{"id":18102,"date":"2013-02-21T07:26:58","date_gmt":"2013-02-21T12:26:58","guid":{"rendered":"http:\/\/www.technologyinvestor.com\/?p=18102"},"modified":"2013-02-21T07:26:58","modified_gmt":"2013-02-21T12:26:58","slug":"is-that-it-for-now-are-we-turning-down-this-is-not-good","status":"publish","type":"post","link":"https:\/\/www.technologyinvestor.com\/?p=18102","title":{"rendered":"Is that it for now? Are we turning down? This is not good."},"content":{"rendered":"
<\/div>\n
<\/div>\n

Tuesday evening:<\/strong> I was rich. I’d just had my biggest day in the market in eons. Maybe ever.
\n Wednesday evening.<\/strong> All my gains of the previous day evaporated. And a little more.<\/p>\n

The market has been up and down faster than a whore’s drawers (tasteless Australian expression):<\/p>\n

\"\"<\/a><\/p>\n

A reader, John Ranks, writes my enthusiasm is misplaced. I should read John Hussman’s latest weekly market comments (dated February 18). Hussman has an entirely different view on where the market is going in the next 18 months.<\/p>\n

Boy, does he ever. I’ve been super-optimistic. Hussman is not. Frankly, I’m freaking. This may be the most important and relevant commentary I’ve ever read on the stockmarket. Let’s start with his first chart:<\/p>\n

\"\"<\/a><\/p>\n

And the words that follow the chart:<\/p>\n

In recent weeks, market conditions have established an overvalued, overbought, overbullish, rising-yield syndrome in a mature bull market; conditions that uniquely marked the peaks of advances in 1929, 1972, 1987, 2000, 2007, and 2011 (see A Reluctant Bear\u2019s Guide to the Universe<\/a>). The instance in 2011 preceded a forgettable market decline near 20%. The other points represent a Who\u2019s Who of tops preceding the most violent market losses in history \u2013 even if the most severe outcomes were not immediate. While the 1987 and 2000 instances coincided with the exact market peaks, the average<\/em> lead time to the market\u2019s ultimate peak was about 4 weeks, and in 2011 took as long as 15 weeks. In every case but 2011, the market peak was within 3% of the point that this syndrome emerged, with the largest gain being a 6% advance observed in the 2011 instance. It is impossible to know whether the recent advance will remain within these prior ranges. The record-high of the S&P 500 was 1565 on October 9, 2007, and that level is only a few percent away. With sentiment already ebullient on nearly every objective measure, a new market high would put a cherry on top, and that should not be ruled out.<\/p>\n

He continues:<\/p>\n

As I noted in Hanging Around, Hoping to Get Lucky<\/a>, extended “secular” moves from extreme undervaluation to extreme overvaluation (or vice-versa) have historically taken about 15-18 years in each direction. At secular<\/em> bear market lows, the Shiller P\/E (S&P 500 divided by the 10-year average of inflation-adjusted earnings) has typically been about 7, as we saw in 1942-1950 and in 1982. By contrast, at secular<\/em> bull market highs, the Shiller P\/E has typically exceeded 24, as we saw in 1929, 1965, and 2000 (the present multiple is 22.7). Doug Short<\/a> \u00a0presented a good historical overview of valuations last week using a variety of metrics. By our own estimates, we expect the nominal total return on the S&P 500 over the coming decade to average about 3.8% annually, though with very broad cyclical fluctuations producing that overall result.<\/p>\n

The near-zero return in the S&P 500 over the past 13 years was the consequence of extraordinary overvaluation in 2000. The secular bull market that ended in 2000 took valuations dramatically above anything seen even at the 1929 peak. We correctly estimated at the time<\/a>that the 10-year total return of the S&P 500 was likely to be negative even with optimistic assumptions about the valuations that might prevail at the end of that 10-year period. The S&P 500 Index lost half its value in the 2000-2002 plunge. The 2007-2009 bear market decline wiped out not only the bull market advance that followed the 2002 low, but the entire total return of the S&P 500, in excess of Treasury bills, all the way back to June 1995. Yet the 2009 decline brought market valuations only briefly below the historical norm, and even that level of valuation is long gone.<\/p>\n

Given the extent and maturity of the recent advance, it\u2019s very odd that analysts are now beginning to toss around the idea that stocks have entered a secular bull<\/em> market. These notions are based not on the level of valuation, nor on the typical 15-18 year duration secular bear markets (if this is a secular bull, it follows that the secular bear lasted only from 2000 to 2009). Instead, it is based on the idea that stocks have gone nowhere for a long time and the recent advance might be enough to break the downtrend we\u2019ve seen in the inflation-adjusted S&P 500 since 2000.<\/p>\n

Unfortunately, secular bull markets do not begin simply because stocks have gone nowhere for a long while or because the market breaches some trendline. They begin at the point that valuations become so depressed – again, about 7 on the Shiller P\/E – that strong and sustained long-term returns are baked in the cake. Similarly, secular bears tend to begin at the point where valuations are so extreme – about 24 or higher on a Shiller P\/E – that weak and ephemeral long-term returns are baked in the cake. The intervening secular moves simply take the market from one extreme to another over the course of something on the order of 15-20 years.<\/p>\n

We can show this with basic arithmetic. Historically, nominal GDP growth, corporate revenues, and even cyclically-adjusted earnings (filtering out short-run variations in profit margins) have grown at about 6% annually over time. Excluding the bubble period since mid-1995, the average historical Shiller P\/E has actually been less than 15. Therefore, it is simple to estimate the 10-year market return by combining three components: 6% growth in fundamentals, reversion in the Shiller P\/E toward 15 over a 10-year period, and the current dividend yield. It\u2019s not an ideal model of 10-year returns, but it\u2019s as simple as one should get, and it still has a correlation of more than 80% with actual subsequent total returns for the S&P 500:<\/p>\n

Shorthand 10-year total return estimate = 1.06 * (15\/ShillerPE)^(1\/10) \u2013 1 + dividend yield(decimal)<\/strong><\/p>\n

For example, at the 1942 market low, the Shiller P\/E was 7.5 and the dividend yield was 8.7%. The shorthand estimate of 10-year nominal returns works out to 1.06*(15\/7.5)^(1\/10)-1+.087 = 22% annually. In fact, the S&P 500 went on to achieve a total return over the following decade of about 23% annually.<\/p>\n

Conversely, at the 1965 valuation peak that is typically used to mark the beginning of the 1965-1982 secular bear market, the Shiller P\/E reached 24, with a dividend yield of 2.9%. The shorthand 10-year return estimate would be 1.06*(15\/24)^(1\/10)+.029 = 4%, which was followed by an actual 10-year total return on the S&P 500 of \u2026 4%.<\/p>\n

Let\u2019s keep this up. At the 1982 secular bear low, the Shiller P\/E was 6.5 and the dividend yield was 6.6%. The shorthand estimate of 10-year returns works out to 22%, which was followed by an actual 10-year total return on the S&P 500 of \u2026 22%. Not every point works out so precisely, but hopefully the relationship between valuations and subsequent returns is clear.<\/p>\n

Now take the 2000 secular bull market peak. The Shiller P\/E reached a stunning 43, with a dividend yield of just 1.1%. The shorthand estimate of 10-year returns would have been -3% at the time, and anybody suggesting a negative return on stocks over the decade ahead would have been mercilessly ridiculed (ah, memories). But that\u2019s exactly what investors experienced.<\/p>\n

The problem today is that the recent half-cycle has taken valuations back to historically rich levels. Presently, the Shiller P\/E is 22.7, with a dividend yield of 2.2%. Do the math. A plausible, and historically reliable estimate of 10-year nominal total returns here works out to only 1.06*(15\/22.7)^(.10)-1+.022 = 3.9% annually, which is roughly the same estimate that we obtain from a much more robust set of fundamental measures and methods.<\/p>\n

Simply put, secular bull markets begin at valuations that are associated with subsequent 10-year market returns near 20% annually. By contrast, secular bear<\/em> markets begin at valuations like we observe at present.<\/strong> It may seem implausible that stocks could have gone this long with near-zero returns, and yet still be at valuations where other secular bear markets have started<\/em> \u2013 but that is the unfortunate result of the extreme valuations that stocks achieved in 2000. It is lunacy to view those extreme valuations as some benchmark that should be recovered before investors need to worry.<\/p>\n

The following chart presents an annotated market history since 1940. Note that there are a few points where the estimate of prospective market returns would have differed from the actual market returns achieved by the S&P 500 over the following decade. These deviations happen to be very informative. When actual<\/em> returns undershoot the estimate from a decade earlier, it is almost always because stocks have moved to significant undervaluation. When actual returns overshoot<\/em> the estimate from a decade earlier, it is almost always because stocks have moved to significant overvaluation. Note the overshoot of actual market returns (versus expected) in the decade since 2002. The reason for this temporary overshoot is clear from the chart at the beginning of this weekly comment: the most recent 10-year period captures a trough-to-peak move: one full cycle plus an unfinished<\/em> bull half-cycle.<\/p>\n

\"\"<\/a><\/p>\n

Valuations are presently rich on every well-tested metric \u2013 even forward operating earnings, provided they are not used na\u00efvely (see Valuing the S&P 500 Using Forward Operating Earnings<\/a>). Secular bull markets don\u2019t begin at valuations associated with 3.8% annual returns for a decade \u2013 secular bears<\/em> do. The near-zero returns of the S&P 500 since 2000 were the predictable outcome of extreme valuations. Valuations have moved from stratospheric in 2000, to about average in 2009, to rich-but-not-stratospheric today. Still, valuations are easily rich enough to produce disappointing returns, with significant volatility, over the coming decade. The next secular bull market will be born of much more attractive valuations and opportunities than are available to investors here.<\/p>\n

Harry’s thoughts:<\/p>\n

1. Hussman argues strictly on the basis of stock over-valuation.\u00a0 That’s one of the causes of the last two busts — dot.com (year 2000) and housing (year 2008). But not the only cause.<\/p>\n

2. If you buy into his logic (and it’s hard not to), you have several choices:<\/p>\n

+ Sell all your stocks and go to cash.<\/p>\n

+ Sell stocks that are egregiously overpriced. For example companies sporting P\/Es way above their growth rate. Momentum stocks have to go.<\/p>\n

+ Keep much of what you have and buy oodles of puts. You can buy puts on individual stocks. You can also buy puts on the market generally, e.g. the S&P 500.<\/p>\n

+ You can do nothing. That would be stupid.<\/p>\n

Whatever you do, you should read and study John Hussman’s entire piece. Click here.<\/strong><\/a><\/p>\n

Kanex USB 3.0 to Gigabit Ethernet Adapter.<\/strong> <\/span><\/p>\n

\"\"<\/a><\/p>\n

You own an ultrabook or MacBook Pro which doesn’t have an Ethernet port. Get this adapter which makes a USB 3.0 connector to create an Ethernet connection. This is handy for conference rooms or hotel rooms that only provide a wired connection to the Internet. The adapter requires a one-dime driver installation. $49 at Amazon here.<\/strong><\/a><\/p>\n

Warning on public WiFi. <\/strong>You really don’t want to use public WiFi — at airports, etc. Your communications are too easy to hack into and your passwords too easy to steal. Better and safer: Get a 4G\/LTE phone with a personal Hot Spot. Don’t download movies. The carriers are charging by data transmitted. One movie could put you over the top for the month.<\/span><\/span><\/p>\n

What do you call a Pope who resigns:<\/strong><\/span><\/p>\n

\"\"<\/a><\/strong><\/span><\/p>\n

Some people have far too much time on their hands.
\n<\/strong><\/span><\/p>\n

\"\"<\/a>
\nHarry Newton, who is not looking forward to today.<\/p>\n


\n<\/strong><\/span><\/p>\n

<\/div>\n","protected":false},"excerpt":{"rendered":"

Tuesday evening: I was rich. I’d just had my biggest day in the market in eons. Maybe ever. Wednesday evening. All my gains of the previous day evaporated. And a little more. The market has been up and down faster than a whore’s drawers (tasteless Australian expression): A reader, John Ranks, writes my enthusiasm is […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-18102","post","type-post","status-publish","format-standard","hentry","category-uncategorized"],"_links":{"self":[{"href":"https:\/\/www.technologyinvestor.com\/index.php?rest_route=\/wp\/v2\/posts\/18102","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.technologyinvestor.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.technologyinvestor.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.technologyinvestor.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.technologyinvestor.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=18102"}],"version-history":[{"count":0,"href":"https:\/\/www.technologyinvestor.com\/index.php?rest_route=\/wp\/v2\/posts\/18102\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.technologyinvestor.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=18102"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.technologyinvestor.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=18102"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.technologyinvestor.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=18102"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}