US Stock Markets Continue To Reach Record Highs- Thanks Obama!

[OriZ 3,157]

Well the reason I said 10-15% is because that is what happened last time and you thought it was close enough to the levels you are looking for to go back in(which makes perfect sense as it's not always good to wait for the absolute bottom) so I was just going based on that but like you said you broke your own rules and I'm guessing you don't plan to do that next time. I still think it will even be more than 30% however.

Anyways good deal on your return and I hope you do just as well next year.

[Expat1 971]

Well the reason I said 10-15% is because that is what happened last time and you thought it was close enough to the levels you are looking for to go back in(which makes perfect sense as it's not always good to wait for the absolute bottom) so I was just going based on that but like you said you broke your own rules and I'm guessing you don't plan to do that next time. I still think it will even be more than 30% however.

Anyways good deal on your return and I hope you do just as well next year.

When it rolls off the edge It always overcorrects.

I believe for instance market cap to gdp was around 65% after the big correction in 2009. Based on today's numbers, that's a 50% hit.

I believe that 50% hit was not because of market value, I believe it was because liquidity evaporated so quickly there was nothing to hold up the market floor. I think there is a LOT more caution in the market today then there was at that time and I believe the floor is closer to fairly valued than it was when there was not liquidity to scoop up what was a ridiculously cheap market.

That's just me. You are right about one thing - absent other factors I'm not breaking my rules again. That could have turned out badly.

[OriZ 3,157]

I'm going to quote just a part of what I wrote earlier in this thread about valuation measures:

Shiller P/E: -84.7% correlation with actual subsequent 12-year S&P 500 total returns

Tobin’s Q: -84.6% correlation
Nonfinancial market capitalization/GDP: -87.6%
Margin-adjusted forward operating P/E: -90.7%
Margin-adjusted CAPE: -90.7%
Nonfinancial market capitalization/GVA: -91.9%

Tobin’s Q and the Shiller P/E are currently the least extreme relative to their pre bubble historical norms(75.5% and 99.6% overvalued, respectively), but they are also not as reliable as the other measures. Market capitalization to GDP(which Warren Buffett once cited in a 2001 Fortune interview as “probably the best single measure of where valuations stand at any given moment”) is the most extreme among these, at more than 145% above its pre bubble norm, implying a 59% market drop simply to restore that norm — not even to move to historical undervaluation.

As far as the most reliable measure, MarketCap/GVA is about 128% above its pre bubble norm, and implies negative 10-year S&P 500 nominal total returns.

So basically here's what I'm expecting to happen: a 40-60% drop from around current levels(meaning even if we go higher from here, the drop will just be that much bigger), followed by a period of a few years of another rally only to bring the market back to those same highs it will fall from. This all should play out over the next decade. Of course, the sitting president at the time of the rally will be a very lucky man cause he will get the credit for it just as some credit Obama for it now. It's just how cycles play out, that's ALL it is.

[OriZ 3,157]

BTW, Market Cap to GDP historically has had a range of roughly 80% at the TOP, and close to 30% at the bottom. The mean has been 69.7%. During the dot com bubble it burst through that ceiling all the way up to more than 3 standard deviations above(153.6%). It thereafter bottomed right at the mean 69% in 2002. The 2007 top came with 112% and the bottom with 62,2%, definitely not historically significantly cheap or undervalued(was 33% in the 50s and 32% in the 80s). Today we are right around 2SD.

All of the above and the other posts talking about a 50% decline just to restore the norm also don't take into account significant deterioration in the economic and financial climate which WOULD sure follow. We are just talking overvaluation compared with how things are now. In a time of crisis/recession we can expect things to look even more dire,

Edited December 5, 2015 by OriZ

[Ban Hammer 12,848]

Today we are right around 2SD.

what is 2SD?

[OriZ 3,157]

Standard Deviations.

Think of it this way. If the market crashsed by 50% tomorrow morning(forget the fact it's closed Sundays lol), assuming no further economic deterioration, the ratio would still only be about 20% lower(cap/gdp) than at ANY previous top except for 2000 and 2007, and 30% higher than the ratio around previous important bottoms.

[The Nature Boy 7,659]

BTW, Market Cap to GDP historically has had a range of roughly 80% at the TOP, and close to 30% at the bottom. The mean has been 69.7%. During the dot com bubble it burst through that ceiling all the way up to more than 3 standard deviations above(153.6%). It thereafter bottomed right at the mean 69% in 2002. The 2007 top came with 112% and the bottom with 62,2%, definitely not historically significantly cheap or undervalued(was 33% in the 50s and 32% in the 80s). Today we are right around 2SD.

All of the above and the other posts talking about a 50% decline just to restore the norm also don't take into account significant deterioration in the economic and financial climate which WOULD sure follow. We are just talking overvaluation compared with how things are now. In a time of crisis/recession we can expect things to look even more dire,

What you mind telling us where to put our money in English please

[OriZ 3,157]

Not a whole lotta places. I've said dollar for years now and I still believe it's not done but obviously halfway through the risk is higher so I can't even really say that now.

Bonds. Nope not that either, too late now.

Cash. That's all there is to it.

I personally have nothing invested in the market, all I do is trade options and futures. For those who don't trade(which is most) all you can really do safely right now is sit on your hands.

Edited December 6, 2015 by OriZ

[Expat1 971]

BTW, Market Cap to GDP historically has had a range of roughly 80% at the TOP, and close to 30% at the bottom. The mean has been 69.7%. During the dot com bubble it burst through that ceiling all the way up to more than 3 standard deviations above(153.6%). It thereafter bottomed right at the mean 69% in 2002. The 2007 top came with 112% and the bottom with 62,2%, definitely not historically significantly cheap or undervalued(was 33% in the 50s and 32% in the 80s). Today we are right around 2SD.

All of the above and the other posts talking about a 50% decline just to restore the norm also don't take into account significant deterioration in the economic and financial climate which WOULD sure follow. We are just talking overvaluation compared with how things are now. In a time of crisis/recession we can expect things to look even more dire,

That is very true and I agree with what you are saying. What I do not see in the historical analysis is correction for interest rates, which tends to drive the "fair value" or "floor" upwards.

If you look back, the "stable" or "fair-valued" market climate is generally set at a premium relative to bond yields, and moves with interest rates. What is fair valued to an investor like me today corresponding approximately to a 3.5-4% minimum annual dividend yield will not be fair valued as interest rates increase. We are in a different investment environment than we have historically been as interest rates are being held so low it pushes investors into accepting higher PE/lower yield.

The biggest mistake we can make is to assume that these valuations might become the new norm or new metric to define a "bull market". They're not.

Where to put money now? This is where mine is: The bank, money market, and cash reserves, depending on the choices one has. I even pulled the toe out of the EM water. You are right. More pain to come. I think most of it is absorbed, leaving another 30% drop in their markets.

[OriZ 3,157]

That is very true and I agree with what you are saying. What I do not see in the historical analysis is correction for interest rates, which tends to drive the "fair value" or "floor" upwards.

If you look back, the "stable" or "fair-valued" market climate is generally set at a premium relative to bond yields, and moves with interest rates. What is fair valued to an investor like me today corresponding approximately to a 3.5-4% minimum annual dividend yield will not be fair valued as interest rates increase. We are in a different investment environment than we have historically been as interest rates are being held so low it pushes investors into accepting higher PE/lower yield.

The biggest mistake we can make is to assume that these valuations might become the new norm or new metric to define a "bull market". They're not.

Every time throughout history investors have said "this time it is different", or it's the "new economy". We heard that in 1929 and in the 70's and in 2000 and 2007 and in other instances. That never turned out well for them. So you are right, accepting that a decade and a half of overvaluation would become the norm after centuries where it was not would be a huge mistake.

As far as interest rates go - Investors may wish to believe that low interest rates somehow may limit their losses. But the fact is that for instance Japanese stocks plunged by 62% in 2000-2003 and 61% in 2007-2009 despite interest rates that never exceeded half of one percent. There are certainly structural differences between Japan and the U.S., but those differences do not extend to eliminating the iron laws of investing - that every security is a claim on some stream of expected future cash flows, and the higher the price one pays for those cash flows, the weaker the long term rate of return. Outside of the disinflationary period of 1980-98, the historical correlation between interest rates and equity valuations has actually been zero. Suppressed interest rates can certainly encourage yield-seeking speculation, and drive equities and other securities to extreme valuations that offer similarly dismal prospects for future returns. But when investors turn risk-averse, as they did in 2000-2002 and 2007-2009, those dismal prospects are realized, and even persistent and aggressive Fed easing has not prevented U.S. equities from collapsing.

Now what happens if interest rates remain so low in the future that investors maintain stocks at extremely high valuation levels, with no tendency toward mean-reversion at all. Well what one has to remember is that there is a 90% correlation between interest rates at any given date (for example the 10-year Treasury bond yield) and nominal economic growth over the preceding decade. So if you’re assuming that interest rates will be low a decade from now, you’re also effectively assuming that nominal economic growth will be dismal. Assuming that interest rates will be strikingly low in the future is essentially equivalent to assuming nominal growth will be strikingly low. Because those two effects tend to offset each other, the relationship between valuations and subsequent 10-12 year returns has typically been unaffected.

The reason I do not believe that the market has much further to go despite the fact that technically overvaluation could eclipse that of 2000, is market internals. When investors are inclined to speculate, they tend to be indiscriminate about it, so strongly speculative markets demonstrate a clear uniformity across a broad range of individual stocks, industries, sectors, and risk sensitive securities, including debt of varying creditworthiness. In contrast, as risk aversion sets in, the first evidence appears as divergence in these market internals. So while overvaluation reflects compressed risk premiums and is reliably associated with poor long term returns, over shorter horizons, investor risk preferences determine whether speculation will continue or collapge, and the condition of market internals acts as the hinge that distinguishes those two outcomes.

Valuations have been obscene for some time. Historically, the thing that has differentiated an overvalued market that remains elevated or continues higher, and an overvalued market that plunges, is the preference of investors toward risk, which is best inferred from the uniformity or divergence of market internals. Those measures have been unfavorable since the third quarter of 2014, which has opened the door to more frequent air-pockets and vertical losses. As with the 2000 and 2007 top formations, market peaks are often a process, and while recoveries on weak internals tend to be followed by fresh losses, the process can extend for months.

The overall economic and financial landscape, then, is one where obscene valuations imply zero or negative S&P 500 total returns for more than a decade, an outcome that is largely baked in the cake regardless of shorter term economic or speculative factors. Presently, market internals remain unfavorable as well. Coming off of recent overvalued, overbought, overbullish extremes, this has historically opened a clear vulnerability of the market to air-pockets, free-falls and crashes.

Part of my work is also technical analysis. There are some who may not believe in it just as there are some who may wish to believe that neither valuations nor market internals matter anymore. My experience has taught my otherwise and technical analysis has helped navigate through the rough waters of this market in the last decade+. Technicals right now are also in horrible condition, so I don't see what's going to push this market higher, but I cannot completely exclude it either at this point.

In the absence of improved market internals or a change in the technical picture, my impression is that the economy is increasingly likely to roll into a recession at the same time the equity market rolls into a rather severe bear market decline. If the Fed raises rates in that environment, the FOMC will likely be blamed for losses that are actually already inevitable as a result of the Fed’s much earlier recklessness. If the Fed fails to raise rates in that environment, after having conditioned investors to expect a rate hike, it will likely be taken as a vote of no-confidence in the economy, and the FOMC will likely be blamed for losses that are actually already inevitable as a result of its much earlier recklessness. Even provided a change in market internals or technicals, ultimately, the only way to avoid near-term losses is to make the prospect of longer-term losses that much worse.

Edited December 6, 2015 by OriZ

[OriZ 3,157]

Standard Deviations.

Think of it this way. If the market crashsed by 50% tomorrow morning(forget the fact it's closed Sundays lol), assuming no further economic deterioration, the ratio would still only be about 20% lower(cap/gdp) than at ANY previous top except for 2000 and 2007, and 30% higher than the ratio around previous important bottoms.

I want to add/clarify something to this. When I write 30% higher than the ratio I meant simply - if it would bottom with a CAP/GDP ratio of 60%, that is 30%more than it used to at 30%.

However, neat math trick here, ultimately, we are talking about twice the level of valuation the market bottomed with during the 20th century. So double, 100% higher. Which would of course require an additional 50% drop FROM those very levels, to make a total decline of 75% from the top. Do I believe it will happen? Well, right now it is not probable, but mean reversion alone as I have already written, and not any sort of undervaluation would require a 40-55% drop.

Edited December 7, 2015 by OriZ

[OriZ 3,157]

That is very true and I agree with what you are saying. What I do not see in the historical analysis is correction for interest rates, which tends to drive the "fair value" or "floor" upwards.

If you look back, the "stable" or "fair-valued" market climate is generally set at a premium relative to bond yields, and moves with interest rates. What is fair valued to an investor like me today corresponding approximately to a 3.5-4% minimum annual dividend yield will not be fair valued as interest rates increase. We are in a different investment environment than we have historically been as interest rates are being held so low it pushes investors into accepting higher PE/lower yield.

The biggest mistake we can make is to assume that these valuations might become the new norm or new metric to define a "bull market". They're not.

Where to put money now? This is where mine is: The bank, money market, and cash reserves, depending on the choices one has. I even pulled the toe out of the EM water. You are right. More pain to come. I think most of it is absorbed, leaving another 30% drop in their markets.

I was also originally going to reply to what you said about the dividend yield and forgot so last piece for me today.

Over centuries of data, the div yield was in a range of roughly 3% to 8.5% historically. At the 1929 top right before black tuesday it was over 3%. It briefly spiked to 14% as the market dropped but went right back into the range, during the 60s it was between 3-4% and at the 1982 bottom it was just over 6%. Before Black Monday(1987) it briefly slipped uner 3% and then spiked to 3.5% due to the drop. But then something happened.

In the 90's bubble investors became to fixated on capital gains(and are to this day) that dividend yields did not matter anymore. They were not what's important because hey, there's a pot of gold in capital gains. So it fell and fell to 1% in the year 2000. The 2000-2002 decline brought it close to 2%, still lower than other historical tops(remember, those normally came at roughly 3%).

The 2007-9 decline brought the yield closer to 3%, but still beneath it. The last few years have caused the dividend yield to retreat back to 2.03% today. So even by this measure, the market is beyond overvalued.

A ranking of the most overvalued extremes in U.S. history, on the basis of several valuation measures(the most reliable over more than a century of data), in order of severity, includes: 2000, 2015, 1929, 2007, 1937, 1907, 1968, and 1972. While the 1969-70 bear market took the S&P 500 down by only 1/3 of its value, each of the other instances was followed by market losses of 50% or more. So considering the fact that 2015 is the second highest valuation extreme on record, such an outcome is not some worst case scenario, but a rather run of the mill expectation.

Just as crucial to remember is, the 2000 market peak was dominated by large cap stocks and the technology sector. The recent Fed induced speculative bubble actually brought the valuation of the median stock beyond the 2000 extreme, marking the most offensive point of overvaluation in history for the broad market. A 50% market loss would not even bring the most historically reliable valuation measures materially below their long-term averages.

BED TIME!

Edited December 7, 2015 by OriZ

[X Factor 1,110]

I am in 97% cash and cash equivalents.

[Teddy B 17,251]

http://www.visajourney.com/forums/topic/519732-obama-drops-oil-prices/?p=7920625

There how's that. Sheesh.

And I was talking about the national average obviously. Not a few places here n there.

For someone who claims to not care about impressing anyone, you sure seem hell bent on , well, impressing people. Please carry on being unimpressive.

ETA: And it seems you have a propensity to hit the report button when you don't like what you see.

Edited December 7, 2015 by Teddy B

[OriZ 3,157]

FYI - you are wrong again, I have NEVER(as in not even one single time) hit the report button since stepping in this forum. N E V E R.

This can be confirmed by all mods I'm sure.

I was actually disappointed that our conversation disappeared.