14 diciembre 2016

demasiados máximos históricos del Dow Jones

Demasiada sobrecompra llega al día que la FED sube tipos de interés. Ya está descontada esta subida desde hace meses, pero el mercado, ¿no ha ido demasiado lejos?
Con el S&P cotizando en 25 veces beneficios…
Seguimos lanzados, en una carrera hacia arriba. ¿No se estará pasando el mercado? Es que no hay dónde invertir, no hay muchas alternativas rentables…
Lo malo es que no acompañan los bonos…, ni la macro, ni el petróleo que también sube… Tampoco las divisas andan finas en su guerra comercial...

Review Dow 20,000

This past week, the market advanced 3% heading towards my target of 2400. The Dow broke above 19700 and is within striking distance of the “psychological” summit of 20,000.
With just 250 points to go, it is extremely likely traders will try and push stocks to that level by Christmas. Woo Hoo!
Caveat Emptor!
Before you go printing up your “Dow 20,000” hats, there is a dark side to the advance.
If you go outside and throw a ball into the air, it will travel until the momentum of the ball is overtaken by gravity. There is, just for a very brief moment, a point where the ball is stationary. However, eventually, gravity wins.
The same is true for market prices. As I discussed on Friday:
“The importance of understanding the nature of reversions is critical for investors. Markets rarely move in one direction for very long, notwithstanding overall trends, without a correction process along the way. While the chart below shows this clearly for the overall market, it applies to individual sectors of the market as well.”
“Importantly, notice the bottom two part of the chart above. When there is a simultaneous culmination of overbought conditions combined with a more extreme deviation, corrections usually occur back to the underlying trend.
This can also be seen in the next chart as well. While the ‘Trump Rally’ has pushed asset prices higher and triggered a corresponding ‘buy signal,’ that signal has been triggered at very high levels combined with a very overbought condition.Historically, rallies following such a combination have not been extremely fruitful.”
While the “exuberance” of the Trump rally has certainly awakened the “animal spirits,”the sustainability of the advance from such egregiously overbought conditions is questionable. David Rosenberg weighed in on this point via The Globe & Mail:
“Okay, so the president-elect is now at 3 percent, again skewed by two or three sectors. Big deal. Ronald Reagan, who was the original ‘Make America Great Again’ advocate (as opposed to a copycat), saw the equity market soar 6 percent in his first month in office.
Guess what? The market peaked less than four weeks into his term and for the next two years we had an economic downturn and a 25-percent slide in the stock market. The combination of rising bond yields, Fed tightening and a stronger dollar took care of that honeymoon.
After all, we all know what happens when the honeymoon is over. The hard work begins.
That slump we just saw in October export volumes and widening in the trade deficit is surely just an early sign of what is to come.
Before The Donald does anything on his first hundred days, something tells me the lagged impact of the tightening in financial conditions associated with the recent bounce in interest rates and appreciation of the U.S. dollar is going to come back and bite the economy in the tush, as was the case heading into 2016.”

It’s Beginning To Look A Lot Like…1999!

It is interesting to watch the excitement build around the market once again as we head into the New Year. There is an optimism rising the “new bull market” has finally arrived and we are set to start an unprecedented advance as the calendar turns. Take a look:
Dow 20,000 And Beyond – Mark DeCambre
Rising Yields A Bullish Signal – James Picerno
You get the idea. And, as I showed last weekend, investor confidence is extremely high levels as well. But here is the latest from NAAIM which shows managers at a net 101% exposure.
See, it’s all good….for now.
If this market rally seems eerily familiar, it’s because it is. If fact, the backdrop of the rally reminds me much of what was happening in 1999.
Fed was hiking rates as worries about inflationary pressures were present.
Economic growth was improving 
Interest and inflation were rising
Earnings were rising through the use of “new metrics,” share buybacks and an M&A spree. (Who can forget the market greats of Enron, Worldcom & Global Crossing)
Stock market was beginning to go parabolic as exuberance exploded in a “can’t lose market.”
If you were around then, you will remember. The charts below show a comparison of GDP, Inflation, Interest Rates (10-year) and the S&P 500 between 1998-2002 (dashed lines)and 2014-Present (solid lines). The data is nominal and quarterly.
While inflation rates and GDP growth are substantially weaker than in 1998, the recent turn higher is similar to what we saw during that previous period. Notice in 2000, there was a spike higher in GDP which got the bulls all excited just before the recession took hold.
The same is true for interest rates which rose about 1.5% between 1998 and 2000. Rates then resumed their long-term downtrend in conjunction with the onset of a recession.
Of course, as rates, inflation, and economic growth were rising by small amounts, investors pushed assets prices higher expecting the longest economic growth cycle on record to continue for another decade.
It didn’t.
The last chart gives a better comparison. I have combined interest rates, GDP, and inflation into a single “economic index” for both the 5-year period beginning in 1998 and 2014 to present. I then recalibrated the 2014 index and market to 1998 levels. 
This is where it gets interesting. If you look at the chart you would quickly make the argument that we have 8-10 quarters ahead of us before a problem occurs. However, because we are running at HALF of the previous rate, there is substantially less room to fall before a recession sets in. In other words, in 1998, the economy had to decline from a 7.5% growth rate to hit recessionary levels. 
Considering we are at 2% today, the time to recession will be considerably shorter – like 2-4 quarters kind of short.
For the skeptics, here is the actual data graphed from 1997-2014. Stocks entered the melt-up phase as the “Bullish Mantra” changed from:
Lower rates and lower inflation is good for stocks
Higher rates and higher inflation is good for stocks
The mantra of higher inflation and higher rates is good for stocks has once again returned as stocks enter their “melt-up” phase of the advance. As shown above, it wasn’t the case then and it likely won’t be the case now.
While there is much hope the new President, and his newly minted cabinet, will “Make America Great Again,” there can be a huge difference between expectations and reality. And, like in 1999, there is just the simple realization that eventually excesses will mean revert.

Last One Out, Turns Off The Lights

I know, lot’s of charts, but “bear” with me. (pun intended)
As shown below, the market is currently pushing well into 3-standard deviations above the 50-day moving average. As discussed above, such extensions are rare and do not historically last very long. 
As shown at the top of the next chart, the market is currently at 92% of a full 3-standard deviation extreme. The horizontal dashed red line shows all the previous times the market hit such extreme levels going back to 1992. Short and intermediate-term corrections are common along with more major crashes. 
This last chart shows a longer-term picture of quarterly data back to 1942. With valuations high and the markets extremely overbought, as shown by the vertical red dashed lines, corrections have been common. The highlighted areas show where extreme deviations have collided with really bad outcomes….like now.
Here is the point. Despite the rampant optimism running through “Main Street” and “Wall Street” since the election there is little changed economically speaking. The economy remains weak, labor costs have surged, monetary policy has tightened, and a stronger dollar negatively impacts corporate earnings. Wages haven’t increased much for the average worker and employment is still trending lower.
In fact looking at the primary indicators of things that affect the production side of the economic equation, things don’t look so good.
However, the markets rally on expectations. Therefore, here is the question you must answer:
“After a 200% increase from the financial crisis lows, trillions of dollars injected into the financial markets and the economy, and 8-years of economic growth – exactly what is not already priced into the financial markets?”
Valuations are also a problem (both P/E and Tobin Q-ratios) with investors currently on the wrong side of the equation.
For those long energy-related equities, this is likely a good time to take in profits and rebalance exposure during short-term corrections.
However, the bigger picture is that while long-exposure remains recommended currently, it is also critically important not become overly complacent. Just because the lights are still on and the music “still a pumpin'”, smarter investors tend to quietly exit before the cops show up. 
Just don’t forget to turn off the lights if you are the last to leave.
PD1: Seguimos en un mercado alcista hasta que se trunque:
Are we in a short-term cyclical bull market, one that is already long in the tooth and coming to an end? Or are we in the early years of a secular bull market, one that might last a decade or more?
The answer could have a significant impact on how your portfolios perform during the next few years. A few examples, definitions and some data points will help provide some context for this discussion.
Markets regularly go through long phases — bullish, bearish and sideways — lasting anywhere from years to decades. The 20th century saw three secular bull markets: The first lasted from 1921 to 1929, when the Dow Jones Industrial Average gained 367%. After World War II, the next bull market lasted about 20 years, more or less from 1946 to 1966. It is a somewhat subjective determination. The Dow had gains of about 350% during that stretch. The most recent bull market began in 1982, with the Dow starting at about 1,000, and ending in 2000 at 11,750 — a whopping gain of more than 1,000%.
In between were secular bear markets: 1966 to 1982, when the Dow went nowhere in nominal terms, but after inflation it lost about 75% of its value. We had another bear market starting in about 2000 and ending in 2013.
Long secular bull markets occur for a specific reason: waves of industrial, technological and economic progress make their way into employees’ wages, consumers’ pockets and corporate profits. Improving standards of living are reflected in the psychology of an era. Not surprisingly, markets do well, as investors become willing to pay more for a dollar of earnings as the cycle progresses. Multiple expansion, in the form of rising price-to-earnings ratios, drives returns even more than rising profits.
Let’s use 1982 to 2000 as an example. The widespread adoption of many technologies, including software, semiconductors, mobile, networking, storage and biotech, fed into each other. The economy expanded, there was record low unemployment, strong wage gains and high corporate profits. As you would imagine, U.S. stocks did very well. Now think about the many long-lasting positive elements that drove the postwar period: interstate highways, suburbanization, automobiles, electronics, commercial airlines. That 1946-1966 era was one of huge growth.
But bull markets tend to get ahead of themselves, especially as they age. They end up pulling years of future returns into the present. Hence, the subsequent bear market can be thought of as a refractory period, working off valuation excesses over time. 
What does this look like in actual markets? According to an analysis by the fund company Fidelity Investments:
+ The average secular bull market lasted 21.2 years and produced a total return of 17.2% in nominal terms and 15.9% in real terms. The market’s P/E more or less doubled, from 10.1 at the start to 20.5 at the end.
+ The average secular bear market lasted 14.5 years and had a nominal total return of 1% and a real return of –2.3%. The market’s P/E compressed by an average of nine points, from 20.5 at the start to 11.3 at the end.
The psychology underlying bull and bear markets is why P/E ratios expand during bull markets and contract during bears. Declining P/Es during bear markets reflect investors’ fears. They become less willing to pay the same price for each dollar of earnings. This is why judging secular moves by price alone fails to fully capture just what is going on.
In 2003, I wrote that we were in a secular bear market and defined it this way:
Historically, this suggests an extended period of range bound trading as the highest probability long-term scenario in my view. I expect vicious rallies, and wicked sell-offs to occur — over shorter term cycles — within the larger timeline. Active management and capital preservation are going to be the key methods of outperformance.
In 2013, markets broke out, implying the start of a new bull market. The Dow's P/E has averaged 16 during the past three years, in the middle of the range during secular bull markets. We discussed last year the divide between the veteran market strategists, technicians and traders who were either in the secular bull or bear camps. I remain in the secular bull camp, and will share what would make me change that view in a future column.
One final thought: These things are always terribly clear in hindsight; in real time, they are more challenging to discern. It is easy to say 1982 to 2000 was a secular bull market, but read the commentary at the time. It was hardly definitive while it was happening.
PD2: Una tontería con los números. Todos los años que acaban en 7, como el que viene 2017, los mercados estadounidenses corrigen un mes muy mucho:
¿Se repetirá? Ciertamente. ¿Qué mes? Ni idea…
PD3: Proverbio chino: “Si quieres que algo se haga, encárgaselo a una persona ocupada”. En España es igual: al que no hace nada, no le queda tiempo ni para leer el periódico. En la vida espiritual ocurre lo mismo, el que consigue rezar algo todo los días es el que no tiene tiempo para nada, y al que le sobra el tiempo, no le dedica ni un segundo a Dios…