Saturday, December 21, 2013

The Case For Optimism

While I like to feel this site provides a more "realistic" view on the world, the truth is that the changes I see coming to financial markets and global economy should be viewed as an opportunity, not something to fear.

Underneath all the mismanagement of our financial, political and economic system there is a growing trend of positive improvement in the real world.

The following slide show briefly walks through examples of some of these positive changes taking place around the world. When the big reset comes, it will be the opportunity of our lifetime to finally invest and live in what will be the biggest boom in human history.

Thursday, December 19, 2013

The Fed Removes The Exit Strategy From Quantitative Easing

Some quick thoughts on the taper:

The Fed chose to slow their bond buying program by $10 billion per month, reducing the amount of mortgages they will purchase by $5 billion and the amount of treasuries they will purchase by $5 billion. They are now buying $75 billion of bonds per month with printed money.

I felt the most important part of the Fed announcement yesterday was not the $10 billion reduction. When they first launched QE-ternity back in September 2012 they had an exit strategy based around the unemployment rate falling to 6.5%. This made the market nervous because as we have discussed numerous times in the past, the unemployment rate is currently falling in large part due to people giving up looking for jobs (they are then considered employed by the government). Bernanke acknowledged this problem in recent press conferences.

Yesterday they removed this barrier saying that they will continue easing "well past" the unemployment rate hitting 6.5%. Now they have removed all limits around how long QE will run.

When the mania in stocks subsides or if they begin to lose control of the bond market (which may already be happening) they will re-enter the market with even larger doses of QE heroine. 

In the meantime, gold, silver, agriculture, strong emerging market stocks and currencies may all fall on the news. I'll be a buyer. 

Wednesday, December 18, 2013

Marc Faber Dumps Cold Water On CNBC's U.S. Stock Market Celebration

Marc Faber provided the shocked CNBC studio with a sobering outlook on the financial markets yesterday afternoon. He feels that cash and precious metals are currently the two most hated assets on the planet. I am steadily accumulating both of those assets right now, which comforts me to hear from Faber (who travels and speaks with people continuously all over the world) how hated they actually are. The reason why it comforts me is a topic I reviewed in detail a few months ago, where I discussed how I look through the lens of the world in terms of both investment and business decisions. See:

Newton's Cradle: Visualizing Asset Prices Through Capital Movement

Sunday, December 15, 2013

Flashback To December, 1999: What Was The Outlook For U.S. Stock Prices?

Here's how it all worked out:

Next stop on the history tour:

Flashback to December, 2007: What Was The Outlook For U.S. Stock Prices?

Flashback To December, 2007: What Was The Outlook For U.S. Stock Prices?

The following shows the rising and falling periods for the U.S. stock market over the last 17 years.

After the fall in 2008-2009, we have once again risen relentlessly for five straight years. Any bearish sentiment toward the market has been completely washed away like the ocean tide. Open any outlook on the future direction for stock prices in 2014 and the answer is higher or much higher. See Here's What 14 Top Wall Street Strategists Are Saying About The Stock Market In 2014.  

In order to put this time period in perspective we can flashback to December 2007. Remember that the United States at this point was already in recession, and the market had already topped a few weeks before the forecasts were provided.

See if you can spot the major themes, which you will notice are the exact same themes you hear today on why the market will move higher in 2014.

1. The Fed's Easing Will Push Stock Prices Higher
2. Prices To Future (Estimated By Wall Street) Earnings Show Stocks Are Cheap
3. Cash On The Sidelines
4. Stocks Are A Good Buy Relative To Bonds

The following are the forecast summaries from Bloomberg's Where To Put Your Cash In 2008, December, 19, 2007.

WILLIAM GREINER, Chief Investment Officer, UMB Financial 

Greiner expects a combination of low stock valuations and lower interest rates to push the Dow up some 8% over today's levels. Moreover, he notes, "the market has a tradition of rallying pretty hard in the second half of a Presidential election year." Greiner favors companies that manufacture products consumers cannot do without, such as food and drugs. He expects such companies to deliver strong profit gains—of some 8% in 2007 and 10% in 2008—even as corporate bottom lines elsewhere stagnate. His favorite stock, Starbucks (SBUX), trades at about 23 times earnings—or "its cheapest level ever."

Greiner's Calls
DJIA: 14,400 (December, 2008)
S&P 500: 1520 (December, 2008)

TOBIAS LEVKOVICH, Chief U.S. Equity Strategist, Citigroup (C)

Citigroup's U.S. stock strategist is advising clients to buy beaten-down financial and retailing stocks and steer clear of stocks that have seen big run-ups. Of course, Levkovich's call amounts to good, old-fashioned investment sense ("buy low, sell high"). But there's no guarantee his timing is right. "Markets don't ring bells at the top or bottom," he replies. "If you wait, you will miss out." Levkovich believes bank earnings are likely to surpass analysts' ultralow expectations for next year. Why? A series of interest-rate cuts from the Fed, extending into 2008, will allow banks to reduce the rates they pay on deposits and repair damaged balance sheets. Meanwhile, he predicts retailers will benefit from healthy consumer spending, fueled by continued job growth. By Levkovich's calculations, stocks are at bargain levels seen in only 90 of the past 550 months. "In every single instance," he adds, "the markets were higher 12 months later."

Levkovich's Calls
DJIA: 15,100 (December, 2008)
S&P 500: 1675 (December, 2008)
Earnings: expects a rise of 5.2%

JASON TRENNERT, Chief Investment Strategist, Strategas Research Partners

His recommendation for 2008 is to stick with U.S. stocks. With corporate balance sheets strong and the U.S. unemployment rate low, Trennert figures the odds of a recession are low. He expects the Federal Reserve to cut the Federal Funds rate from 4.25% to 3.5% by midyear—averting a major credit crunch and fueling stock gains. At 15 times 2008 earnings projections, Trennert argues U.S. stocks are a good buy in comparison with bonds: The ten-year Treasury bond's 4.2% yield equates to a price-earnings ratio of 25.

Trennert's Calls
DJIA: 15,150 (December, 2008)
S&P 500: 1680 (December, 2008)

BERNIE SCHAEFFER, Chairman, Schaeffer's Investment Research

Schaeffer—a past winner of BusinessWeek's annual stock market forecasting contest—remains optimistic about the outlook for stocks in 2008. He expects a series of "aggressive" interest-rate cuts by the Federal Reserve to bolster consumer spending, economic growth, and stock prices next year, and for a weaker dollar to inflate the overseas earnings of multinational companies.

Schaeffer also scrutinizes various technical indicators, most of which, he believes, are currently flashing positive signals. For instance, he cites indicators of negative investor sentiment which, counterintuitively, are positive for stocks, since they signal there's a lot of money on the sidelines waiting to move into stocks upon good news.

Schaeffer's Calls
DJIA: 15,300 (December, 2008)
S&P 500: 1700 (December, 2008)
Earnings Growth: 7%
Asset Allocation: 80% to stocks

LEO GROHOWSKI, Chief Investment Officer, BNY Mellon Wealth Management

Overall, Grohowski is expecting the Dow to finish 2008 some 10% higher. But along the way, he warns, investors will be in for a choppy ride, as uncertainty about the economic outlook fuels "above normal volatility." Grohowski recommends a defensive portfolio. He likes U.S. stocks, because he thinks valuations are reasonable and because there aren't a lot of attractive alternatives.

When it comes to bonds, Grohowski favors municipals, which on an after-tax basis currently yield more than comparable Treasuries. "In almost any tax bracket, it makes sense to buy munis," he says. Later in the year, Grohowski thinks investors will be rewarded for taking more risk. He's expecting financial stocks to rebound. And he thinks international stocks still have room to outperform.

Grohowski's Calls
DJIA: 14,800 (December, 2008)
S&P 500: 1675 (December, 2008)

THOMAS McMANUS, Chief Investment Strategist, Banc of America Securities

McManus is expecting the Dow to decline by 3% in the first half of 2008 before rebounding to finish the year a solid 10% above current levels.

McManus' Calls
JIA: 14,700 (December, 2008)
S&P 500: 1625 (December, 2008)

DAVID BIANCO, Chief U.S. Equity Strategist, UBS Investment Research (UBS)

UBS's chief U.S. equity strategist expects economic growth to slow next year, to about 2%. But he believes the odds of a recession are less than 50/50, thanks to the Federal Reserve, which he expects to cut interest rates enough to provide relief to banks and, to a lesser extent, consumers. By yearend, Bianco sees economic growth heading modestly higher and the Dow at 15,250, or 14% above today's level.

Bianco's Calls
DJIA: 15,250 (December, 2008)
S&P 500: 1700 (December, 2008

Here's how it all worked out:


Next stop on the history tour:

Flashback to December, 1999: What Was The Outlook For The U.S. Stock Market?

2014 Outlook: Rogue Wave 3: The Global Housing Bubble Is Back

- Nouriel Roubini 
  December, 2013

The world property price index has crossed above the record high reached in the third quarter of 2008. This past year, price increases took place all across the world, with only a few major markets experiencing declines.

The froth in the global real estate market, as seen previously during the 2000 to 2008 price surge, has been concentrated in the major cities. 

In Australia the poster city has been Sydney, which has launched to new highs.

Sydney's year over year rise:

In Canada, the largest cities such as Toronto and Vancouver have experienced the largest amount of speculative froth. The following shows the staggering rise in real estate prices in Toronto:

In the U.S., coastal markets like San Francisco are relaunching toward their previous record highs.

However, nothing around the world compares to what is taking place in China. Hot money has plowed into Chinese real estate simply to speculate that prices will move higher (many real estate properties purchased just sit empty) in a way that would make the 2005 market in Miami, FL look tame.

Here is how China's home price appreciation stacks up against some of the other (very frothy) markets:

The key metric to follow is the price to income ratio. In many of these major markets, the ratio has moved to unsustainable levels.

In Hong Kong it now takes almost 14 years worth of income to purchase a property, which surpasses the ratio seen in 1997 (their last property bubble peak). Prices fell 65% from that point in 1997, with the price to income ratio falling to only 6 years and creating an amazing buying opportunity. 

Hong Kong is pegged to the U.S. dollar, so the interest rates are virtually zero. You can receive a mortgage in the 2 to 3 percent range, but here is the most crucial point: they are adjustable rate mortgages. When interest rates reset, it will be catastrophic for their property market.

The Fed, Bank of Japan and Bank of England are pumping printed currency into the global economy at a staggering rate. Hot money is chasing property in the same exact speculative way it did in the first part of this millennium. Major cities such as Sydney, Toronto, Shanghai, Dubai, London and San Francisco are experiencing the greatest benefit of this hot money. 

The story will end the same. If you live in a major city around the world, I would suggest taking a hard look at the price to income levels in your region before making a decision to buy, sell or hold.

With home prices now at new record highs in the U.K., residents are being forced to move into shipping containers.

Up Next: Investment Opportunities In The Year Ahead

h/t Bloomberg, FRED

Rick Santelli & David Stockman Review This Week's U.S. Budget Deal