exposures. Liquidity is cheap, and only rebalancers are selling. (This is where we are now.)

5. The market continues to rise, but before the peak, momentum flattens, and the market meanders. Credit spreads remain tight, but are edgy, and maybe a little volatile. This is usually a good time to sell. Remember, tops are often a process.

6. Cash flow proves insufficient to cover the debt at some institution or set of institutions, and defaults ensue. Some think that the problem is an isolated one, but search begins for where there is additional weakness. Credit spreads widen, momentum is lousy, and valuations fall to normal-ish levels.

7. The true size of the crisis is revealed, defaults mount, valuations are low, credit spreads are high. A few institutions and investors fail who you wouldn’t have expected. Momentum is lousy. We are back to part 1 of the cycle. Remember, bottoms are often an event.

The full piece is well worth your time thing morning . . .


Impossible Dream, Part 2
David Merkel
Aleph Blog May 13, 2011

Category: Cycles, Fixed Income/Interest Rates, Investing

Best Market Analogy: 1973 or 1907 ?

For most of the selloff and recovery, I have mentioned that my favorite market analogy to our current situation has been 1973-74, which had a 55% collapse and 74% snapback rally. However, as this market has continued to power higher, it has left 1973 behind, and is looking more and more like the Great Panic…Read More

Category: Cycles, Markets, Technical Analysis

Short Memories (Fade the Inflation Hysteria, II)

Flashback to June 2008 (only three short years ago): Headline CPI was running very close to 5.0 percent.  The Fed funds rate was at 2.0 percent.  Brent crude was $132/barrel.  The Fed’s June 2008 minutes mentioned the word “inflation” 110 times (“deflation” and “disinflation” combined:  zero), and also contained this caveat (emphasis mine): With increased…Read More

Category: Contrary Indicators, Cycles, Data Analysis, Economy, Federal Reserve, Inflation

Housing Starts, Composites vs 2007-11 Cycle

Terrific pair of charts from Ron Griess The excesses in the prior cycle (2001-2006) have made the current run utterly abysmal: > Current Cycle versus 1o Prior Cycles Click for larger graphs > Current Cycle versus Composite All charts courtesy of The Chart Store

Category: Cycles, Real Estate

About 8 months ago, I was intrigued by the prospects of 500% market gains being a regular cyclical phenomena.

The first post was titled “Hirsch’s WTF Forecast: Dow 38,820” and filed under the category “Really, really bad calls.” (I’ll mea culpa if we come anywhere near 30,000 by 2025). I thought my old pal Jeff had lost his mind.

But then I spoke with Jeff. He explained his reasoning. He sent me his fathers infamous 1977 500% call. I ended up doing a new post “War & Peace + Inflation + Secular Bull = Dow 38K ?”  The more I looked into it, the more it seemed like an ingenious piece of history repeating.

I became impressed enough the methodology that I agreed to write the forward! I have no idea if we will see Dow 38820 in 2025, but the thesis is both intriguing and  defendable . . .

Some notable reviews follow:

“As someone who views the investment glass half empty, I would normally treat a forecasted price target for the Dow Jones Industrial of 38,820 as hyperbolic and outlandish.  That is, unless the forecaster is Jeff Hirsch!  Jeff is ‘bred in the purple’ and has royalty in his investment blood as his legendary dad, Yale Hirsch, was the dean of all technical analysts (and was the first of his kind to accurately predict the roaring Bull Market of 1974-1990). More importantly, Jeff’s rationale for another super boom is well articulated in his own unique set of facts, figures and dissection of history.  To every serious investor I say, Read Super Boom or Perish!”

-Douglas A. Kass, President, Seabreeze Partners Management Inc.

“Jeff Hirsch delivers a 500% effort in Super Boom. Unless you’re closed minded or comatose there is a lot, lot more here than any investment reader can normally hope for. The visuals and data alone are worth many times the price.”
-Ken Fisher, Founder and CEO, Fisher Investments, Forbes “Portfolio Strategy” Columnist, 5-time New York Times bestselling author

Super Boom reminds the reader of the power of compounding. DJIA 38,820 by 2025 might sound like an outrageous level, but the implied sub-9% compound annual growth rate (following a decade of decline) makes the target appear more attainable. Within these pages, Jeff demonstrates that he has learned a lot from his father and has inherited the reputation as a renowned and respected market historian.”
-Sam Stovall, Chief Investment Strategist, Standard & Poor’s Equity Research

“As a kid I taught Jeff how to catch big rainbow trout in Montana. In Super Boom, he’s returned the favor by showing us how to catch a monster stock market move. A must-read book.”
—Larry Williams, trader

Chapter 5 excerpt after the jump

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Category: Books, Cycles, Technical Analysis

Fade the Inflation Hysteria

Tons of talk and pixels being spilled over the imminent inflation threat.  It bears an eerie resemblance to what we heard from the likes of Jerry Bowyer and Art Laffer two years ago.  I’d fade it now, exactly as I suggested back then (here and here, the latter piece co-authored with Bonddad): Exhibit A —…Read More

Category: Commodities, Current Affairs, Cycles, Data Analysis, Economy, Inflation, Markets, Research, Wages & Income

Attention WSJ OpEd: Correction Needed

Invictus here, requesting a correction from the WSJ. In an editorial on Saturday, the WSJ made the following demonstrably false claim, using a slightly modified Calculated Risk (Bill McBride) employment graph (emphasis mine): The nearby chart compares the recovery rate in jobs after each of the last four recessions, and so far this one has been…Read More

Category: Cycles, Data Analysis, Economy, Employment, Financial Press

What is the Half Life of Your Favorite Technology?

I mentioned this on Bloomberg early this morning, but its worth exploring further: What is the average half life of your favorite technology? We operate under the false assumption of substance and solidity, when in reality, things are deeply in flux. Everything changes, nothing lasts. The various technologies we use are physical manifestations of ideas,…Read More

Category: Cycles, Philosophy, Technology

Secular Bear Markets (inflation adjusted)

Fabulous set of charts looking at inflation adjusted S&P composite during major secular bear markets, via The Chart Store:


Secular Bear Markets


Here is the current crash and snapback:

2007-09 Bear Market


Prior bear markets (WWI, great Depression, 1970s) after the jump

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Category: Cycles, Markets, Technical Analysis

Rebound vs Valuations

Two seemingly contradictory articles are in the WSJ today: • Dow’s Big Rebound Can’t Erase Doubts • A Serving of Doubt on Bank Valuations Perhaps we can help reconcile them. The Dow has recovered from a deeply oversold condition; some of this was the natural elapsing of time, as the panic passed and things moved…Read More

Category: Bailouts, Cycles, Federal Reserve, Investing, Valuation