Blodget on Market History

John Mauldin

 
I remember the first time I walked into Henry Blodget’s new startup, Business Insider, back in 2009. Twelve fresh-faced kids were crammed into a room about the size of my bedroom, pounding away on laptops, creating a new destination website. He took me over to a corner; we sat down in front of a few cameras; and he began shooting question after question at me, later turning the session into a series of interviews.

You walk into his office today and it’s still packed wall-to-wall with fresh-faced kids (the older I get the younger they look), but the offices are much larger, and it seemed to me last time that there had to be at least 150 people in them. But the interviews are still quick-paced, even if they’re now conducted in a special room, with upgraded equipment.

One of the things Business Insider is noted for is compelling headlines. They republish much of the work from Mauldin Economics, but they often come up with more interesting headlines for our content than we do. And they still produce a lot of original material as well.

This week’s Outside the Box is a brief note from Henry himself, with the snappy title “Market history is calling, and it’s saying stock performance will be crappy for another ~10 years.” Beyond the compelling headline is a look back at historical market performance and market cycles, with almost a dozen charts to illustrate Henry’s thesis. It’s a quick read, but investors should pay attention to his main premise: if you’re looking for returns that are north of zero, you’re going to have to be a better-than-average investor.

As an aside, I want to pass along my congratulations to Henry on the rather outsized offer (in the multiple nine figures) he has received from a German publisher for his business. I’ve always admired his determination and focus, and I enjoy watching another businessman prosper.

Now here’s a good one for you. I’m sitting in my dentist’s chair this morning, he’s checking on the laser-evisceration of my gums he performed last week, and he says, “You know, most older people have the opposite problem from you – they have too little in the way of gums, not too much. And that’s where we got the old saying ‘long in the tooth.’” So there.

It’s been a busy though uneventful week here at home; hope you’re easing into autumn, too.

Your no longer short in the tooth analyst,


John Mauldin, Editor
Outside the Box

 

Market history is calling, and it’s saying stock performance will be crappy for another ~10 years


By Henry Blodget
Business Insider, Oct. 4, 2015
 

Stock performance has been weak for the past 15 years.

If history is a guide, it’s likely to stay weak for at least another 10 years.

Why?

Because stocks are still fantastically expensive relative to most of recorded history.

And in the past, when stocks have been this expensive – or close to this expensive – performance over the next decade has been lousy.

Long-term valuation analysis suggests that we are still working through aftermath of the highest level of stock-market valuation in history – the peak of the tech bubble in 2000 – and that this workout process will take at least another 5-10 years.

That’s the bottom line.

The Details


Over the past century, the market has gone through distinct “bull” and “bear” phases. These last, on average, 10-25 years each. Specifically:

  • A 29-year bull market from 1900-1929
     
  • A ~20-year bear market from 1930-1950
     
  • A ~15-year bull market from 1951-1966
     
  • A ~15 year bear market from 1967-1982
     
  • An ~18 year bull market from 1982-2000
     
  • A ~? year bear market from 2000-?

Some people think the latest “bear” phase ended in 2009. They also think we’re in the middle of a glorious “bull” phase again.

But based on valuation – stock prices relative to the fundamentals of the underlying companies – we unfortunately appear to still be in the middle of the latest “bear” phase.

Don’t believe it?

Let’s go to the charts.

Last year, the excellent investor and commentator Barry Ritholtz published a long-term stock market chart that shows the “bull” and “bear” phase phenomenon:


The bulls look at this chart and point out that we moved sideways for 10 years after 2000, say that was plenty, and predict that stocks will now forge ever higher for years as the new bull market continues:


Bears, meanwhile, look at the chart and see a temporary, Fed-fueled spike in the middle of a long bear market that they believe will see at least one more big downtrend and correction (likely lasting years) before it is done:


So who’s more likely to be right?

Well, let’s add more information to that chart. 

Throughout history, stock prices have loosely gravitated around the “fundamentals” of the underlying companies – namely, earnings. Specifically, stocks have traded in a range of 5X cyclically adjusted earnings (at bear-market lows) to 44X earnings (at the peak of the biggest bull market in history – the one that ended in 2000). The “average” P/E ratio over this period, meanwhile, has been about 15X.

When you add P/E ratios to the charts above, you quickly notice a pattern:

Sustained bear-market periods have begun when the P/E is very high (~25X+).

Sustained bull-market periods, meanwhile, have begun when the P/E is very low (5X to 9X).


In other words, sustained bull markets begin when investors are so disgusted by stocks – and so pessimistic about the future of stocks – that they’ll pay only 5X to 9X earnings for them. And sustained bear markets begin when investors are so giddy with excitement about stocks and the prospects for stocks that they’ll happily pay 25X earnings or more for them.

So how about the recent “bear” period?

Well, it began as history suggested it would: With a stratospheric P/E ratio (44X) and widespread investor jubilation, and excitement. Back in 2000, investors were wild about stocks and the prospects for stocks, and most people (including, sadly, me) believed that stocks would keep going up.

Then, after a crash (2000 to 2002) and one failed recovery (2003 to 2007), stocks hit a crushing low in 2009 that was down more than 50% from the 2000 peak. At that moment, March 2009, many investors were scared to death of owning stocks, and many analysts expected the market to drop much farther.
 
At that moment, the PE ratio also hit 13X. This was a below-average P/E, finally, but it was also considerably higher than the P/E ratios that had marked previous bear-market bottoms.

Then, for six years, stocks rocketed straight upward, until the market had nearly tripled off the 2009 low. Over this period, investors overcame their fear and gradually fell in love with stocks again.

As recently as six months ago, with the market setting new highs, investors were once again very excited about the future of stock prices. So excited, in fact, that they were willing to pay 26X earnings for them. But now the market is wobbling again.

And here are two more charts for you. They’re from portfolio manager John Hussman of the Hussman Funds.

First, Hussman’s analysis suggests that, on average, it takes the market about 12 years to work off extreme over- or undervaluation and get back to “normal.” In other words, it takes valuations about a dozen years to mean-revert.


Further, Hussman’s analysis suggests that, once we have gotten back to “normal,” valuations usually continue “reverting” for many more years, until they hit the opposite extreme. This process takes, on average, about another decade.

Putting the two together, Hussman has found that the market generally takes about ~20 years to “mean-invert” – to go from one valuation extreme to the other. That’s exactly the pattern we see in the long-term charts above.
 


So, what does all this tell us?

Nothing conclusive, unfortunately. No one knows the future.

But let’s make a couple of observations about our current situation:

  • First, even after the recent market wobble, stocks are still more expensive than they have been at any time in the past century with the exception of 2000 and 1929. And we know what happened after those years. For the “new bull market” to continue indefinitely, the market’s P/E would have to continue to keep rising toward the P/E at the historic 2000 market peak – which, it is worth noting, was followed by a devastating crash.
     
  • Second, if we are indeed in the middle of a new bull market, the bear-market “workout period” following the 2000 peak would have been one of the shortest in history. And we were starting from the highest valuation in history, by a mile.

Unless something has changed that makes the past 115 years of market history irrelevant (always possible, but probably not likely), it would not be surprising if the biggest bull-market peak in market history was followed by one of the biggest bear-market workouts in history – one that, perhaps, might last as long or longer than any major workout period to date.

As a long-term investor, I thankfully don’t have to make short-term market calls. I have also learned (the hard and expensive way) to limit my stock exposure enough so as not to get freaked out by crashes. I own stocks, so if we’re in the middle of a new bull market, great. I also own cash and bonds, so if we’re still in the middle of a long bear market, fine. If stocks tank from here, I’ll trade some of that cash for stocks and hope that the world doesn’t end.

But my guess, for what it’s worth, is that we’re still in the middle of a long bear market. If you made me draw what I think is the most likely future for stock prices, therefore, I would draw it like this:
 


domingo, octubre 11, 2015

COMPUTER LED HFT´S DOMINATE RALLY / DAVE´S DAILY

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Computer Led HFTs Dominate Rally
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The market’s overall rally has been attributed to a massive short squeeze primarily led by HFTs. This is easy to believe, still it makes you want to shut them down. If the rally is real, the supporting news will follow the trend. If there is none then we’ll be heading south again methinks.

According to a note from Goldman Sachs the previous week, they state a rally could happen if two conditions were met: ongoing share buybacks financed by cheap interest rates and earnings saw improvement. The latter is represented below with no comment.

10-9-2015 6-32-49 PM EPS

If earnings should improve you wouldn’t know it from Alcoa’s S&P 500 lead-off earning’s report. The stock was even weaker than three previous earnings downgrades. The stock fell nearly 6%.

Friday, two Fed Governors took the stage to assert some weird ideas. Fed Governor Evans tried to demonstrate via a strange dot chart that the economy was strong, without explaining the “dots” adequately if at all. And then he contradicted himself by saying the Fed should keep rates low until the end of 2016.

10-9-2015 6-33-10 PM Federal funds

Then Fed Governor Lockhart gave us the quote of the day: “…understands why people may get a little skeptical of the Fed”.

A late burst of buying Friday allowed stock indexes to rally once again. This will push overbought conditions to new heights. The big winner on the day were long beaten down commodity markets.

Market sectors moving higher included: Transports (IYT), Tech (QQQ), Biotech (XBI), Brazil (EWZ), Hedged Japan (DXJ), South Korea (EWY), Germany (EWG), Spain (EWP), Eurozone (EZU), Australia (EWA), Malaysia (EWM), Mexico (EWW), Canada (EWC), Indonesia (IDX), Singapore (EWS), Vietnam (VNM), Thailand (THD), Gold (GLD), Gold Miners (GDX), Silver (SLV), Base Metals (DBB), Euro (FXE), Swiss Franc (FXF) and more.

Market sectors moving lower included: Dollar (UUP), Energy (XLE), Oil & Gas Exploration (XOP), Financials (XLF), Banks (KBE), Regional Banks (KRE), Utilities (XLU), Semiconductors (SMH), Crude Oil (USO) and others.

The top ETF daily market movers by percentage change in volume whether rising or falling is available daily.
Volume was lightest on the week thus far and breadth per the WSJ was modestly positive.

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10-9-2015 6-33-44 PM Diary

9-18-2015 5-51-09 PM ytd rev


Charts of the Day
  • SPY 5 MINUTE

    SPY 5 MINUTE


  • SPX DAILY

    SPX DAILY

  • SPX DAILY

    SPX DAILY

  • SPX WEEKLY

    SPX WEEKLY

  • INDU DAILY

    INDU DAILY

  • INDU WEEKLY

    INDU WEEKLY

  • RUT WEEKLY

    RUT WEEKLY

  • XLB WEEKLY

    XLB WEEKLY

  • XLE WEEKLY

    XLE WEEKLY

  • XLF WEEKLY

    XLF WEEKLY

  • XLI WEEKLY

    XLI WEEKLY

  • XLP WEEKLY

    XLP WEEKLY

  • XLY WEEKLY

    XLY WEEKLY

  • XRT WEEKLY

    XRT WEEKLY

  • XLV WEEKLY

    XLV WEEKLY

  • IBB WEEKLY

    IBB WEEKLY

  • ITB WEEKLY

    ITB WEEKLY

  • IYR WEEKLY

    IYR WEEKLY

  • IYT WEEKLY

    IYT WEEKLY

  • XLU WEEKLY

    XLU WEEKLY



  • HYG WEEKLY

    HYG WEEKLY

  • TLT WEEKLY

    TLT WEEKLY

  • UUP WEEKLY

    UUP WEEKLY

  • FXE WEEKLY

    FXE WEEKLY

  • FXY MONTHLY

    FXY MONTHLY

  • FXF WEEKLY

    FXF WEEKLY

  • GLD MONTHLY

    GLD MONTHLY

  • GDX MONTHLY

    GDX MONTHLY

  • SLV MONTHLY

    SLV MONTHLY

  • DBB MONTHLY

    DBB MONTHLY

  • PPLT WEEKLY

    PPLT WEEKLY

  • USO MONTHLY

    USO MONTHLY

  • DBC MONTHLY

    DBC MONTHLY

  • EFA WEEKLY

    EFA WEEKLY

  • IEV WEEKLY

    IEV WEEKLY

  • EEM WEEKLY

    EEM WEEKLY

  • EWU WEEKLY

    EWU WEEKLY

  • EWG WEEKLY

    EWG WEEKLY

  • EWS WEEKLY

    EWS WEEKLY

  • IDX WEEKLY

    IDX WEEKLY

  • EWZ WEEKLY

    EWZ WEEKLY

  • EPI WEEKLY

    EPI WEEKLY

  • FXI WEEKLY

    FXI WEEKLY

  • NYMO DAILY

    NYMO DAILY
    The NYMO is a market breadth indicator that is based on the difference between the number of advancing and declining issues on the NYSE. When readings are +60/-60 markets are extended short-term.



  • NYSI WEEKLY

    NYSI WEEKLY
    The McClellan Summation Index is a long-term version of the McClellan Oscillator. It is a market breadth indicator, and interpretation is similar to that of the McClellan Oscillator, except that it is more suited to major trends. I believe readings of +1000/-1000 reveal markets as much extended.

  • VIX WEEKLY

    VIX WEEKLY
    The VIX is a widely used measure of market risk and is often referred to as the "investor fear gauge". Our own interpretation is highlighted in the chart above. The VIX measures the level of put option activity over a 30-day period. Greater buying of put options (protection) causes the index to rise.


 






































What a week! And, it’s hard to know if it’s all just a short-squeeze or something more durable. Really, and for the most part, HFTs are behind the short-squeeze rally. They can easily go in the other direction in a millisecond.

With the last push on the day, algos gave us another reason to know how sharply overbought conditions are.
Let’s see what ha
ppens. 

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