Down goes the Dow

Maybe STFU for Awhile (aka "An open letter to Igy")

Here’s the latest – Faber says the S&P 500 is set to crash 50%. Okay, it’s happened a handful of times before over the last century, I suppose it’s possible. Is it probable?

I wrote a book about the history of market calls and outrageous stock market punditry. In the course of my research (which encompassed 300 years of market history back to the South Seas Bubble), I came away with a few important takeaways:

– No one who called any of the big ones was able to also call the recoveries, or even the next crash

– Lots of people have historically gotten credit for major crash calls, because all of their previous and subsequent calls were forgotten about

– It’s pretty easy to get on a soapbox and say that horrible things “could” happen

– The uber-bulls are just as bad – notably outlandish upside targets for the Dow Jones have all occurred at major tops

– It’s harder to admit that the future is unknowable – and it’s much less marketable

– It is irrational to be constantly worried about low-probability events – and a long-term money loser of a strategy

– The best investors in history focused their time and energy away from attention-grabbing predictions

With that preamble in mind, I direct you to today’s chart, which comes to us from my friend Jon Boorman. You may click on it to embiggen the image:

http://thereformedbroker.com/wp-content/uploads/2016/08/pundits.jpeg

Maybe, instead of making repeated pronouncements based on nonsense, it would be better to just STFU for a little while. Professionals laugh at this stuff but mom & pop investors normally don’t have as much context and are more susceptible to crash calls and being scared out of their portfolios.

And now, my prediction: Average annual returns somewhere between 5 and 10% for the S&P 500 over the next 30 years, punctuated by drastic sell-offs and brutal bear markets here and there, which serve to reward the best investors and punish the emotional ones. After all, the stock market must go down from time to time. Otherwise, there would be no premium return available for those who choose to persevere.

http://thereformedbroker.com/2016/08/09/chart-o-the-day-maybe-stfu-for-a-little-while/

Dear Reformed Broker,

My prediction for the next ten years, S&P 500 returns of 2%, basically dividend income, very similar to the 1.5% return of the 10 Year Treasury. The advantage of the 10 Year Treasury will be the avoidance of drastic drawdowns. Most investors who profess to be buy and hold, will sell at the bottom, and get back in late. So the returns that you quote will be substantially less. If you disagree please refer to the most recent Dalbar study on actual investor returns. So STFU yourself.

Igy

But this is how bad it gets, example Joshua Brown, in one episode he contradicts himself multiple times, last week when asked if the Twitter valuation makes sense and do valuations matter anymore, now at $70 dollars a share suddenly it does, he states if that is the valuation then that is the correct valuation and further that valuations really don’t matter anymore. Are you following that, valuations don’t matter but Twitter’s valuation is correct, if investors are willing to pay 74 dollars a share then it it is worth 74 dollars a share. But when Twitter was 40 dollars a share Josh Brown was telling you it was overvalued and it was going to the low 30’s. Further he says a valuation only matters when a company gets good news and the stock goes down, are you still following, probably not because clearly Josh Brown is full of garbage.

But it gets better, a few minutes later he says his short share pick is Facebook FB, why, because the company is overvalued, suddenly valuations matter once again as Joshua Brown uses CNBC to profit and hope that investors dump Facebook while he shorts it. Funny that FB was about 54 when he stated this and now it is close to 58 but that does not matter, what matters is that these financial and stock experts that you see on CNBC and Fox Business are full of crap. Never listen to them.

Earnie,

The strategy that the non-GAAP numbers provide any meaningful use when done to manipulate performance. Furthermore, Wall Street conveniently lowers the hurdle rate. Let's look at how the estimated numbers for Q2 2016 non-GAAP EPS have continued to be lowered since March of last year.

3/31/2015 $33.27

6/302015 $32.27

9/30/2015 $31.82

12/31/2015 $31.02

3/31/2016 $29.05

630/2016 $28.32

Current $26.28

Earnie that is a drop of $6.99 in EPS, or 21%. So even using the non-GAAP EPS, things don't look so good.

Igy

But that is not my strategy and I'm not sure why you would jump to that conclusion.

OK, fair enough.

Igy

Ghost of Igloi wrote:

... what matters is that these financial and stock experts that you see on CNBC and Fox Business are full of crap. Never listen to them.

Well done, Figy, but once again you give yourself away. Given the real Igy's uncontrollable man love for guys like David Stockman and John Hussman, he would never say such a thing. 7/10

Sally V's lover....

http://www.mikefrancesa.com/wordpress/?p=3344

Oh snap! Figy, you are too much. Plagiarizing investment advice from a sports reporter! Damn. I've got to give you props for some terrific trolling. Based on this new evidence I'll adjust my rating to 9/10.

ya, awesome, ya know ya, totally....

For Sally, Earnie and the Reformed Broker:

http://www.bloomberg.com/news/articles/2016-08-09/soaring-debt-has-u-s-companies-as-vulnerable-to-default-as-2008

Awesome.....

Igy

I'm guessing that you see that article as a negative, but the reality is quite different.

Junk rated firms are at risk -- nothing new there. Those accepting more risk are more vulnerable -- duh. Corporate leverage is high because interest rates are low -- makes sense. M&A to continue revenue growth -- good!

There is no problem here.

Joe,

Here is the problem. Company X buys back stock at $100 a share, and finances the debt with five year notes at 2%. Five year later the stock is at $50 and X has to refinance the debt at 5%.

There's your trouble.

Igy

Joe,

Evidently rating agency S&P disagrees with your analysis:

"S&P Global Ratings sees a clear cause for concern as aggregate debt levels and leverage components that we use to help determine the financial profile of rated companies now exceeds that which we saw just prior to the most recent economic and financial crisis."

Igy

A fantasy of yours is my problem? For every story of doom you make up, I can make 10 success stories. History suggests my scenario is more likely than yours.

And taking a quote from S&P out of context is meaningless. Or are they up to their dirty tricks again? You might as well quote Goldman Sachs. They're all crooks and say whatever is best for their bottom line, truth be damned.

OK Joe, then buy with both hands.

Igy

It's got nothing to do with buying, but more with keeping an open mind and doing some critical thinking. You should give it a try instead of working on your cryptic comebacks.

Joe,

Actually I am the one confronting your conventional thinking with facts. Everything you spout is what you get every day from the financial media. I provide you with specific examples, and your response is the very simpleton view that low interest rates justifies pilling on debt to pay dividends, buyback stock and acquire businesses at record high prices. There is a hundred years of market history pointing out the folly of such activities. But your response is "no problem here," right. We'll see who has the correct view.

Igy

Are you so insecure in your position that you constantly feel the need to fabricate things about the other person's position? You did it earlier today with another poster, you've done it multiple times in the past, and you're doing it again now with me. It is very transparent and strongly suggests that you are arguing from a point of weakness.

There are actual facts that support your position. I don't think it's enough to win a rational argument, but you have a legitimate position. So stop selectively quoting articles, cherry picking data, and making up stuff to allegedly support your points.

And for God's sake, stop the cryptic and condescending comebacks. If you can't offer something of substance, walk away, lick your wounds, and live to fight another day.