Wednesday, August 26, 2015

The Fed Is Trapped In A Corner: First Signal Of No September Rate Increase

William Dudley, a voting member of the Federal Reserve, said this morning "the case for a September rate hike is less compelling" and "I really hope we can raise rates this year." What changed from 10 days ago when every person in the world (including the Fed) was expecting a September rate increase? Stocks are down 10%.

As this saga unfolds more and more people will begin to understand the Fed is trapped in a corner. They know additional monetary easing (0% rates and potentially QE4) may, in the short term, push stocks artificially higher. They also know taking away the punch bowl and raising rates will temporarily crash the economy.

Dudley has already thrown up the white flag after a only a 10% fall in stocks. Perhaps the Fed can talk the market higher in the short term, but the real crisis will arrive when the Fed announces monetary easing and stocks continue to fall (remember they were easing policy from late 2007 through early 2009 as stocks fell during the entire time).

For more see: Governments & Central Banks Do Not Control Market Movement

Peter Schiff has more on the Fed's dilemma:

Tuesday, August 25, 2015

El-Erian: Asset Prices Must Revalue Back To Reality

The chief market advisor at Allianz and the former CEO of PIMCO speaks with Bloomberg about the process of repricing of assets down toward the real fundamental strength of the economy.


U.S. Stocks Slightly Cheaper But Still Ridiculously Expensive

The trailing 12 month Price to Earnings ratio on the S&P 500 has fallen from 18.5 to 16.75 over the last week. This means stocks have become less expensive relative to their earnings (lower priced stocks are more attractive to purchase for value investors).


Stocks are historically considered cheap when their trailing P/E ratio moves under 10 so we would need the S&P 500 to fall about 40% from here for stocks to provide a safe long term entry point. In addition, earnings would need to remain at the level they are today (price is only half the equation). If earnings fell (they are sitting at all time record highs), then stocks would need to fall significantly more than 40% in order to provide a safe, attractive entry point.

Just a quick big picture overview for those hunting for bargains in the United States after the recent decline. Save your time; they don't exist (yet).

Monday, August 24, 2015

Jim Grant On Artificial Global Asset Prices

Blood & Gore: Global Markets Crashing Everywhere

As I write this morning stock markets are selling off everywhere. China's market fell close to 9% overnight, U.S. DOW futures are down 600 points while most other global markets are down over 3%.

It's interesting listening to the media trying to figure out "why" stocks are down. "What was the one trigger that pushed us down?" Was it China? The Fed? Donald Trump?"

The reality is global stock markets have been trading at prices that do not reflect the economic strength of the economy that supports those prices. The global economy has been slowing down for some time now, but in many areas of the world (specifically the United States) people have not paid attention because the stock market was moving higher.

Many people wake up in the morning and check the markets. They see green and they assume everything is right in the world. They believe the market is a rational indicator of the current and future health of the economy.

The reality is the stock market is one of the most irrational gauges of the economy available, especially at the high and low extremes. The future growth potential for the U.S. and global economy was far better than the U.S. stock market reflected in 1982, and it was far worse than the U.S. market reflected a month ago.

There was not one "trigger" that pushed the markets lower over the past week. There is never one triggering event at a high (people are still trying to determine what it was in 1987, 2000 and 2007). Markets fall when prices become overvalued and people finally move toward a more risk averse mind set. Here are some thoughts from John Hussman from over the weekend.

"The way to understand the bubbles and collapses of the past 15 years, and those throughout history, is to learn the right lesson. That lesson is not that overvaluation can be ignored indefinitely – we know different from the collapses that have regularly followed extreme valuations. The lesson is not that easy monetary policy reliably supports stock prices – persistent and aggressive easing did nothing to keep stocks from losing more than half their value in 2000-2002 and 2007-2009. Rather, the key lesson to draw from recent market cycles, and those across a century of history, is this:

Valuations are the main driver of long-term returns, but the main driver of market returns over shorter horizons is the attitude of investors toward risk, and the most reliable way to measure this is through the uniformity or divergence of market internals. When market internals are uniformly favorable, overvaluation has little effect, and monetary easing can encourage further risk-seeking speculation. Conversely, when deterioration in market internals signals a shift toward risk-aversion among investors, monetary easing has little effect, and overvaluation can suddenly matter with a vengeance."

We know markets usually fall a lot faster than they rise, especially when everyone is on one side of the boat and there is heavy leverage involved. Is this the wash out moment to cleanse the mal-investment over the past 7 years? Will the Fed step in with an announcement to launch stocks higher into the realm of absurdity? I have no idea. What I do know is that U.S. stocks this morning are still a long, long way away from being undervalued. We'll see if the market can finally bring us back to a rational entry point for buying.

My guess is you are unlikely to see experts on CNBC today "so bullish it hurts."