Down goes the Dow

agreed that expectations have come down...but I believe they always come down. that is, every year 'analysts' think too-optimistic thoughts, and as the year goes on they bring down their estimates. I saw a graph showing this, but I can't find it now.

yet despite this phenomenon...the market rises. Seems to me the market knows early year predictions of earnings are sales pitches and doesn't pay much attention to them.

I mean look at January 2016...despite those overly optimistic earnings predictions, the market tanked sharply. And then in the second half of the year, as earnings expectations have fallen...the market has risen.

the problem of course is that even if you avoided the subprime blowup....you've already given back half of that by missing a 20-25% rally.

the problem with getting out is that you have be right twice - getting out and then getting back in. You were only right once, and that has been hurting your returns.

The key thing about your observation is your use of the term "near future".

It's definitely a shaky time to "invest", but maybe a good time to "speculate". Remember that old adage that you should only spend in the markets the amount of money that you can afford to lose? I think that's especially true at the moment. My GUESS is that we will see some profit-taking, but that the US will continue to be seen as a haven of stability, which is getting harder to find around the world.

Of course I'm just talking about market proxies in general, not specific stocks. If you do your work (as you seem to do), you will likely be able to find some stocks that show promise in helping you meet your investment goals, although it's becoming increasingly difficult to ascertain what is what.

I know a guy in Basel who works for a bank, and whose job it is to travel to potential investment targets and physically determine what is what--and these are publicly-traded companies. The bank of course does both equities and bonds, so it's great that they actually check things out. Unlike them, small guys just don't have the kind of access needed to make a very informed decision.

I have beaten the equity markets in every single year I have been out, with the possible exception of this one, once all is said and done--and even at that I will be essentially even.

Unlike most, I have options, with which I have done very well because they are true investments, rather than speculations.

I chafe at missing this rally not because I haven't made good money throughout the year, but because there were easy pickings. I missed it because I was focused on something else--which did very well, also...but I could have done even more had I hit this rally.

I'm not by nature a greedy person, at all--but I could have made some easy gravy because I had some money on the sidelines that I could have used.

BTW if I had bought it, I would now sell, with the markets hovering at a relatively consistent level for a while now.

So while my return potential is lowered because I missed the rally, they have been lowered from "insane" to "very good"--and I will take "very good", with the degree of control and certainty that I have, any day.

But yes, I still chafe a bit. One thing I do NOT chafe about is not having been in the bond market. BTW the bond market scares the crap out of me. Just think about the people upon whom you are relying--scam-artists who work at credit-rating agencies and underwriters. I have LONG felt that the rates offered on bonds relative to their risk profiles has been ridiculously low, it's like the whole spectrum has been shifted in one direction.

About not having been in bonds, or even in a so-called "balanced portfolio", I am very glad.

agip,

"agreed that expectations have come down...but I believe they always come down. that is, every year 'analysts' think too-optimistic thoughts, and as the year goes on they bring down their estimates. I saw a graph showing this, but I can't find it now.

yet despite this phenomenon...the market rises. Seems to me the market knows early year predictions of earnings are sales pitches and doesn't pay much attention to them.

I mean look at January 2016...despite those overly optimistic earnings predictions, the market tanked sharply. And then in the second half of the year, as earnings expectations have fallen...the market has risen."

agip,

It is far worse that it has ever been. For one using the highly manipulated non-GAAP, even the SEC is now getting involved. Secondly, to miss the number by 15%, give me a break. The non-GAAP to GAAP difference is even greater. The difference between the 20016 non-GAAP EPS estimate on 9/30/2015 and the actual LTM GAAP EPS was a whopping 31.13%. It is done for one reason alone, to justify paying more for stocks.

Igy

Maserati wrote:

About not having been in bonds, or even in a so-called "balanced portfolio", I am very glad.

bonds have had a decent year - the vanguard total bond market index is up 1.95% this year. Matching inflation is a pretty standard year for bonds. Not great, but fine. But sure they were up more before the election.

Balanced portfolios have done quite well this year - I think we all would all be happy with their return. Vanguard balanced index is up 9.14% year to date.

so hey we disagree again.

agip and Maserati,

"the problem of course is that even if you avoided the subprime blowup....you've already given back half of that by missing a 20-25% rally."

Using even a modest reversion multiple of 15 and the current non-recessionary EPS of $90 gets you to S&P 500 1,350 (15 x $90 = 1,350). The S&P 500 first crossed that number in April of 1999. I fully expect us to at least touch that level by completion of this cycle, and see 1,100 as a more likely target. This should not be shocking at all. It is merely representative of the same boom-bust cycle of 2000-2002 and 2007-2009.

I would like to know why anyone thinks this cycle would be substantially different?

Igy

Ghost of Igloi wrote:

agip and Maserati,

"the problem of course is that even if you avoided the subprime blowup....you've already given back half of that by missing a 20-25% rally."

Using even a modest reversion multiple of 15 and the current non-recessionary EPS of $90 gets you to S&P 500 1,350 (15 x $90 = 1,350). The S&P 500 first crossed that number in April of 1999. I fully expect us to at least touch that level by completion of this cycle, and see 1,100 as a more likely target. This should not be shocking at all. It is merely representative of the same boom-bust cycle of 2000-2002 and 2007-2009.

I would like to know why anyone thinks this cycle would be substantially different?

Igy

valuation is not a timing mechanism and really it isn't even a mechanism.

Stocks have been overpriced since the reagan administration by some measures. Valuation is one tool of many to evaluate opportunity in the markets.

that, and the fact that profits are surging right now

Ghost of Igloi wrote:

This should not be shocking at all. It is merely representative of the same boom-bust cycle of 2000-2002 and 2007-2009.

I would like to know why anyone thinks this cycle would be substantially different?

Igy

There will certainly be a "bust", but perhaps not to the same relative degree as those other two. Fundamentals suggest that the pullback may be more muted than those others.

IDK about actual profits soaring, but I do agree with agip that they are one measure by which to judge the opportunity afforded by markets.

Well said agip.

Igy, I have given my reasons why I think this cycle might be different.

Pretty ballsy of you go up the ante and have that 1,100 target! If only...

Look at housing, Igy, and compare house prices to median income in any particular region...by that measure, they are WAY up, historically. Housing is WAY overpriced, but wait...we already had the housing correction 7-8 years ago, right? So these are the rationalized levels?

Housing is now famously considered a "store of wealth". The housing market doesn't respond to just interest rates, it also responds to broader social phenomena, the same ones I suggest now apply to US equities.

In housing, there are still some deals to be found if you look carefully, but in general housing is overpriced by historical measures similar to the "fundamental" measures you use to measure the equity market.

Asset inflation is what it has all been about, and you have to ask yourself why, and whether those reasons are likely to change or not, and who has the power to either change or maintain the system.

Invest O'Pedia wrote:

Ghost of Igloi wrote:

This should not be shocking at all. It is merely representative of the same boom-bust cycle of 2000-2002 and 2007-2009.

I would like to know why anyone thinks this cycle would be substantially different?

Igy

There will certainly be a "bust", but perhaps not to the same relative degree as those other two. Fundamentals suggest that the pullback may be more muted than those others.

I agree. It will be a much better-managed "bust".

"profits are surging right now"

Apples to Apples Comparison:

3Q 2014 S&P 500 Close 1,972.29

3Q 2016 S&P 500 Close 2,168.27

3Q 2014 (9/30/2014) non-GAAP EPS $29.60

3Q 2016 (9/30/2016) non-GAAP EPS $28.73

3Q 2014 (9/30/2014) GAAP EPS $27.47

3Q 2016 (9/30/2016) GAAP EPS $25.40

3Q 2014 (9/30/2014) non-GAAP PE 17.22

3Q 2016 (9/30/2016) non-GAAP PE 22.29

3Q 2014 (9/30/2014) GAAP PE 18.61

3Q 2016 (9/30/2016) GAAP PE 25.39

Correction market surging...

Igy

Invest,

"Fundamentals suggest that the pullback may be more muted than those others."

Please explain what fundamentals you are talking about?

Igy

Ghost of Igloi wrote:

"profits are surging right now"

Apples to Apples Comparison:

3Q 2014 S&P 500 Close 1,972.29

3Q 2016 S&P 500 Close 2,168.27

3Q 2014 (9/30/2014) non-GAAP EPS $29.60

3Q 2016 (9/30/2016) non-GAAP EPS $28.73

3Q 2014 (9/30/2014) GAAP EPS $27.47

3Q 2016 (9/30/2016) GAAP EPS $25.40

3Q 2014 (9/30/2014) non-GAAP PE 17.22

3Q 2016 (9/30/2016) non-GAAP PE 22.29

3Q 2014 (9/30/2014) GAAP PE 18.61

3Q 2016 (9/30/2016) GAAP PE 25.39

Correction market surging...

Igy

Earnings and profits are not the same thing.

Maserati,

"It will be a much better-managed "bust"."

Well hummmm, perhaps wishful thinking:

Fed Balance Sheet 2007: $900 Billion

Fed Balance Sheet 2016: $4.4 Trillion

Fed Funds Rate 2007: 5%

Fed Funds Rate 2016: 0.50-0.75%

Igy

Ghost of Igloi wrote:

"profits are surging right now"

Apples to Apples Comparison:

3Q 2014 S&P 500 Close 1,972.29

3Q 2016 S&P 500 Close 2,168.27

3Q 2014 (9/30/2014) non-GAAP EPS $29.60

3Q 2016 (9/30/2016) non-GAAP EPS $28.73

3Q 2014 (9/30/2014) GAAP EPS $27.47

3Q 2016 (9/30/2016) GAAP EPS $25.40

3Q 2014 (9/30/2014) non-GAAP PE 17.22

3Q 2016 (9/30/2016) non-GAAP PE 22.29

3Q 2014 (9/30/2014) GAAP PE 18.61

3Q 2016 (9/30/2016) GAAP PE 25.39

Correction market surging...

Igy

there are several ways to measure profits. year over year EPS is just one

today the gov't released a number on year over year corporate earnings showing a 4.2% rise.

those same data show an approximate 16% rise in profits from the nadir in Q42015 to Q32016. I'm going to call that a surge.

but sure there are different ways to measure profits.

a rare good call, sort of

9/29 Carl Icahn warned against high yield bonds

they fell around 4% to their bottom in November.

So that was good. really good call.

But then they rallied back to today, where they were in September, so unless you were a sharp market timer, you did not profit from the call.

That's using HYG as a proxy, and not including dividends, which we probably should but yahoo doesn't have an adjusted NAV feature anymore (I think) so I can't count divs.

Ghost of Igloi wrote:

Maserati,

"It will be a much better-managed "bust"."

Well hummmm, perhaps wishful thinking:

Fed Balance Sheet 2007: $900 Billion

Fed Balance Sheet 2016: $4.4 Trillion

Fed Funds Rate 2007: 5%

Fed Funds Rate 2016: 0.50-0.75%

Igy

The Fed is not the market.