Saturday, May 31, 2014

Volatility Disappears Setting The Stage For A Cyclical Market Top

Last week I commented that A New Bubble Has Emerged: Complacency. This topic seemed to resonate throughout the week from some of the top minds in finance who are noticing that there is no volatility in asset classes, anywhere. This type of behavior tends to occur at the cyclical peak of market cycles, shown below with the combined (extremely low) volatility in stocks, currencies and bonds.

In his weekly commentary this morning, John Hussman described market peaks as a process, noting the following regarding the United States S&P 500 index:

"It’s fascinating how investors come to forget that markets move in cycles and not perpetual diagonal lines. A normal, run-of-the mill cyclical bear market wipes out more than half of the preceding bull market advance."

Cyclical market cycles tend to follow a three stage process, which overshoot the long term trend line upward before finally overshooting the long term trend line downward.

During the final stage of a cyclical rally you end up at a point where participants believe that the market cannot fall. Everyone has forgotten the last downturn, and the bears have gone into hibernation.

Who is the big buyer that continues to push the U.S. stock market further into the stratosphere? As Zero Hedge noted this week, it is the companies that make up the S&P 500 which purchased $160 billion of their own stock in the first quarter.

"Unlike traditional investors who at least pretend to try to buy low and sell high, companies, who are simply buying back their own stock to reduce their outstanding stock float, have virtually zero cost considerations. The only perogative is to reduce the amount of shares outstanding and make the S in EPS lower, thus boosting the overall fraction in order to beat estimates for one more quarter."

You'll note that in March 2009, when stocks represented a tremendous discount in comparison to where prices are today, companies wanted nothing to do with making purchases of their own shares. Today they cannot get enough.

It's great to know that stocks are over valued and over loved today by almost any metric in history, but what people really want to know is the day the party is going to end and U.S. stocks will finally return back to earth. Unfortunately, no one can tell you when that will occur. You can either continue to play Russian Roulette with this market and ride the momentum further upward into bubble territory, or you can wait on the sidelines and look foolish with the rest of the rational market participants.

With that said, I believe that when this ridiculous party ends it is going to have a very violent conclusion.

h/t STA Wealth Management

Looking Beyond The U.S. Stock Market To Find Value Around The World

A few weeks back I discussed Mebane Faber's excellent new book in Global & Historical Shiller CAPE Price To Earnings Ratios. Faber's work not only looks at the markets that are the most dangerous (helping you avoid trouble), but he shows you where you can find value in markets around the world and profit handsomely over the next decade if you have the ability to ride through short term turbulence.

Much more on global P/E ratios in the presentation below:

How The World Consumes Media

Great chart from The Atlantic showing the time spent consuming media by category in different countries around the world. What was striking to me is how much time people spend looking at their cell phones.

Thursday, May 29, 2014

John Hussman Wine Country Conference Presentation

Some of this gets a bit complicated, but if you would like an extensive look at the current valuation metrics of the United States stock market, John Hussman provides an incredible walk through below.

Sunday, May 25, 2014

A New Bubble Has Emerged: Complacency

John Mauldin said last week he felt there is currently a bubble in complacency. I thought that was an interesting way to describe the current psychology in the markets today, and I agree completely. Here is what I wrote to start the year in the 2014 Outlook:

Entering 2014 there is no obvious disaster sitting right in front of us such as a sovereign debt default or a new major war. There is no immediate rogue wave catalyst for a serious decline in risk assets. Because of this, market participants have entered into a period of unprecedented complacency. As we will see, this complacency is the true danger that faces the market.

While a large portion of the U.S. stock market has been clobbered during the first five months of the year (some of the 2012 - 2013 high flyers have fallen 40% to 60%), the major indices have grind higher, and the complacency has continued to spread across the financial system.

Market rallies usually top when they have participants feeling the most at ease that nothing could possibly go wrong. One of the best measures of this sentiment is the VIX  index (also called the "fear index"), which continues to reach to new lows. The last time the markets were this complacent and assured that nothing could go wrong was during the peak of the last cycle in late 2007, circled in the graph below.

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

Do High School Grades Impact Earnings In Adulthood?

A recent study showed that high school grades correlate directly to income in adulthood (seen in the chart below), something parents can now show their children in a simple graph.

I would argue this has less to do with the material learned in high school or even the ability to take tests, and more to do with the type of person a higher GPA student is (meaning they are a hard worker).