Yesterday, markets did nothing. Gold and US stocks ended the day roughly flat.
Who knows what tomorrow will bring. A crash? A bubble?
Not for us! For dear readers who had lingering doubts, we just proved we are no good at predicting the future. We missed one of the biggest bull markets in history! Bloomberg has the details:
The S&P 500 rose 0.1% to 1,762.15 at 4 p.m. in New York. The gauge has rallied 23.6% this year, which would be the best annual gain since a 26.4% surge in 2003. The Dow Jones Industrial Average fell 1.09 points, or less than 0.1%, to 15,569.19.
“The most bullish thing a market can do is go up, and that’s what it’s been doing,” Bruce Bittles, chief investment strategist at RW Baird & Co, said by phone from Sarasota, Florida. His firm oversees $100 billion. “With Janet Yellen coming on stream and the latest jobs data that was a disappointment, that suggests that the Fed will continue to ease and print money until at least March and probably beyond.”
Fed policy makers meet Tuesday and Wednesday to consider whether economic growth is strong enough to start trimming $85 billion of bond purchases. This month’s 16-day government shutdown took at least $24 billion out of the economy and will spur central-bank policy makers to wait until March to scale back the stimulus, a Bloomberg survey showed this month.
We should have had more faith in the feds. They set out in a panic to boost asset prices. “Yes we can!” they said. “No you can’t,” we replied.
In our case, we are dealing with family money. And it would have been incredibly reckless and foolish to have moved 100% of our family money into US stocks. (We follow a strict asset allocation strategy that prevents us from betting the farm on any single investment.)
Besides, we assumed the feds would mess it up. And we believed their recovery efforts would end in failure – like nearly every other federal program since World War II. Then the stock market would be doomed to a final bear-market selloff, similar to 1982, when you could buy all you wanted for only six times earnings. (At one point, you could have bought the Dow for a single ounce of gold.)
The Dumbbells Were Right
Well, we were right… and wrong.
As to the recovery, it has been a dud, just as we said it would be. Americans, on average, have gotten poorer every year since 2007. What kind of recovery is it when disposable household income goes down? It is no recovery at all.
But as to the stock market, the dumbbells were right. It didn’t retrace half of its losses, as we predicted. It retraced 100%… and kept going… more than doubling investors’ money.
But wait…
What kind of stock market is it that doubles in price even though the economy on which it depends barely limps along? From whence cometh a bull market, if not from the growth and prosperity of the society it serves?
It was not a boom you could depend on, we reasoned. It was a precarious and dangerously manipulated boom – a boom driven by the fed’s policies, not by real growth. It was just a matter of time, we guessed, before it would blow up.
And so we hoisted our poor “Crash Alert” flag, where it has stayed for months… soaked in the rain… bleached in the sun. The poor thing is now in tatters.
Even so, we’re afraid to take it down! If stocks were risky in 2008… they’re more than twice as risky now!
But so what? Prices have gone up. That’s all that matters, right? The bulls were right. The bears were wrong… and we were wrong along with them.
Still, without genuine economic growth, what made US companies worth twice as much?
A Goosed-Up Market
Well, three things.
First, corporate earnings rose. But behind that story lurked another sordid tale. Since the March 2009 low, nearly two-thirds of the rise in operating earnings for S&P 500 companies has come from neither higher sales nor increased productivity. Instead, it has come from lower interest expenses on corporate debt. Corporate America is a debtor. It benefits from lower interest rates, while savers lose.
Second, as the so-called “risk free” return on bonds falls, future earnings streams from stocks look more attractive on a relative basis. (Wall Street prices stocks based off bond yields. The lower bond yields are, the more attractive stocks look by comparison.)
Third, by evaporating the yields off bonds, the Fed has forced investors to “reach for yield” elsewhere. An obvious place to look is stocks.
Between these three things – not to mention the implicit guarantee by the feds to backstop the stock market – the Dow rose to over 15,500 – an increase worth about $8 trillion to investors.
Let’s get this straight. Corporations haven’t been selling much more product (reflected in relatively static top-line revenues). Nor have they been hiring more employees or paying higher wages… thus expanding the base of potential buyers for their products.
What was really going was that the Fed goosed up stock prices. And now (maybe… perhaps… probably… could be, but who knows) it is headed for disaster.
Regards,
Bill
Market Insight:
Are US Stocks in Bubble Territory?
From the desk of Chris Hunter, Editor-in-Chief, Bonner & Partners
Are US stock market investors once again becoming “irrationally exuberant” like they were in 1996, when then Fed chairman Alan Greenspan warned of a bubble in stocks?
It certainly seems that way, if you look at the level of leverage US corporations have taken on. Reports Brett Arends at MarketWatch:
In the past three years, non-financial corporations have borrowed more than $1 trillion, taking their total liabilities above $14 trillion, according to the Federal Reserve. To put that in context, they now owe more than twice as much as they did when Greenspan issued his famous warning in 1996.
The Fed has facilitated this surge in borrowing by artificially holding down interest rates by way of ZIRP (zero interest-rate policy) and QE.
And corporations have used this debt pile to help fund massive share buyback programs. These reduce the amount of shares in the market… and increase the value of outstanding shares.
This new debt also makes US stocks horribly expensive on an enterprise-value-to-revenue basis.
Enterprise value measures the total value of a company’s outstanding stock and its outstanding bonds, net of any cash. And it gives investors a good proxy for a company’s intrinsic value.
According to FactSet, enterprise value for the US stock market is now 2.3 times annual corporate revenues.
This is the highest level ever, except for the peak of the 1999-2000 bubble. And it’s plenty higher than when Greenspan first warned of irrational exuberance (when enterprise value was 1.7 times revenues).
US stocks shot up from their 1996 levels, despite Greenspan’s warning… and their rich valuations. And they could go higher today.
But at current valuations, long-term returns are likely to be just as disastrous as they were for anyone buying in 1996.
