U.S. companies have been doing reasonably well. Outlooks are generally fairly rosy. So what's the problem? Is the stock market going to tank, or does it have room to run a lot higher?
The bears are starting to get clobbered a bit by the financial press, as of late. So I'm starting to get a little nervous. It seems to me that our whole financial system is based on emotion and social psychology. While his speech is a bit rambling, Minyanville's Todd Harrison seems to sum up the pervading sense of unease associated with the run-up in today's stock market, and he hits on this same theme of social mood and perception driving the stock market, and its possible disconnect from reality.
I found this blog to be interesting; it puts forth a compelling argument that U.S. companies are not as healthy as we might think. My own inclination is to believe that U.S. business is doing better every day...but I've also learned from bitter experience that our emotions alone are usually 100% wrong when it comes to such matters. Could the stock market go up a lot more yet? Certainly, although perhaps in the same way that the housing market kept on going up years after the gloom-and-doom folks sensibly predicted its demise. Or perhaps the bubble will burst next week...or not...and please don't interpret this blog as me recommending any particular plan of action; I'm correct no more often than the next person...and even if I were perfectly logical, the market doesn't have to be. The market is not efficient, it's not always even rational. Never was. It's more like a mob mentality that can turn suddenly and unexpectedly.
Bears point to massive (and potentially suicidal) stock-repurchase programs based on borrowing at artificially low interest rates, record levels of buying on margin (which is a bad sign), anemic earnings-per-share growth (especially when looking at GAAP earnings), and "overly-optimistic" (read "bogus") forward P/E ratios. They point to a fragile global financial system strung together by a web of potentially shaky derivatives, a $4 trillion QE program helping to fuel the stock "bubble" with no exit strategy, flash crashes based on a hair-trigger interpretation of certain words in news articles, international currency "wars" where each country tries to devalue its own currency via QE. They cite unfunded healthcare and other government commitments, disappearance of well-paying manual-labor jobs to China & India (and thus the destruction of the middle class), increasing social unrest and more stockpiling of food and weapons by people not necessarily considered "kooks", a widening political, social, economic, religious and educational chasm between different groups of people in the U.S. (possibly leading to class warfare), potential for the situation in Syria to spin out of control, or another serious provocation by Iran or N Korea, and so on, depending upon how bleak a picture you want to paint. They even paint "good" news in negative terms: "Unemployment last month ticked down to 7.6 percent, but only because more people gave up looking for jobs, and it remains high by historical standards, while job growth for March was quite weak."
On the other hand, bulls point to our rapidly-decreasing dependence on foreign oil (and thus a gradual slowing of foreign debt accumulation), the promise of a boom in natural gas extraction and also in solar and wind energy, a resurgence in the auto industry, successful repayment of emergency government loans by companies like GE, GM, Fannie Mae, etc., a perception that Europe has already hit "bottom", etc.
An article about the crash of '29 illustrates just how difficult it is to identify a bubble ready to pop, or predict a crash. Even with many years of hindsight, we still struggle to identify exactly what it was that caused the '29 crash. For instance, if we use the conventional explanation that it was "speculative buying of over-valued stocks using excessive margin buying", then by that same criteria, we would have to say today's market will crash. Alternatively--and more likely--we might be left with the rather unsatisfying "explanation" that a negative comment here or there tended to grow until it "suddenly" caused fear to replace bullishness...sort of a butterfly effect. In 1929, investment trusts were the rage--it was an easy way for people to diversify and lower their overall risk. Now we have mutual funds, index funds, ETF's, hedge funds, derivatives and so forth--which allow a bubble to become bigger and even more all-encompassing before it finally bursts.
We can easily construct sensible-sounding bull or bear arguments based on an emotional sentiment and wrongly believe that we are being logical and prescient--without even realizing exactly how or why we arrived at our thesis in the first place. Perhaps just another result of the emotional "butterfly effect".
I like to think I'm optimistic in general (why not?), but I've gotten pretty cautious of late. Again, though, don't take any of this as being investment advice. The point I really want to make, though, is to be careful about trusting your emotions--the herd mentality can often do us in, but on the other hand, it might also drive the market further than we ever imagined before it abruptly changes direction.
Speaking of abruptness...when a trend is accelerating at ever-increasing speed in one direction and generating increasing levels of excitement, it always means there will be a very abrupt and severe change in direction. Nature generally does not tolerate singularities. When that trendline starts looking like it's going straight up (even after some filtering for normal random fluctuations), watch out below. But that's emotionally difficult to do.
Perhaps one could simply not participate...some folks believe this is the proper approach. After all--despite all the talk--nothing has yet been done about flash crashes, derivative accumulation, speculative "hedge" funds (a contradiction in terms), punishment of greed and bad judgment by top bank executives, high-frequency trading, moral hazard associated with money flows into banks (and bank executives' pockets), needed bank breakups, etc. Not to mention, a suspension of reality by people who claim to admire Warren Buffet's investment mentality, and yet themselves display a purely speculative, trading mentality. Perhaps serious investment awaits another crash, followed by financial regulation and reforms. And this will likely power the next bubble, which will probably be a repeat of the housing bubble or gold bubble or developing countries bubble or commodities bubble or....wish I knew which bubble. That's where I'd put my pennies, ha. Except, it would probably be difficult to do, emotionally.
Thank goodness it's only money. And thank goodness I don't have more of it, it would probably consume an embarrassing amount of my time if I let it. Any billionaire at the end of his life would gladly trade his life savings for another day like today, and here I am wasting time on my computer instead of enjoying the sunshine! Time to sign off. I don't intend to spend another morning engaging in another narcissistic orgy like this on the stock market again for a long time...it's just a waste of (truly valuable and limited) time.
The bears are starting to get clobbered a bit by the financial press, as of late. So I'm starting to get a little nervous. It seems to me that our whole financial system is based on emotion and social psychology. While his speech is a bit rambling, Minyanville's Todd Harrison seems to sum up the pervading sense of unease associated with the run-up in today's stock market, and he hits on this same theme of social mood and perception driving the stock market, and its possible disconnect from reality.
I found this blog to be interesting; it puts forth a compelling argument that U.S. companies are not as healthy as we might think. My own inclination is to believe that U.S. business is doing better every day...but I've also learned from bitter experience that our emotions alone are usually 100% wrong when it comes to such matters. Could the stock market go up a lot more yet? Certainly, although perhaps in the same way that the housing market kept on going up years after the gloom-and-doom folks sensibly predicted its demise. Or perhaps the bubble will burst next week...or not...and please don't interpret this blog as me recommending any particular plan of action; I'm correct no more often than the next person...and even if I were perfectly logical, the market doesn't have to be. The market is not efficient, it's not always even rational. Never was. It's more like a mob mentality that can turn suddenly and unexpectedly.
Bears point to massive (and potentially suicidal) stock-repurchase programs based on borrowing at artificially low interest rates, record levels of buying on margin (which is a bad sign), anemic earnings-per-share growth (especially when looking at GAAP earnings), and "overly-optimistic" (read "bogus") forward P/E ratios. They point to a fragile global financial system strung together by a web of potentially shaky derivatives, a $4 trillion QE program helping to fuel the stock "bubble" with no exit strategy, flash crashes based on a hair-trigger interpretation of certain words in news articles, international currency "wars" where each country tries to devalue its own currency via QE. They cite unfunded healthcare and other government commitments, disappearance of well-paying manual-labor jobs to China & India (and thus the destruction of the middle class), increasing social unrest and more stockpiling of food and weapons by people not necessarily considered "kooks", a widening political, social, economic, religious and educational chasm between different groups of people in the U.S. (possibly leading to class warfare), potential for the situation in Syria to spin out of control, or another serious provocation by Iran or N Korea, and so on, depending upon how bleak a picture you want to paint. They even paint "good" news in negative terms: "Unemployment last month ticked down to 7.6 percent, but only because more people gave up looking for jobs, and it remains high by historical standards, while job growth for March was quite weak."
On the other hand, bulls point to our rapidly-decreasing dependence on foreign oil (and thus a gradual slowing of foreign debt accumulation), the promise of a boom in natural gas extraction and also in solar and wind energy, a resurgence in the auto industry, successful repayment of emergency government loans by companies like GE, GM, Fannie Mae, etc., a perception that Europe has already hit "bottom", etc.
An article about the crash of '29 illustrates just how difficult it is to identify a bubble ready to pop, or predict a crash. Even with many years of hindsight, we still struggle to identify exactly what it was that caused the '29 crash. For instance, if we use the conventional explanation that it was "speculative buying of over-valued stocks using excessive margin buying", then by that same criteria, we would have to say today's market will crash. Alternatively--and more likely--we might be left with the rather unsatisfying "explanation" that a negative comment here or there tended to grow until it "suddenly" caused fear to replace bullishness...sort of a butterfly effect. In 1929, investment trusts were the rage--it was an easy way for people to diversify and lower their overall risk. Now we have mutual funds, index funds, ETF's, hedge funds, derivatives and so forth--which allow a bubble to become bigger and even more all-encompassing before it finally bursts.
We can easily construct sensible-sounding bull or bear arguments based on an emotional sentiment and wrongly believe that we are being logical and prescient--without even realizing exactly how or why we arrived at our thesis in the first place. Perhaps just another result of the emotional "butterfly effect".
I like to think I'm optimistic in general (why not?), but I've gotten pretty cautious of late. Again, though, don't take any of this as being investment advice. The point I really want to make, though, is to be careful about trusting your emotions--the herd mentality can often do us in, but on the other hand, it might also drive the market further than we ever imagined before it abruptly changes direction.
Speaking of abruptness...when a trend is accelerating at ever-increasing speed in one direction and generating increasing levels of excitement, it always means there will be a very abrupt and severe change in direction. Nature generally does not tolerate singularities. When that trendline starts looking like it's going straight up (even after some filtering for normal random fluctuations), watch out below. But that's emotionally difficult to do.
Perhaps one could simply not participate...some folks believe this is the proper approach. After all--despite all the talk--nothing has yet been done about flash crashes, derivative accumulation, speculative "hedge" funds (a contradiction in terms), punishment of greed and bad judgment by top bank executives, high-frequency trading, moral hazard associated with money flows into banks (and bank executives' pockets), needed bank breakups, etc. Not to mention, a suspension of reality by people who claim to admire Warren Buffet's investment mentality, and yet themselves display a purely speculative, trading mentality. Perhaps serious investment awaits another crash, followed by financial regulation and reforms. And this will likely power the next bubble, which will probably be a repeat of the housing bubble or gold bubble or developing countries bubble or commodities bubble or....wish I knew which bubble. That's where I'd put my pennies, ha. Except, it would probably be difficult to do, emotionally.
Thank goodness it's only money. And thank goodness I don't have more of it, it would probably consume an embarrassing amount of my time if I let it. Any billionaire at the end of his life would gladly trade his life savings for another day like today, and here I am wasting time on my computer instead of enjoying the sunshine! Time to sign off. I don't intend to spend another morning engaging in another narcissistic orgy like this on the stock market again for a long time...it's just a waste of (truly valuable and limited) time.
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