Saturday, April 26, 2014

The U.S. Housing Growth Engine Has Stalled

David Einhorn On The New Tech Bubble

The letter below has been widely discussed this month throughout the financial world because it comes from legendary hedge fund manager David Einhorn. He believes we have entered a new tech bubble and he compares the new crop of technology darlings to those of the late 1990's. He notes:

There is a huge gap between the bubble price and the point where disciplined growth investors (let alone value investors) become interested buyers. When the last internet bubble popped, Cisco (the best of the best bubble stocks) fell 89%, Amazon fell 93%, and the lower quality stocks fell even more.

The letter has unleashed a torrent of responses across the financial media explaining why the new group of companies that do not produce profits will be different from those created during the last mania.

David is very used to being early and being ridiculed. He was a lone voice on the conference calls for a major bank back in early 2008 asking uncomfortable questions about their balance sheet. He took a large short position and received a steady stream of media ridicule and personal attacks from the bank in question. That bank was Lehman Brothers. You can listen to a great CNBC interview here, just a few months before the bankruptcy.

In his new letter below, the good stuff gets going in the last paragraph on page two. Click the bottom right square below to take the letter full screen:

Thursday, April 24, 2014

Jim Rickards On Europe's Long Term Growth Potential & U.S. Stocks

Jim Rickards, author of The Death Of Money, discusses how Europe is focusing on repairing long term structural economic problems while the United States and Japan have only focused on pushing back immediate pain (with an ocean of printed money).


Global & Historical Shiller CAPE Price To Earnings Ratios

Last weekend I read Mebane Faber's excellent new book Global Value, which is an extensive study on the Shiller CAPE P/E ratio. It moves beyond the United States CAPE ratio and reviews both historical and global values.

We have often reviewed the chart below showing the current overvaluation of the U.S. stock market in relation to the historical average (the line running through the center). The glaring anomaly in the chart is the massive spike seen in the late 1990's when the PE ratio crossed into the 40's.

As insane as the late 1990's period was, it pales in comparison to what took place in Japan during the late 1980's. The chart below layers the Japan P/E against the U.S. in 2000. Japan's stock market at its peak had a P/E ratio above 90! 

There are two things you can take away from this:

1. The U.S. market is overpriced against historical value metrics. This can be seen in the chart below, put together by John Hussman, which shows the U.S. market weighted against a broad basket of value metrics. Many of these metrics are now well above the 2007 peak. Buying into an overvalued markets historically had led to lower than average returns over a 7 to 10 year period (and a greater chance for negative returns in the shorter term). 

2. Overvalued markets have the chance to become far more overvalued before they come back down to earth. The U.S. market would need to almost double in price in order to get back to 2000 valuations. It would need to almost quadruple to reach the Japanese valuations of 1990. Is this possible? Of course it is.

By why would you want to take that chance? Why not invest in a more undervalued market with stronger long term fundamentals and just wait for capital to locate that value? 

The chart below shows the U.S. is currently the second most expensive stock market on the planet, trailing just behind Columbia. Click for larger image:

As just discussed, this does not mean that the U.S. market cannot become more expensive and other markets cannot become less inexpensive. Russian stocks are currently the second cheapest on the planet, but they recently suffered a single day 10% price decline! 

Looking at the markets from both a historical and global perspective helps you understand the truth behind how the U.S. market stands in terms of relative value.

Monday, April 21, 2014

A New SAT Question

From the L.A. Times this weekend; "Student Debt Holds Back Many Would Be Home Buyers"

Sarah Luna wants to buy a home in up-and-coming northeast Los Angeles before it's too late.
At 31, she has a master's degree and earns more than $70,000 as a court reporter and freelance editor. She daydreams about trading the Glendale apartment she shares for a little condo, maybe in Echo Park or Highland Park.

Just one thing holds her back: The $700 she's paid every month since 2008, after she graduated from the University of Southern California — with $75,000 in student debt. With about half that total left to pay, buying that condo seems a long way off.

"Honestly, I don't know if it'll ever happen," she said. "Barring some sort of awesome miracle, a down payment is hard to wrap my head around right now."

Of the many factors holding back young home buyers — rising prices, tougher lending standards, a still-shaky job market — none looms larger than the recent explosion of college debt.

The amount owed on student loans has tripled in a decade, to nearly $1.1 trillion, according to the Federal Reserve Bank of New York. People in their 20s and 30s — often the best-educated and highest-earning among them — owe most of that tab. That is keeping a crucial segment of home buyers on the sidelines, deferring one of the traditional markers of adult success.

It is fairly common sense. If students borrow $1.1 trillion to get through school today, that is $1.1 trillion (plus interest) less that they have in the future to purchase a home, invest, buy goods or start a business.

The unlimited money offered by the U.S. government to cover tuition, housing, books, food and "other expenses" (clothes, alcohol, phones, etc.), has been a short term back door boost to the economy that will have lasting negative impacts for years to come.

Will Japan's Pension Fund Rescue The Japanese Stock Market?