Down goes the Dow

Ghost of Igloi wrote:

agip,

That's why the country's largest retailer WMT is doing so well. Though AMZN business is good, the company lost $0.43 a share over the last year and sells at $562. Yet numbskulls are loading up on the stock. You were cheering a stock market going up in spite of poor earnings and revenue misses. Why, oh the Federal Reserve can always go to negative interest rates. The trend is down and even the Fed can't save it now. Cheer if you like, but it won't last.

Igy

you can't look at two oddball companies and say they mean much.

Walmart's stock tanked because it expects flat sales and it going to spend billions on higher wages and online business. Flat sales don't sound godawful to me when you are selling 500 billion dollars of stuff every year.They have serious law of big numbers problems. Raising salaries is well not a negative for the economy, and building an online business is expensive but a good long term investment. This is more a stock problem than a problem with the company.

Amazon is in its own world - that is not a normal company that means anything in interpreting the rest of the economy. It has endless losses but if it ever decides to cut spending it will make billions. Just a weird stock.

and if you want to play the stock game -

YTD:

Amazon: +75%

Home Depot: +16%

O'reilly +28%

Starbux: +44%

Nike +32%

I could go on...

Since the first day of January, 2016 (which occurred on 9/30 this year) the DOW is over 1000 points closer to 23000. If earnings don't change, the CAPE/10 level that we had in December 1999 would occur at approximately 29000 on the DOW.

I think the critical issue is here:

http://www.schwab.com/public/schwab/nn/articles/Deflation-What-Investors-Need-to-Know?cmp=em-QYB

It is not that deflation is actually here in the US, but the FED's hands are tied due to the risks in the EMs, China, industrial commodities, and such, and if the situation is not reversed for some time--as in 1998-1999--I think the same result will occur. Ultimately, there will be a massacre--and lets not forget that the real stimulus bubble is in the bond market, and the huge risk is the junk bond market--but not before the US stock market goes much higher.

Ride that tiger until he turns around and bites you.

why is the real bubble in high yield? I hear that a lot but I don't understand it.

Don't high yield bonds usually yield around 500 bps more than treasuries?

Now the spread is 631 bps, suggesting high yield might be cheap. What am I missing?

I can't help but laugh every time I see Igy support his position by linking to the web site of a guy who lost millions of his clients dollars.

There's no chance in hell that I'm gambling on things like EM debt/equities or junk bonds with my family's retirement funds. I know that Carl Icahn is very concerned about the high yield bond risk, and I think I'll trust him about that. But remember what the FED was doing in QE--buying bonds. And this is a 15 year chart of treasuries, which I think is a pretty good definition of a market going parabolic:

http://www.barchart.com/chart.php?sym=ZBZ15&style=technical&template=&p=MC&d=H&sd=&ed=&size=M&log=0&t=BAR&v=1&g=1&evnt=1&late=1&o1=&o2=&o3=&sh=100&indicators=&addindicator=&submitted=1&fpage=&txtDate=#jump

Ultimately, every market that looks like this (which is what the SP500 looked like in 1999) ends in a crash of some magnitude. I do think that George Soros/Quantum might want to buy this market now--and I might as well--but I'm afraid that the seeds of ultimate disaster have already been sown: It is almost impossible to pop a bubble like this without it blowing up, as Japan and now the Chinese have found out.

I see way too many generals fighting the last war. Banks have been stress tested against what happened in 2008: It won't happened that way again. But we have bonds at extreme levels, and the other thing that concerns me are all the ETFs with little/no regulation that tons of hot money flows into/out of on a daily basis.

At some point Igy IS going to be right. I just think the opportunity cost of being short/out at this point is going to be more than a little extreme. Even if we get the gap at 2035 closed then a 50% correction of the gains this month, I think the market is going quite a bit higher until some time after the FED begins to raise rates.

Has there ever been a bear market that started before the FED hiked rates?

agip, coach d, and of course POTO,

I glanced over your posts prior to mowing my lawn. Like running, a dose of hard yard work gives you some time to reflect. One can't control the willingness of seemingly smart people to do stupid things. The so-called Wall Street smart money loaded up on Micron, Valeant Pharma, and Lord knows how many momentum stocks. Hedge funds and many long money managers are having a bad year. Perhaps its catch-up time or risk a short career? Today we heard some dumb reasons for the market to go up like San Francisco Fed paper on negative interest rates or the killer, McDonald's spinning off their real estate in a REIT structure. For Wall Street there is never a time not to buy stocks. Earnings do not support the lofty stock valuations and risk aversion can be seen in various sectors of the market. Few investors understand that their return is inversely correlated to the price they pay for a stock. I will reduce my shorts if I am overwhelmed by the Muppets. Until then I will continue to short the rips and cover the dips.

Igy

POTO,

I never know which of the many POTOs I am responding to. In the spirit of mutual respect, I will point out what I said before, much of what is on the Stockman site is not his and cannot be sourced directly. For example here is a piece from the Wall Street Journal. See if you can source the entire article on your own.

http://davidstockmanscontracorner.com/the-real-reason-for-zirp-1-17-trillion-of-zero-yield-treasury-bills/

Igy

I believe most absolute return hedge funds are beating the US equity markets, as long as you stayed away from EM and a couple of other things, but they're not beating their indices enough that 20% of the margin accounts for a whole lot as of right now:

http://www.hedgefundintelligence.com/Database-Absolute-Return-Indices-Performance.html

As far as earnings not supporting valuations for ALL stocks (and that's an important distinction), I put into my quantitative analysis software (Java, which I wrote myself) the following:

PE under 50

Forward PE under 50

PEG under 3

EPS growth this year over 20%

EPS growth next year over 20%

EPS growth 5 year average/year over 30%

In other words, these are stocks that are expensive but worth the money, at least in the short run. The software returned these as the top 5 picks:

ACHC

AIN

AL

ALGN

ASGN

The average PE for these stocks is about 30, and the average return is +3.74%, beating the market. And then there's this one, with a PE of 130, a 1 year return of +148%, and a YTD return of 53%:

PAYC

As I've said before, ride that tiger until he turns around an bites you.

Just as with Ben Graham-type value stocks, there is a time for momentum stocks, and those times are the absolute opposite ends of the cycle. That's a lesson I learned in the last 12 months before the 2000 top, when my "Mary Meeker stocks" like CMGI and @home were up well over 100%, but I had already pulled most of my money out of the market.

hard to judge hedgie performance right now because the market dropped 14% and then rocketed back up.

At the end of August, which was a long time ago, hedge funds were flat for the year and stocks were down 5-8%

Now, in mid October, stocks are down around 2% ytd. No idea what hedge funds are doing, but probably up 0-2%.

So relatively speaking, hedgies are beating by a couple hundred bps, but not making any money.

This is good news for them - since the crisis they have been truly awful, betting against the stock market and losing year after year. So hard to get excited about a couple hundred bps of outperformance.

https://secure.hedgeindex.com/hedgeindex/en/indexoverview.aspx?cy=USD&indexname=HEDG

Well I still don't know anything about high yield...

agip,

High yield tends to turn down in advance of the general economy as poor business models are unable to rollover their debt and defaults increase. High yield defaults are rising and spread are moving out. The asset class has lost some of its mojo and the yield is just covering the loss of principal.

Igy

coach d,

I do recall a top producer say "we are in trouble if Mary's (Meeker) stocks fall." If we do get a blow-off top it will coming from the insitutions churning the market as opposed to retail in 2000. Hey my neighbor was trading internet stocks in 2000 thinking he was a genius.

Igy

coach d,

Here is a different view of the technicals from famed Louise Yamada:

http://www.cnbc.com/2015/10/15/bear-claw-will-strike-the-market-again-louise-yamada.html

Igy

agip,

Another view of retailing and the attempts of WMT to cushion tge blow through stock buybacks.

http://wolfstreet.com/2015/10/14/have-share-buybacks-suddenly-lost-their-magic-wal-mart-financial-engineering/

Igy

Igy, it doesn't matter who wrote the articles. They are on Stockman's site because he supports the ideas they put forth. He also supported investment methods which lost his clients millions of dollars. Smart advisors avoid his site like the plague that it is.

Ghost of Igloi wrote:

agip,

High yield tends to turn down in advance of the general economy as poor business models are unable to rollover their debt and defaults increase. High yield defaults are rising and spread are moving out. The asset class has lost some of its mojo and the yield is just covering the loss of principal.

Igy

right, well sure, but Icahn and others say high yield is a bubble,

I did a little research - Icahn thinks that a slowing economy and some rise in defaults could trigger a collapse in teh high yield market because so many people have been chasing yield there, and etfs are very fast money.

well ok

but the fact is, spreads are above average - that shows there is fear in the high yield market, which means to me anyway that excesses are probably being curbed.

POTO,

Most of that is nonsense, but OK its your opinion.

Have a good weekend.

Igy

agip,

The ETF JNK is down 6% in principal YTD and yields 6%.

Igy

agip and coach d,

Even though we are within 5% of S&P all-time highs only 37% of the stocks are above their 200 day moving average. Credit spreads remain wide. Many of the high multiple stocks continue to deteriorate while energy and commodities have seen a lift. Earnings and especially revenue reports have been poor. The biggest IPO of the year First Date had a bad opening day. Albertson cancelled their proposed IPO. The market is being driven up by a Wall Street narrative that lacks substance.

Igy