Showing posts with label bull market. Show all posts
Showing posts with label bull market. Show all posts

Tuesday 25 July 2023

China's historical debt binge

September 2008, pre-Lehman Brothers bankruptcy

In September 2008, China's economy was slowing.   The Shanghai stock market had just crashed.  Property prices were weak.  The Chinese officials said China was entering the middle-income rank of nations, so it was time for it to slow down as previous Asian miracle economies, like Japan, South Korea and Taiwan, had.  They talked about cutting back on investment, downsizing large state companies and letting the market allocate credit, which at this point was not growing faster than the economy.  Between 2003 and 2008, credit had held steady at about 10% of GDP.


October 2008, post Lehman Brothers bankruptcy

Lehman Brothers filed for bankruptcy in the US and global markets went into a tail-spin.  Demand collapsed in the US and Europe, crushing export growth in China, where leaders panicked.

By October 2008, the Chinese government had reversed course, redoubling its commitment to the old investment -led growth model, this time by fueling the engine with debt.   From 2008 through 2018, total debts would increase by $80 trillion worldwide, as countries fought off the effects of the financial crisis, but of that total, $35 trillion, or nearly half, was racked up by China alone.


August 2009

By August 2009, the Chinese government had launched an aggressive spending and lending program that kept China's GDP growth above 8%, while the US and Europe were in recession.  That steadily high GDP growth had convinced many Chinese that their government could produce any growth rate it wanted.

Bank regulators were the only officials who expressed alarm and their main concern was increasingly reckless lending in the private sector.  "Shadow banks" had started to appear, selling credit products with yields that were too high to be true.  


2013

By 2013, shadow banks accounted for half of the trillions of dollars in new yearly credit flows in China.  When Beijing began to limit borrowing by local governments, local authorities set up shell companies to borrow from shadow banks.  Soon these "local government funding vehicles" became the biggest debtors in the shadow banking system.

As the flow of debt accelerated, more lending went to wasteful projects.  By some estimates, 10% of the firms on the mainland stock exchange were "zombie companies." kept alive by government loans.  The state doled out loans to incompetent and failing borrowers.


  • Lending started to flow into real estate

Much of the lending started to flow into real estate, the worst target for investment binges.  Easy loans spurred the sale of about 800 million square feet of real estate in 2010, more than in all other market so the world combined.  In big cities, prices were rising at 20% to 30% a year.

Caught up in the excitement, banks stopped looking at whether borrowers had income and started lending on collateral - often property.  This "collateralized lending" works only as long as borrowers short on income can keep making loan payments by borrowing against the rising price of their property.  By 2013, a third of the new loans in China were gong to pay off old loans.  In October 2013, Bank of China chairman warned that shadow banking resembled a "Ponzi scheme," with more and more loans based on "empty real estate."


  • At the March 2013 party congress, Li Keqiang came in as prime minister.  

He was one of the Chinese leaders who appeared to accept the reality that a maturing economy needed to slow down, which would allow him to restrain the credit boom.  Yet every time the economy showed signs of slowing, the government would reopen the credit spigot to revive it.


  • Dubious creditors grew

The cast of dubious creditors grew increasingly flaky, including coal and steel companies with no experience in finance, guaranteeing billions of dollars in IOUs issued by their clients and partners.  



2014: Chinese urged to buy stocks

By 2014, lending entrepreneurs were shifting their sights from property to new markets - including the stock market.

Even the state-controlled media jumped in the game, urging ordinary Chinese to buy stocks for patriotic reasons.  Their hope was to create a steady bull market and provide debt-laden state companies with a new source of funding.  Instead they got one of the biggest stock bubbles in history.

There are 4 basic signs of a stock bubble:  

  • high levels of borrowing for stock purchases; 
  • prices rising at a pace that can't be justified by the underlying rate of economic growth; 
  • overtrading by retail investors and 
  • exorbitant valuation.  


June 2015, Shanghai market started to crash

By April 2015, when the state-run People's Daily crowed that the good times were "just beginning,"  The Shanghai market had reached the extreme end of all four bubble metrics, which is rare.

The amount that Chinese investors borrowed to buy stock had set a world record, equal to 9% of the total value of tradable stocks.  Stock prices were up 70% in just 6 months, despite slowing growth in the economy.  On some days, more stock was changing hands in China than in all other stock markets combined.  In June 2015, the market started to crash and it continued to crash despite government orders to investors not to sell.

[Comments:

This credit binge had some characteristics unique to China's state-run system, including the borrowing by local government fronts and the Communist propaganda cheering on a capitalist bubble.  But its fundamental dynamics were typical of debt mania.  It began with private players, who assume the government would not let them fail, and devolved into a game of whack-a-mole.  As the government fitfully tried to contain the mania, more and more dubious lenders and borrowers got in the game, blowing bubbles in stocks and real estate.  The quality of credit deteriorated sharply, into collateralized loans and IOUs.  These are all important mania warning signals.

The most important sign was, as ever, private credit growing much faster than the economy.   After holding steady before 2008, the debt burden exploded over the next 5 years, increasing by 74 % points as a share of GDP.  This was the largest credit boom ever recorded int he emerging world (though Ireland and Spain have outdone it in the developed world).]


By mid 2019

By mid-2019 China had, in fact, seen economic growth slow by nearly half, from double digits to 6%, right in line with previous extreme binges.  To date then, no country has escaped this rule:  a five-year increase in the ratio of private credit to GDP that is more than 40% points has always led to a sharp slowdown in economic growth.

[Comments:

China did however, dodge the less consistent threat of a financial crisis, aided by some unexpected strengths.  One was the dazzling boom in its tech sector, without which the economy would have slowed much more dramatically.  Another was the fact that Chinese borrowers were in debt mainly to Chinese lenders and in many cases the state owned bother parties to the loan.  In short, /China was well positioned to forgive or roll over its own debts.  And with strong export income, vast foreign exchange reserves, strong domestic savings and still ample bank deposits, it has managed to avert the financial crisis that often accompanies large, debt driven economic slowdowns.]



Friday 6 January 2023

Actions in an overvalued market

 When markets are overvalued, Graham recommends the following actions:

1)      Do not borrow to buy or hold securities. 
2)      Do not increase the proportion of stocks held in funds.
3)      Reduce common stock holdings to no more than 50% of the overall portfolio.
4)      Suspend contributions to any “dollar-cost averaging” stock contribution plan.       

Bear-Market Rally or New Bull?

How do investors tell the difference between a bear-market rally and the birth of a new bull market? .

Investment professionals look for certain technical signals to be in place before confirming a reversal is underway. What’s key is the number of stocks participating in a move, which is why these sorts of indicators are referred to in the parlance of market technicians as “breadth thrust” signals. The duration of the move and the price gains associated with it are also important. 

The indicators that most reliably confirm that there is a shift into a new bull market are:
  • On the New York Stock Exchange, the NYSE American, and Nasdaq, 90% of the common stocks trade above their 10-day moving averages.
  • Stocks advancing on the NYSE outpace those declining by nearly a 2-to-1 margin for at least 10 days.
  • More than 55% of the stocks on the NYSE set new highs over a 20-day period.

These events only happen at bullish turns, says NDR’s Clissold. He highlights the end of the pandemic-induced bear market in March 2020, the shortest in history. That lasted 33 or 40 days, depending on whether you’re looking at the S&P 500 or the Dow Jones Industrial Average, where there were a series of powerful rallies that occurred through March and early April signaling a new upward move.

Faced with the worst first half for stocks and bonds in 50 years, the highest inflation in 40 years, and an endless barrage of bad economic data, investors might be excused for searching for bargains amid the rubble and assuming most of the damage is done.

Wall Street pros are at odds as to whether we are at an inflection point in the markets. Some see indications that we have likely hit the lows for stocks, while others warn of more pain ahead.

Representing the more bullish camp is James Paulsen, chief investment strategist at Leuthold Group in Minneapolis. He notes that the bottom may have already been made as the Fed is nearing the end of its tightening cycle, growth is slowing, and inflation is beginning to roll over. Moreover, he believes most of “the sellers are long gone.”

“Are there any nervous Nellies left?” he asks.  

Taking the opposite view is David Kotok, co-founder and chief investment officer of Cumberland Advisors, a registered investment advisory firm in Sarasota, Florida, with $3.5 billion under management.

“We haven’t reached extreme levels of fear yet,” Kotok says. “We haven’t made a bottom because we haven’t seen extreme selling.” He expects interest rates will continue to go higher as inflation proves harder to subdue, geopolitical tensions worsen, and “shocks” emerge. He’s also concerned about “contagion risk” emanating from slowdowns in global economies


Saturday 11 July 2020

The Anatomy of a Rally (Howard Marks)

Memo from Howard Marks: The Anatomy of a Rally


The background is well known to all.

  • On February 19, the U.S. stock market hit a new all-time high, with the S&P 500 reaching 3,386.

  • Then investors began to price in the novel coronavirus, causing the market to make its fastest trip ever into bear territory, with the S&P 500 down 34% in five weeks to a low of 2,237.

  • That low was reached on March 23, the day the Fed announced a major expansion of its response to the Covid-19-induced shutdown of the U.S. economy.

  • Following that, the stock market – along with the credit markets – began a recovery of massive proportions.

The advance started off with a bang – a 17.6% gain for the S&P 500 on March 24-26, the biggest three-day advance in more than 80 years – and by June 8 it had lifted stocks from the low by almost 45%. The market rose on 33 of the 53 trading days between March 24 and June 8, and on 24 of those 33 up days (including the first nine in a row), it gained more than one percent. By June 8, the S&P 500 was down only 4.5% from the February peak and even for the year to date.


I’m writing to take a closer look at the market’s rise and where it leaves us. The goal as usual isn’t to predict the future but rather to put the rally into perspective.


The questions I get are always indicative of what’s going on in investors’ minds at the time. Around the early-June high and in the time since, the most frequent ones have been, “How can stocks be doing so well during a severe pandemic and recession?” “Have the securities markets decoupled from reality?” and “Is this irrational exuberance?”


The process of answering these questions gives me an opportunity to dissect the breathtaking market rise. The world is combatting the greatest pandemic in a century and the worst economic contraction of the last 80+ years. And yet the stock market – supposedly a gauge of current conditions and a barometer regarding the future – was able to compile a record advance and nearly recapture an all-time high that had been achieved at a time when the economy was humming, the outlook was rosy, and the risk of a pandemic hadn’t registered. How could that be?


The possible reasons for the markets’ recovery are many and, as I write this memo, the list is growing as people find more things to take positively. (As usual, the higher the market goes, the easier it becomes for investors to find rationalizations for a further rise.) I’ll survey the apparent reasons below:

  • Investors placed great credence in the ability of the Fed and Treasury to bring about an economic recovery. Investors were cheered by the steps taken to support the economy during the shutdown, reopen it, put people back to work and begin the return to normalcy. Everyone understands that the recovery will be gradual and perhaps even bumpy – few people are talking about a powerful V-shaped recovery these days – but a broad consensus developed that recovery is a sure thing.

  • As the market recovery took hold, the total number of Covid-19 cases and deaths, and the statistics in states like New York that had experienced the earliest and worst outbreaks, were going in the right direction. Daily new cases declined to very low levels in many places, and the signs of a second-wave rebound were limited. The curve in most locations clearly had been flattened.

  • In short, the worst fears – things like massive shortages of hospital beds and PPE, and an immediate “second wave” as soon as reopening began – weren’t realized. This was cause for relief.

  • Rising optimism with regard to vaccines, tests and treatments added to investors’ willingness to write off the present episode.

  • People became comfortable looking past the pandemic, considering it one-of-a-kind and thus not fundamental. In other words, for some it seemed easy to say, “I’m glad that’s over (or soon will be).”

  • Positive economic announcements reinforced this conclusion. And the unprecedented extent of the economic carnage in the current quarter made it highly likely that we’ll see substantial quarter-over-quarter gains in the next three quarters and dramatic year-over-year comparisons in mid-2021.

  • Thus, overall, investors were glad to “look across the valley” at better times ahead. There will be a substantial dip this year in GDP and corporate earnings, but investors became willing to anticipate a time – perhaps in 2022 – when full-year earnings for the S&P 500 would exceed what they were in 2019 and had been expected to be in 2020.

  • With the outlook now positive, investors likely concluded that they no longer needed to insist on the generous risk premiums afforded by low entry prices, meaning purchase prices could rise.

  • In other words, with regard to economic and corporate developments, investors concluded that it was “all good” or at least heading in the right direction.

Monetary and fiscal actions made an enormous contribution to the market rebound:

  • The chant went up during the week of March 23: “You can’t fight the Fed.” Certainly the evidence convinced investors that interest rates will be what the Fed wants them to be, and the markets will do what the Fed wants them to do. The higher the market went, the more people believed that it was the goal of the Fed to keep it going up, and that it would be able to.

  • The Fed and Treasury demonstrated their dedication to doing absolutely everything they could think of. Fed Chairman Jay Powell and Treasury Secretary Steve Mnuchin acted early and dramatically, and Powell’s assurances that “we will not run out of ammunition” had a very positive effect.

  • The Fed said it would continue buying securities “for as long as it takes,” and since its actions suggested it was unconcerned about the ballooning deficits and debt, there was no apparent reason why its ability to keep buying had to have a limit.

  • When the Fed buys securities, it puts money into the hands of the sellers, and that money has to be reinvested. The reinvestment process, in turn, drives up the prices of assets while driving down interest rates and prospective returns.

  • There’s been a related expectation that the Fed’s buying might be less than discriminating. That is, there’s no reason to believe the Fed insists on good value, high prospective returns, strong creditworthiness to protect it from possible defaults, or adequate risk premiums. Rather, its goal seems to be to keep the markets liquid and capital flowing freely to companies that need it. This orientation suggests it has no aversion to prices that overstate financial reality.

  • Everyone is convinced that interest rates will be lower for longer. (On June 10, the Fed strongly indicated that there will be no rate increases through 2021 and possibly 2022.)

  • Low interest rates engineered by the Fed have a multifaceted, positive impact:

    • The lower the fed funds rate, the lower the discount rate used by investors and, as a result, the higher the discounted present value of future cash flows. This is one of the ways in which declining interest rates increase asset values.

    • The risk-free rate represents the origin of the yield curve and the capital market line. Thus a low risk-free rate brings down demanded returns all along these continua. All a priori returns on potential investments are viewed in relation to the risk-free rate, and when it’s low, even low returns seem attractive.

    • The pricing of all assets is interconnected through these relative considerations. Even if the Fed is buying asset A but not asset B, the rising price and falling expected return on A mean that B doesn’t have to appear likely to return as much as it used to, so its price can rise, too. Thus if buying on the part of the Fed raises the price of investment grade debt, the price of non-investment grade debt is likely to follow suit. And if the Fed buys “fallen angels” that have gone from BBB to BB, that’s likely to lift the price of B-rated bonds.

    • Lower yields on bonds means they offer less competition to stocks, etc. This is yet another way of saying relative considerations dominate. Fewer people refuse to buy just because prospective returns are low in the absolute.

  • In all, the Fed created capital market conditions that gave rise to readily available financing, bond issuance at record levels, and deals that were heavily oversubscribed. As long as money-losing companies are enabled to refinance their debt and borrow more, they’re likely to stay alive and out of bankruptcy, regardless of how bad their business models might be. Zombie companies (debt service > EBITDA) and moral hazard don’t appear to trouble the Fed.

Obviously, behavioral factors also had a significant impact:

  • Although suspended from February 19 until March 23, the ever-hopeful “buy the dips” mentality and belief in momentum quickly came back to life. The large percentage of trading in today’s markets accounted for by index funds, ETFs and other entities that don’t make value judgments probably contributes to the perpetuation of trends like these once they’re set in motion.

  • Investors have been cheered by the fact that today’s Fed seems to be offering a “Powell put,” a successor to the Greenspan put of the late 1990s/early 2000s and the Bernanke put induced by the Global Financial Crisis. The belief in the Powell put stems from the view that the Fed has no choice but to keep the markets levitated to reassure financial market participants and keep the credit markets wide open for borrowers.

  • Thus FOMO – fear of missing out – seemed to take over from the prior fear of losing money, a transition that’s always pivotal in determining the mood of the market.

  • Retail investors are said to have contributed substantially to the stock market’s rise, and certainly to its most irrational aspects, like the huge gains in the stock prices of some bankrupt companies. In the exceptional case of Hertz, it seemed for a while that the buoyant stock price might enable the company to sell large amounts of new equity, even though the equity would probably end up worthless. (Equity capital raised by a company in bankruptcy is extremely likely to end up going straight to the creditors, whose improbability of otherwise being paid gave rise to the bankruptcy filing in the first place.) Large numbers of call options have been bought in recent days, and it was reported that small investors accounted for much of the volume. Developments like these suggest the influence of speculative fever and the absence of careful analysis.

  • There’s a widely held theory that government benefit checks have been behind some of the retail investors’ purchases. And that makes sense: in the last three months, there’ve been no games for sports bettors to wager on, and the stock market was the only casino that was open.

  • Importantly, fundamentals and valuations appeared to be of limited relevance. The stock prices of beneficiaries of the virus – such as digital service providers and on-line merchants – approached “no-price-too-high” proportions. And the stocks of companies in negatively affected industries like travel, restaurants, time-sharing and casinos saw massive recoveries, even though their businesses remained shut down or barely functioning. Investors were likely attracted to the former by their positive stories and to the latter by their huge percentage declines and the resulting low absolute dollar prices.

In all these ways, optimistic possibilities were given the benefit of the doubt, making the terms “melt-up” and “buying panic” seem applicable. We saw numerous records smashed in the 11-week recovery of the stock market from its March 23 low.


To sum up and over-simplify, as my partner Bruce Karsh asks in his role as devil’s advocate: can the Fed keep buying debt forever, and can its doing so keep asset prices up forever? In short, many investors appeared to conclude that it could.




And on the Other Hand . . .


I’m not going to go to the same lengths in cataloging the negatives that exist today. Especially given their appeal to my cautious bias, I’ve done so plenty in recent memos. But they certainly have been and are out there:

  • The likelihood that, since the U.S. engaged in a more voluntary and less sweeping shutdown than the countries that were most successful in suppressing Covid-19, the reopening of the economy would trigger a second wave of the disease.

  • The simultaneous likelihood that, due to fatigue and because many consider “the cure to have been worse than the disease,” there won’t be the same enthusiasm for a new shutdown, meaning there may be significant stress on the health care system and/or large numbers of fatalities.

  • The possibility that we won’t have a vaccine as soon as hoped, or that it will be limited in its duration or its effectiveness with various strains of the disease.

  • The reporting of actual GDP declines on the order of 20-30% for the second quarter and 5-10% for the full year, and of an unemployment rate around 10% in late 2020 and into 2021.

  • The impact on the economic recovery if the return to work is slow, large numbers of small businesses never reopen, and millions of jobs turn out to be permanently lost. In particular, the slow return of customers and the regulations that limit the scale of operation may prevent newly opened public-facing businesses from being much more profitable than they were when they were fully closed.

  • Worry that political or financial considerations will keep the Fed and/or Treasury from renewing their monetary and fiscal tools to combat the economic slowdown.

  • The significant long-term damage done to state and city finances.

  • The likelihood that there’ll be widespread defaults and bankruptcies despite the Fed and Treasury machinations.

  • The impact of potentially permanent changes to business models in industries like retail and travel, and on office buildings and high-density urban centers.

  • The possibility of increased inflation (or, some say, deflation), long-term damage to the reserve status of the dollar, a downgrade of the U.S. credit rating, or an increase in the cost to finance our vastly expanded deficits.

There are always positives and negatives, and we can list them, consider their validity and try to assess what they boil down to. But what matters most at a given point in time in determining market behavior is which ones investors weight most heavily. Following the March 23 low, the emphasis certainly was on the positives.


Does It Make Sense?


Yes, there had been something approaching a selling panic between mid-February and late March in response to the pandemic, with the S&P 500 collapsing and the yields on high yield bonds tripling in just four and a half weeks. And yes, the Fed and the Treasury seem to have averted a depression and put us on the path to recoveryBut was there justification for the stock market’s 45% gain from the low and the halving of high yield bond yields from their high? And were the resulting security prices appropriate? In other words, some recovery was not unreasonable, but was the magnitude of the one that occurred justified?


Of course, the answers to these questions lie in the eye of the beholder. If there were a straightforward, reliable and universally accepted way to arrive at appropriate security prices, (a) securities would likely sell at or near those prices and (b) over-optimistic highs and over-pessimistic lows wouldn’t be reached. But the most optimistic psychology is always applied when things are thought to be going well, compounding and exaggerating the positives, and the most depressed psychology is applied when things are going poorly, compounding the negatives. This guarantees that extreme highs and lows will always be the eventual result in cycles, not the exception. (For a few hundred pages more on this subject, see my 2018 book, Mastering the Market Cycle: Getting the Odds on Your Side.)


Maybe it’s the increased availability of information and opinion; maybe it’s the popularization of investing; and maybe it’s the vastly increased emphasis on short-term performance. But for whatever reason, things seem to happen faster in the markets these days. That certainly has been true in the last four months. In the current episode, the 34% decline from the all-time high to the crisis low took less than five weeks, and the 45% recovery to the June 8 high took only 11 weeks. These fluctuations were incredibly swift and powerful.


In my memo, On the Couch (January 2016), I wrote that:


That’s one of the crazy things: in the real world, things generally fluctuate between “pretty good” and “not so hot.” But in the world of investing, perception often swings from “flawless” to “hopeless.”


Thus far in 2020, the swing from flawless to hopeless and back has taken place in record time. The challenge is to figure out what was justified and what was aberration.


The Bottom Line

I tend to return to a select few investment adages to make my points, for the simple reason that these time-honored standards contain so much wisdom. And I’ve written often about the first one shared with me by an experienced investor in the mid-1970s: the three stages of a bull market. There’s a usual progression in market advances according to this beauty, and as far as I’m concerned, it’s absolutely accurate and fully captures the reality:

  • the first stage, when only a few unusually perceptive people believe improvement is possible;

  • the second stage, when most investors realize that improvement is actually taking place; and

  • the third stage, when everyone concludes everything will get better forever.

Looking back (which is the main way we know these things), the first stage began in mid-March and culminated on March 23. Certainly very few people were thinking about economic improvement or stock market gains around that time. Then we passed briefly through stage two and went straight to stage three.


Certainly by the time the interim high was reached on June 8, it felt like the market was being valued in a way that focused on the positives, swallowed them whole, and overlooked the negatives. That’s nothing but a value judgment on my part. It’s just my opinion that the imbalance of attention to – and blanket acceptance of – the positives was overdone.


I had good company in being skeptical of the May/June gains. On May 12, with the S&P 500 up a startling 28% from the March 23 low, Stan Druckenmiller, one of the greatest investors of all time, said, “The risk-reward for equity is maybe as bad as I’ve seen in my career.” The next day, David Tepper, another investing great, said it was “maybe the second-most overvalued stock market I’ve ever seen. I would say ’99 was more overvalued.”


On the days those two spoke, both the plain vanilla forward-looking p/e ratio and the Shiller cyclically adjusted price-to-earnings ratio were well above normal levels, disregarding all the uncertainties present and the big declines that lie ahead for GDP and earnings.


And yet, over the next four weeks leading up to the June 8 high, the S&P 500 rose an additional 13%. What this proves is that either (a) “overpriced” isn’t synonymous with “sure to decline soon” or (b) Druckenmiller and Tepper were wrong. I’ll go with (a). On June 8, Druckenmiller described himself as “humbled.” (In this line of work, if you never feel humbled, it just means you haven’t realistically appraised your performance.) All I know is that a lot of smart, experienced investors concluded that asset prices had become too high for the fundamentals. Time will tell.

*          *          *

There’s no way to determine for sure whether an advance has been appropriate or irrational, and whether markets are too high or too low. But there are questions to ask:

  • Are investors weighing both the positives and the negatives dispassionately?

  • What’s the probability the positive factors driving the market will prove valid (or that the negatives will gain in strength instead)?

  • Are the positives fundamental (value-based) or largely technical, relating to inflows of liquidity (i.e., cash-driven)? If the latter, is their salutary influence likely to prove temporary or permanent?

  • Is the market being lifted by rampant optimism?

  • Is that optimism causing investors to ignore valid counter-arguments?

  • How do valuations based on things like earnings, sales and asset values stack up against historical norms?

Questions like these can’t tell us for a fact whether an advance has been reasonable and current asset prices are justified. But they can assist in that assessment. They lead me to conclude that the powerful rally we’ve seen has been built on optimism; has incorporated positive expectations and overlooked potential negatives; and has been driven largely by the Fed’s injections of liquidity and the Treasury’s stimulus payments, which investors assume will bridge to a fundamental recovery and be free from highly negative second-order consequences.


A bounce from the depressed levels of late March was warranted at some point, but it came surprisingly early and quickly went incredibly far. The S&P 500 closed last night at 3,113, down only 8% from an all-time high struck in trouble-free times. As such, it seems to me that the potential for further gains from things turning out better than expected or valuations continuing to expand doesn’t fully compensate for the risk of decline from events disappointing or multiples contracting.


In other words, the fundamental outlook may be positive on balance, but with listed security prices where they are, the odds aren’t in investors’ favor.



June 18, 2020

Monday 3 September 2018

Bull Market – Bear Market

1.  Bull Market and Bear Market. What do they mean?

(a)  What is a bull market?

A bull market is defined by steadily rising prices. 

The economy is thriving and companies are generally making a profit.

Most investors feel that this trend will continue for some time.


(b)  What is a bear market?

By contrast a bear market is one where prices are dropping. 

The economy is probably in a decline and many companies are experiencing difficulties.

Now the investors are pessimistic about the future profitability of the stock market.

Since investors’ attitudes tend to drive their willingness to buy or sell these trends normally perpetuate themselves until significant outside events intervene to cause a reversal of opinion.



2.  Investing in a bull market

In a bull market the investor hopes to buy early and hold the stock until it has reached it’s high.

Obviously predicting the low and high is impossible. 

Since most investors are “bullish” they make more money in the rising bull market.

They are willing to invest more money as the stock is rising and realize more profit.



3.  Investing in a bear market

Investing in a bear market incurs the greatest possibility of losses because the trend in downward and there is no end in sight.

An investment strategy in this case might be short selling. 

Short selling is selling a stock that you don’t own.

You can make arrangements with your broker to do this.

You will in effect be borrowing shares from your broker to sell in the hope of buying them back later when the price has dropped.

You will profit from the difference in the two prices. 

Another strategy for a bear market would be buying defensive stocks. 

These are stocks like utility companies that are not affected by the market downturn or companies that sell their products during all economic conditions.

Monday 8 May 2017

A sound mental approach towards stock fluctuations (4): Advancing, Bull or Rising Market


Advancing or Rising Market

The investor is neither a smart investor nor a richer one when he buys in an advancing market and the market continues to rise.

That is true, even when the investor cashes in a good profit, unless either:
  • (a) he is definitely through with buying stocks - an unlikely story - or 
  • (b) he is determined to reinvest only at considerably lower levels.

In a continuous program no market profit is fully realised until the later reinvestment has actually taken place, and the true measure of the trading profit is the difference between the previous selling level and the new buying level.

Tuesday 12 May 2015

Market Sentiment

Market sentiment is the general prevailing attitude of investors as to anticipated price development in a market.  This attitude is the accumulation of a variety of fundamental and technical factors, including price history, economic reports, seasonal factors, and national and world events.
For example, if investors expect upward price movement in the stock market, the sentiment is said to be bullish. On the contrary, if the market sentiment is bearish, most investors expect downward price movement. Market sentiment is usually considered as a contrarian indicator: what most people expect is a good thing to bet against. Market sentiment is used because it is believed to be a good predictor of market moves, especially when it is more extreme.  Very bearish sentiment is usually followed by the market going up more than normal, and vice versa.
Mutual fund flows are very useful.
Market sentiment is monitored with a variety of technical and statistical methods such as the number of advancing versus declining stocks and new highs versus new lows comparisons. A large share of overall movement of an individual stock has been attributed to market sentiment. The stock market's demonstration of the situation is often described as all boats float or sink with the tide, in the popular Wall Street phrase "the trend is your friend".
In the last decade, investors are also known to measure market sentiment through the use of news analytics, which include sentiment analysis on textual stories about companies and sectors. Market sentiment, as such, might be acquired from more than one sentiment analytical tool. For example, there could be just simple extraction of movement on stock exchange and validly called market sentiment. Another tool is to extract the news and media information based on their polarity. Yet another sub-subject might be community sentiment about the market movements (blogs, forums).
The Acertus Market Sentiment Indicator (AMSI) is one indicator of market sentiment. AMSI incorporates five variables. In descending order of weight in the indicator they are 
-  Price/Earnings Ratio, a measure of stock market valuations; 
-  price momentum, a measure of market psychology; 
-  Realized Volatility, a measure of recent historical risk; 
-  High Yield Bond Returns, a measure of credit risk; and 
-  the TED Spread, a measure of systemic financial risk. 

Each of these factors provides a measure of market sentiment through a unique lens, and together they may offer a more robust indicator of market sentiment.
Additional indicators exist to measure the sentiment specifically of retail Forex market investors. Though the Forex market is decentralized (not traded on a central exchange),  various retail Forex brokerage firms publish positioning ratios (similar to the Put/Call ratio) and other data regarding their own clients' trading behavior.  Since most retail currency traders are unsuccessful,  measures of Forex market sentiment are typically used as contrarian indicators.

http://en.wikipedia.org/wiki/Market_sentiment

Friday 7 March 2014

Bull Markets in Calendar Days

bull markets data

http://money.cnn.com/2014/03/06/investing/bull-market-five-years/index.html?iid=Lead

Is buy and hold, as an investing strategy, dead?

Study the chart below.  Is buy and hold, as an investing strategy, dead? 
Everytime the stock market crashed, many investors shouted buy and hold is dead.
Yet, the truth is, it is exactly at this time when the market crashes, that buy and hold is alive and most profitable.




NEW YORK (CNNMoney)
The stock market bulls have had the upper hand on the bears for nearly five years, and they may be just getting started.

Sunday marks the fifth anniversary of the day the stock market hit its lowest point during the financial crisis and Great Recession.

The fact that the rally is about to turn five has some investors wondering if stocks can keep going much higher.

But previous bull markets, which are broadly defined as a period where the S&P 500 gains 20% or more without a decline of 20% in between, have gone on longer than the current one.

As of this week, this bull market ranks as the sixth longest since 1928 -- just behind the bull market from 1982 to 1987, according to Bespoke Investment Group.

If the S&P 500 hits a new high any time after March 22, this bull market would become the fifth longest. Assuming it continues to rally through Memorial Day, the current run would be longer than the bull market from 2002 to 2007, when the housing bubble inflated.

But this bull market has a long way to go before it becomes the longest -- that honor goes to the epic rally that began shortly after Black Monday in late 1987 and lasted until the tech crash of 2000.

This bull market also isn't the best in terms of stock market performance either.

As of Tuesday, the S&P 500 had gained 177% since March 2009, making it the fourth strongest bull market, according to Bespoke. The S&P 500 would have to rise another 20% before it will top the bull market gain from 1982 to 1987, when stocks surged nearly 230%. That's unlikely to happen, but it's not out of the realm of possibility.

So can the rally continue for a sixth year?

Of the 11 bull markets that have occurred since World War II, only three have made through a sixth year, according to Sam Stovall, chief equity strategist at S&P Capital.

But Stovall thinks there's a "good chance" the current bull market will defy history and make it to its sixth birthday. That's partly because stock valuations are still reasonable, he says. The S&P 500 is trading at 16 times 2014 earnings estimates. That's not cheap. But it's not overly expensive either.

Assuming the economy continues to grow and corporate earnings increase as expected this year, Stovall believes the bull market can last another year. He's not alone.

A survey of 30 market strategists by CNNMoney in January found that most are expecting the S&P 500 to end at 1,960, up about 6% for the year. While that would be a healthy gain, it's a far cry from 2013's 30% increase.

Jeffrey Kleintop, chief market strategist at LPL Financial, sees no signs the rally will end soon either. "In fact," he said, "the bull market may be getting a second wind."

Kleintop argues that stocks will continue to hit new highs as investors who have been sitting on the sidelines jump back into the market. He thinks more investors will come to realize that returns for stocks are likely to exceed safer assets such as bonds.

Looking further ahead, Kleintop says current market valuations suggest stocks can produce "mid- to high-single-digit gains" over the next ten years. That's not including dividends, which could add another 2%.


Of course, even the bulls concede that stocks could suffer some setbacks.

Kleintop says stocks will be volatile over the next ten years and there could even be another recession and big market pullback along the way. But for now, many experts think the bear is going to remain in hibernation mode for the remainder of this year.  



http://money.cnn.com/2014/03/06/investing/bull-market-five-years/index.html?iid=Lead


Tuesday 24 September 2013

The Overpriced Market: It's hard to find anything worth buying

1.  Stocks in the market had enjoyed a great rise to a year high and optimism abounded.
2.  In the festive atmosphere that surrounded a recent 300 points in three weeks, I was the most depressed person.
3.  I am always more depressed by an overpriced market in which many stocks are hitting new highs every day than by a beaten-down market in a recession.
4.  Recessions, I figure, will always end sooner or later.
5.  In a beaten-down market there are bargains everywhere you look.
6.  But in an overpriced market, it's hard to find anything worth buying.
7.  The devoted stockpicker is happier when the market drops 300 points than when it rises the same amount.
8.  Many of the larger stocks had risen in price to the point that they'd strayed far above their earning lines.  This was a bad sign.
9.  Stocks that are priced higher than their earnings lines have a regular habit of moving sideways (a.k.a. taking a breather) or falling in price until they are brought back to more reasonable valuations.
10.  A glance at these charts led me to suspect that the much-ballyhooed growth stocks this year would do nothing or go sideways in the next year, even in a good market.
11.  In a bad market, they could suffer 30% declines.  
12.  I was more worried about the growth stocks.
13.  There's no quicker way to tell if a large growth stock is overvalued, undervalued, or fairly priced than by looking at  a chart book.
14.  Buy shares when the stock price is at or below the earnings line, and not when the price line diverges into the danger zone, way above the earnings line.
15. The market overall had also reached very pricey levels relative to book value, earnings and other common measures, but many of the smaller stocks had not.
16.  Annual tax selling by disheartened investors at the end of the year drives the prices of smaller issues to pathetic lows.
17.  You could make a nice living buying stocks from the low list in November and December during the tax-selling period and then holding them through January, when the prices always seem to rebound.
18.  This January effect, is especially powerful with smaller companies., which over the last 60 years have risen 6.86% in price in that one month, while stocks in general have risen only 1.6%.
19.  Don't pick a new and different company just to give yourself another quote to look up.  You'll end up with too many stocks and you won't remember why you bought any of them.
20.  Getting involved with a manageable number of companies and confining your buying and selling to these is not a bad strategy.  
21.  Once you have bought a stock, presumably you have learned something about the industry and the company's place within it, how it behaves in recessions, what factors affect the earnings, etc.
22.  Inevitably, some gloomy scenario will cause a general retreat in the stock market, your old favourites will once again become bargains, and you can add to your investment.
23.  The more common practice of buying, selling, and forgetting a long string of companies is not likely to succeed.  Yet many investors continue to do this.
24.  They want to put their old stocks out of their minds, because an old stock evokes a painful memory.
25.  If they didn't lose money on it by selling too late, then they lost money on it by selling too soon.  Either way, it's something to forget.
26.  With a stock you once owned, especially one that's gone up since you sold it, it's human nature to avoid looking at the quote on the business page, the way you might sneak around the aisle to avoid meeting an old flame in a supermarket.
27.  I know people who read the stock tables with their fingers over their eyes, to protect themselves from the emotional shock of seeing that their sold stock has doubled since they sold it.
28.  People have to train themselves to overcome this phobia.
29.  I am forced to get involved with stocks I have owned before, because otherwise there'd be nothing left to buy.
30.  Along the way, I have also learned to think of investments not as disconnected events, but as continuing sagas, which need to be rechecked from time to time for new twists and turns in the plots.
31.  Unless a company goes bankrupt, the story is never over.
32.  A stock you might have owned 10 years ago, or 2 years ago, may be worth buying again.
33.  To keep up with the old favourites, I carry a notebook, in which I record important details from the quarterly and annual reports, plus the reasons that I bought or sold each stock the last time around.
34.  On the way to the office or at home late at night, I thumb through these notebooks, as other people thumb through love letters found in the attic.


Peter Lynch
Beating the Street