Down goes the Dow

All of this talk of GAAP/non-GAAP, the Fed, Brexit, debt, buybacks, etc is all just noise. This isn't really that complicated. Here's a simple summary...

A. The stock market is at record highs, so get ready for it to go down.

B. Bond yields were near zero, so they are going up.

No one should be surprised by either of these. It's not rocket science.

Rocket scientist wrote:

All of this talk of GAAP/non-GAAP, the Fed, Brexit, debt, buybacks, etc is all just noise. This isn't really that complicated. Here's a simple summary...

A. The stock market is at record highs, so get ready for it to go down.

B. Bond yields were near zero, so they are going up.

No one should be surprised by either of these. It's not rocket science.

I am always ready for the stock market to do down, but you seem to be saying that the market is more likely to go down when at an all time high than otherwise

Historically speaking I don't think that is true - markets hit all time highs again and again without falling back significantly.

And we've recently had highs again and again. This isn't flipping a coin. The more highs you hit in a short time frame, the more likely you'll see a correction sooner rather than later. Strap in, boys and girls.

Maserati wrote:

Back from my tour. Will post more later, just wanted to acknowledge this rally, and the fact that I missed out on it. I have been doing well, but I could have made better money, easier, on this latest rally had I stayed in rather than getting out at around 18k, IIRC. Yes even after tax.

I'm still up better on the year, but not by much at all--but this has been a big opportunity missed. I thought about it but wasn't sure enough to pull the trigger, and left lots on the table as a result.

Fail for me this time, although my wife did call it correctly, but not for any good reason.

I have been chafing about it during my travels, when all anybody wanted to talk about was Trump. Not policies, just the personality.

I went all cash at 17.9k ... sigh! Why did I try to time the market?!

Ryan, Maserati, and agip:

Good comments. My view has always been that investing in stocks and bonds, or anything really, should be based on some measure of cash flow. The historical average GAAP PE of the S&P 500 is about 15. Current GAAP EPS is around $90 per share. Fair value calculation would be 15 x 90 = 1,350. At a 2.4% Yield the 10 Year Treasury is trading on a cash flow basis slightly ahead of inflation.

So, as Maserati correctly noted, securities are being traded with little regard to valuation. Hot potatoes passed around in a chain. Only a few question the possibility it might be a giant Ponzi scheme. However Ryan shows the duplicity of the Wall Street narrative and facts.

Markets are more interesting at extremes. Expectations for the future are colored by the here and now. For the moment few here can even envision the Dow at 13,000 or a 10 Year Treasury yield at 4%, yet this would be just an average reversion to the mean. Lastly, investors should hope for such a resolution, since that creates real value. At any given point in time someone must hold a security, but at what price?

Igy

Not to hijack the thread, which I certainly find more interesting and knowledgeable than most NRR options, but...

What are your thoughts on the widely-predicted (and hence self-fulfilling?) Trump Slump? While I do anticipate a period with increased inflation *and* increased unemployment--supposedly a Presidency-killing combo--I don't expect the situation to bite deeply until after the 2018 elections, keeping the GOP solidly in power at least until the next presidential year.

Any thoughts? In "pure" economic terms, one would say that restricting trade, cronyism/playing favorites, and nonproductive infrastructure projects (e.g. The Wall), etc., "must" result in a slump...but we also know that values are what the market thinks they are, regardless of whether those valuations are based on fundamentals or emotion.

Apologies if this has already been discussed--I don't have time to go through the whole thread. Anyway, I'd appreciate it if any knowledgeable investors would weigh in.

kibitzer,

Hundreds of years of market history tells that ignoring traditional financial valuation measures is a "yuge" mistake. I will let others detail the political/economic climate. But let me state that any decrease in regulation has a negative effect on all those industries and employees that have benefitted over the past eight years. Speaking of non-productive government intervention one only has to look at Green initiatives. Either way, be it Democratic or Republican initiatives, it is not a zero sum game. In my view the economic rebalancing is inevitable, of course people will attribute an event as the cause, when the overvaluation of assets was the cause.

Nassim Taleb uses the analogy of the turkey thinking he is living the dream. The turkey was fed and generously cared for by the farmer. Then the day before Thansgiving everything changed. Who would have known?

Igy

That's what you get for listening to Igy. No wonder his clients are upset at him.

Ghost of Igloi wrote:

Ryan, Maserati, and agip:

Good comments. My view has always been that investing in stocks and bonds, or anything really, should be based on some measure of cash flow. The historical average GAAP PE of the S&P 500 is about 15. Current GAAP EPS is around $90 per share. Fair value calculation would be 15 x 90 = 1,350. At a 2.4% Yield the 10 Year Treasury is trading on a cash flow basis slightly ahead of inflation.

So, as Maserati correctly noted, securities are being traded with little regard to valuation. Hot potatoes passed around in a chain. Only a few question the possibility it might be a giant Ponzi scheme.

You think the market is overvalued yet you believe the average price per share should be $1350? Make up your mind.

You did the math wrote:

Ghost of Igloi wrote:

Ryan, Maserati, and agip:

Good comments. My view has always been that investing in stocks and bonds, or anything really, should be based on some measure of cash flow. The historical average GAAP PE of the S&P 500 is about 15. Current GAAP EPS is around $90 per share. Fair value calculation would be 15 x 90 = 1,350. At a 2.4% Yield the 10 Year Treasury is trading on a cash flow basis slightly ahead of inflation.

So, as Maserati correctly noted, securities are being traded with little regard to valuation. Hot potatoes passed around in a chain. Only a few question the possibility it might be a giant Ponzi scheme.

You think the market is overvalued yet you believe the average price per share should be $1350? Make up your mind.

math minor,

Just another post from someone that probably should not. SPY trades at 1/10th the equivalent valuation of the index. Fair value calclation would put the share price of SPY at $135, it closed Friday at $226.

Igy

Ghost of Igloi wrote:

Just another post from someone that probably should not.

Oh, the irony!

How long is Ghost of Iggy going to post this nonsense? He always predicts market collapse but the market has provided 10 to 12% returns for more than 100 years. I repeat - for more than 100 years. What other investment consistently provides those types of returns?

Ghost of Igloi wrote:

Ryan, Maserati, and agip:

Good comments. My view has always been that investing in stocks and bonds, or anything really, should be based on some measure of cash flow. The historical average GAAP PE of the S&P 500 is about 15. Current GAAP EPS is around $90 per share. Fair value calculation would be 15 x 90 = 1,350. At a 2.4% Yield the 10 Year Treasury is trading on a cash flow basis slightly ahead of inflation.

You paint an incomplete picture. The market is forward looking. Earnings have been growing and are expected to continue that trend. An above-average number of companies have issued positive EPS guidance. So it's only natural that valuations are above average.

By the way, you also fail to acknowledge that you're talking about a moving average.

Your point is a good one, but you do a disservice to the readers by ignoring this important information.

clearly the market doesn't think there will be a wall, a torn up NAFTA, trade wars or whatever.

the market sees lighter regulation, lower taxes and the very good economic numbers coming out every day.

so ja, if the idiot in chief does build a wall, start a trade war, tear up NAFTA or keep jabbing at China, the market will tank.

SAlly V wrote:

How long is Ghost of Iggy going to post this nonsense? He always predicts market collapse but the market has provided 10 to 12% returns for more than 100 years. I repeat - for more than 100 years. What other investment consistently provides those types of returns?

I wonder why the last 17 years have average only 4.5% per year and we are at an all-time high?

Agip I don't necessarily disagree with what you say. But is that it? That's all you can come up with justify this rally? Its pretty shallow. Of course psychology can move markets up. It always will. Except when it doesn't. It is especially dangerous if a rising stock market is what is driving consumer confidence, and consumer confidence is what is driving the stock market. We've been over this on GAAP. Look, GAAP doesn't serve to be some pain in the @ss method of measuring a corporations financial position to drive markets down. It requires corporation to expense things like "stock based" compensation and restructuring charges because they really are expenses. You would help your argument better if you could convince people that pro forma earnings will eventually show up in GAAP earnings. Cherry picking the earnings that look best is not a good argument.

agip wrote:

psychology is a major mover of markets. The stock market is not an abacus. When uncertainty is removed, when profits are rising, when confidence is high, when inflation is low but not too low, when budget deficits are appropriate, when there is peace in the world, when wages are rising, that's good. People will feel ok about investing in that kind of market.

and if you believe trump will remove regulations and lower corporate tax, that is a new positive.

(corporate profits are not stagnant- they are rising 5% per year GAAP is just one measure)

https://www.bloomberg.com/markets/economic-calendar

Ghost of Igloi wrote:

SAlly V wrote:

How long is Ghost of Iggy going to post this nonsense? He always predicts market collapse but the market has provided 10 to 12% returns for more than 100 years. I repeat - for more than 100 years. What other investment consistently provides those types of returns?

I wonder why the last 17 years have average only 4.5% per year and we are at an all-time high?

Igy,

cherry picking again!

So I finished up my road season today Igy - ran a longish race and almost set a masters PB. I had an really good fall season - ran faster than I thought I would going in . This weekend in the last few miles I was up with a female olympic trials qualifier - that was an unusual place for me to be. She's not in top form but fun to be up with people who usually beat me.

Now I chill for a bit and do a few indoor track races.

I hope all is well with you still.

🍒

Maserati,

A very unhealthy development is that so many people really don't care about what the market does. There is such a growing disconnect between their lives and the market. For a lot of people a bull market just means higher inflation, congestion. Sooner or later that is going to show up politically.

A big thing to watch in the next year or two is if anything happens with entitlements. Paul Ryan and the Republican congress are sticking to this B$ that entitlements have to be cut. Trump said he won't cut entitlements. I know their is broad bipartisan among voters to protect them. Since Reagan, politicians have had some success of either cutting entitlements, "privatizing" them, or raising payroll taxes to help finance corporate boondoggles. It wouldn't surprise me if the American public finally unite together to tell politicians that enough is enough. They will insist entitlments remain intact or even increased. If that means the stock market goes down, so be it.