A bunch of economists won the the Nobel prize, by discarding short-term forward guidance in valuing stocks; by instead smoothing out their last 10 years of actual earnings/adjusting for inflation and comparing them to their price-to-historical growth rates. This is known as CAPE.
The key finding was that the higher the CAPE ratio, the lower the annualized growth is. And the lower the CAPE ratio, the higher the annualized growth is.
The S&P 500 is into the plus-30X range now. And adjusted for inflation, annualized returns have turned negative.
What's more disturbing is that there is 1/2 of a trillion dollars of S&P 500 stocks bought on margin. As I have explained before, high investor margins make corrections more severe because of the very act of covering margin calls means demand to sell is higher than demand to buy.
The other disturbing number is $7.4 trillion. That's how much debt the top 500 corporations have as of this writing. The debt is being used for acquisitions and stock buy backs, which inflate the value of their stocks. Once the cycle turns from expansion to downturn, the buildup of past excesses will eventually lead to future defaults and losses.
The CAPE method of valuation - from the 80s - foretold that CAPE ratios in 1929, 1999, 2007 and now, are and were too high.
The average CAPE ratio is 15.51. So we are now 2X that amount.
Don't take my world for it.
The Office of Financial Research, the agency tasked with promoting financial stability and keeping an eye on markets, released a paper last week stating that the stock market is dangerously overpriced, and that excessive leverage will exacerbate the next market correction.
Stock market investors ... don't say you were not warned!
March 26, 2015
This would be funny even if it wasn't true. But it is.
Russia held a "values" conference in St. Petersburg at the Holiday Inn.
That's were the humor stops.
One of the justifications for intervening in Ukraine was against neo-Nazis. To be fair, Nazis to the Russian citizen, cast a long shadow of 20 million lives lost in World War II. Which is why the members of the "values" conference were so strange.
Leaders of 11 European far-right parties gathered at the Holiday Inn for what was called the “International Russian Conservative Forum.”
How could President Putin allow such characters, some of whom did not even hide their swastika tattoos, to gather in a high-profile meeting in his hometown only weeks before Russia is to celebrate the 70th anniversary of Victory Day in the war against the German Nazis of World War II?
Because he is trying to undermine Europe. And continues to do it on the cheap.
Putin is not an ideologue. He is a pragmatist. Using the threat of "Nazis" in Ukraine played well to the Russian people because of World War II.
The conference's make up of similar characters is duplicitous; but it is the kind of pragmatism one would expect out of an ex-KGB officer.
Namely sowing the seeds of disruption in Europe by cozying up with Europe's far right serves two purposes.
1. A tactical response to European sanctions
2. And allying Russia with European far right wingnuts - who live within the midst of high unemployment and austerity - threatens the status quo of Europe.
So it is only appropriate to host a wingnut conference at a Holiday Inn. Putin continues to fight for his political life; but only on the cheap.
March 24, 2015
Part of the attraction of the Euro was a diversification of the dollar from central banks like China. Such diversification led to a EU/USD of $1.60 at it's peak.
Now the Euro is down to $1.08. And it's not just the speculators that are driving the price down. As I have written before, the smart speculation was to short it early this year, because $1.05 was the support level and the gain was large. Now speculators are trimming their short positions as the Euro is at its 15-year support level
But it's gigantic outflows of Euros that are now driving down its price. What made the Euro appreciate was its diversification from dollars. Now a combination of negative interest rates and risk is drying up that option.
And investors and more importantly central bankers are moving the money to dollars. How much? Well the Fed has signaled a raise of interest rates in the future. But the yield on US Treasuries have plummeted to 1.93%.
Yields move inversely to bonds price. Bond prices rising means more demand than supply.
Now market experts are warning that EU/USD will fall to $ 0.85. Where did they get that number. The same place I got it months ago when I wrote my first series of blogs called "Death By Euro": that's the next support level.
Europe has to start getting their act together and quick. A good place to start might be Greece. Obviously the problem is deeper than Greece. But it doesn't help, that the EU, hasn't plugged the biggest headline leak in the boat.
March 23, 2015
PolitiFact keeps track of politicians truthfulness. Ted Cruz has the second worst record of anyone in the 2016 GOP presidential field. Only Ben Carson - we hardly knew ye - is worse.
A sample of his mostly false, false and "Pants On Fire" comments -
92 million Americans aren't working - if you count high school seniors and senior citizens.
Democrats told the Catholic Church that they’ll use federal powers to shut down church charities and hospitals if the church doesn’t change its beliefs - never happened.
So Ted Cruz is either a serial liar of just lazy with his fact checking. Either way his path to becoming president is a dead end anyways.
Russia has threatened to target Denmark’s warships with nuclear weapons if the Scandinavian nation becomes a member of Nato’s missile defense shield.
Playing the nuclear card by threatening a warship in open waters is different than threatening Denmark. Just enough to be provocative, without threatening a nuclear attack on an actual country.
Why is Putin doing this?
Because his asymmetrical border control is imploding. Yesterday. signs of it backfiring in Chechnya. Now the EU maintaining sanctions from his asymmetrical strategy in Ukraine.
He, not the West, is between a rock and a hard place.
The only claim to power, he has left, is being the great defender of the people of Russia.
Why's is the missile shield a provocative move by the West?
Because - while the missile shield was put into place for Europe against terrorists and Russia was invited - Putin has played it has a missile shield against a Russian response to a Western first strike.
If this is what you have been told, without a free press, wouldn't you be scared?
Adding Denmark to the missile shield is incrementally worse.
Thus Putin is trying to cling to power after his asymmetrical border strategy - one on the cheap because he doesn't have a lot of money and sanctions make it worse - backfired.
Denmark don't take the bait. You are not the target today. Putin is. And he is acting as rationally as he can. And at some point, the people living the high life in Russia, won't let him do anything that is a threat to their survival.
They can wait out the sanctions. But they can't wait out a leader that continues suicidal strategies forever.
March 22, 2015
I have written before that Putin wants his borders under control. But he doesn't possess enough money to engage in anything but asymmetrical warfare.
His asymmetrical war tool is to fan radical causes like in Crimea and the Ukraine. He also has used this method in neighboring Georgia.
And is using it within the Russia Republic of Chechnya.
But according to "Business Insider" he is paying a cost for his policies in Chechnya.
They correlate the assassination of outspoken Kremlin critic Boris Nemtsov, who was mysteriously gunned down in front of the Kremlin last month, with Putin's 10-day disappearance.
And the murder was all about that fact that, Putin has allowed Kadyrov - the 38-year-old head of the Chechen Republic, to rule the region for eight years while "seemingly turning a blind eye to assassinations, torture and other human rights abuses." And critics, including Nemtsov, were warning about what happens if the warlord turned strongman's ambitions for power spin out of Putin's control.
People initially suspected Kremlin involvement in Nemtsov's murder, but now five Chechens have been arrested in connection with the killing, and fingers are starting to point at Kadyrov as the possible architect of the hit.
If this was an attempt to discredit Putin by Kadyrov, it shows the cost of Putin's asymmetrical border control, and perhaps destroys the mythology of Putin having total control of Moscow.
March 21, 2015
"Polling After Email Flop Shows HRC With A 10 Point Lead On All Rivals"
On the face of actual polling, this is true. But when you look at HRC's historical favorable/unfavorable ratings and overall trajectory; it is more illuminating.
The first data point is January of 2008: 53% favorable. She dipped during her failed primary. Then she ascended through her tenure as Secretary Of State. Largely due to being a dedicated foot soldier to Obama while seemingly being seen as a good natured loser.
Then about a 8 point drop after leaving the Obama administration.
But here is the key. What's not in the headlines. A 6 point drop in both favorable and unfavorable ratings. That's the effect of seeing the Old HRC going back to do what she does: disregarding the rules and acting entitled. (BTW ... what kind of organization loses the terms of employment and separation). Laughable if it wasn't either gross incompetence or a willing destruction of records.
The net result is HRC's favorability is at the same number as it was at the start of the 2008 primaries. And, if that was bad enough, her unfavorable rating is up from 39% in January of 2008, to 44%.
HRC is a polarizing politician. By the numbers, shown during the 2008 primaries, she lost. And I don't see her chances being any better in 2016.
To the Democrats: find someone else or you lost. To the GOP: don't screw it up and make sure you nominate a RINO like Jeb Bush.
March 18, 2015
As of this writing, Janet Yellen and the Fed will be sending out a press release this afternoon.
No interest rates hikes are expected; but whether the Fed drops the "patient" word on interest rates is a known unknown.
From all indications, it is a 50/50 bet.
I am not sure why the Fed seems to be so hell-bent on signaling zero interest rates will be ending sooner than later.
1. The US dollar is sky high. Signaling higher interest rates will only make the dollar stronger. In a month, first quarter earning will be announced. Expect the earnings of multinationals to disappoint blaming it on a strong dollar. That is going to be a hit to the stock market even if Janet Yellen and the Fed stay on a patient course.
2. Dropping "patient" will force a sell off within 24 hours. The market has mostly priced in the affects of the current strong dollar. But have not priced in a more hawkish Fed action.
3. All of this has to do with inflation. Or fear of inflation. But there are no signs of inflation.
So again, I say "Janet Yellen: Don't Do It".
March 17, 2015
I wrote the above blog "Death By Euro III - Feel Free To Short It" on January the 23rd of this year. I wrote it when the EU/USD was 1.12. Today it is 1.05.
Highlights of the blog -
The next support level is just above 0.80 euro/$1.00. If you were to short the Euro today, it's almost certain your inevitable returns could be at least (1.12-0.85 or 0.27/1.12) 24%.
The Euro will almost certainly test the next support level. There is no bet to made when that happens. Meaning at the support level, there is a 50% chance it will fall lower and a 50% chance it will bounce up.
But by shorting it today, and putting a sales order just comfortably above the next support level, there are tremendous returns to be had.
I am not a professional investor. In fact all of my money is liquid. But if I can see why it is obvious to short the Euro; you can bet professional investors see the same thing.
What does that mean? Even though the Euro should academically fall steadily from today until September of 2016; professional investors short positions will drive the Euro down faster in practice.
So if you want to short the Euro, the sooner the better. I would not be greedy. I would short it to fall 10%. That has a 100% chance of happening.
As predicted, professional investors are shorting the Euro. And that has indeed causing it to fall in practice.
Again the next technical level of support is 0.85. A short of the Euro would have been wise in January. Again, if you short it, don't be greedy. Put a sell order in at a physcological support of 1.00.
A short of the Euro, when I called it, would have netted you an 11% return in two months. Today it's not as much: 5%. But we are talking about a % return in months, not years. So on an annualized basis, there is nothing that comes close to a higher investment angle than shorting the Euro today and selling it at 1.00.
March 16, 2015
First a disclaimer. I am going to vote for a Republican president in 2016, as long as the GOP nominates a RINO. Otherwise I am not voting. But that's not going to happen. The history of the GOP is to ultimately select the best mainstream candidate. From two Bushes, to Dole, to McCain to Romney, the GOP conservatively nominates candidates
But I recognize, there is a large amount of people that will vote for the most liberal candidate.
And today they face a "faustian bargain" by voting for HRC.
You might not support Obama, but Obama has brought nothing but integrity to the White House, and even his detractors find him likable.
HRC? She doesn't like the press. She doesn't like campaigning. She is putting if off as long as she can. She isn't likable "enough". And she and her husband have proven, time and again, the rules don't apply.
Travel-gate, Whitewater, stripping bare the WH after leaving, "oops I had a concussion" so it took a month to testify on Benghazi and now email-gate.
Are liberals so desperate to nominate such a candidate for 2016? So desperate to make such as "faustian bargain"?
It's time for the Democratic party to consider a competitive primary. It's time to nominate a fresh face. It's best chance is to replace HRC with Elizabeth Warren.
Warren has no baggage. She can squeeze off moderates by her rejection of rolling back Glass-Steagall under Bill Clinton. And she is a pristine choice as a potential first women to be elected president.
A funny thing happened from 2008 to today. The Democratic Party's torchbearer is now not a Clinton. It's Obama. And it's likely Obama and his staff leaked the email-gate and other investigative activities surrounding HRC's tenure as Secretary of State.
There has always been a uneasy detente between the Obama and Clinton house. The Clinton house thinks it has been using Obama. But Obama is not a Clinton. He plays for the long game. And he has had damaging information on HRC since she was Secretary of State.
Revealing it all now, after so much time, was a careful plan to derail another "inevitability" HRC candidacy before she got out of the gate.
Obama didn't let on anything before he killed Osama Bin Laden. He seems to have read a passage of Lincoln that the "wisest animal is the hen, who cackles only after she has laid an egg". Obama just laid a big egg.
March 15, 2015