Biderman on portfolio managers that only know of being long the market.
If you ask portfolio managers why stocks have not gone down? The answer can be bottom lined as the Bernanke Put. A key truth for those who believe in today’s School of What Works is that the Bernanke Put has been and will keep on saving the stock market.
For those of you who have been hibernating from the financial markets over the past few years, the Bernanke Put means that Wall Street believes that Fed Chairman Ben Bernanke is omnipotent; and that he can do whatever is takes to keep stock prices at around double the March 2009 lows. That is why most portfolio managers believe that any and all bad news cannot ultimately hurt stock prices.
Guest post by Azizonomics.
Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.
Sir John Templeton
Buy the fear, sell the greed. Since bottoming-out in 2009 markets have seen an uptrend in equity prices:
Guest post via Dough Short.
In my article Get Ready for the Next Great Bull Market I showed that when the spread between the 50- and 200-month moving average of the S&P forms a trough, it identifies beginnings of major bull markets. Accordingly a new bull market should start at the end of this year. My further analysis, using an adjusted normalized price to earnings ratio, indicates that a major bull market has already started in 2009.
Most of us are familiar with the Shiller cyclically adjusted price to earnings ratio of the S&P. It is the real price of the S&P divided by the average of the real earnings over the preceding 10 years and is identified as P/E10 in Shiller’s S&P data series. The 10 year period seems to have been arbitrarily chosen so as to minimize the effects of business cycles. I am using P/E5 for my analysis, which is the real price of the S&P divided by the average of the real earnings over the preceding 5 years.
From the Shiller data I have calculated the real values of the S&P composite with dividends reinvested (S&P-real), which is shown together with P/E5 in figure 1 below. I did this in order to have all the data in real values, not only P/E5, and since I wanted to compare recent market action with that of the past. One can see that $100 invested in 1873 would have grown over 139 years to about $740,000 by 2012 for a real average annual return of 6.62%.
With the European markets having put on a stealth performance, the summer has been rather sweaty for the shorts. From Bloomberg.
Bulls say professional investors buying back shares that were borrowed and sold short are fueling a rally led by European Central Bank President Mario Draghi’s pledge to defend the euro. The Euro Stoxx 50 is up more than 12 percent in three weeks, twice the gain of the MSCI All-Country World Index (MXWD), even as the euro-area economy is forecast to slide into recession. Bears point to a drop in earnings estimates after profit fell about 10 percent last quarter as a sign stocks in Europe may fall.
“Macro hedge funds missed collectively the policy news of June, and with the prospect of central bank interventions they are now capitulating,” Nikolaos Panigirtzoglou, head of globalasset allocation at JPMorgan in London, said in an Aug. 7 phone interview. JPMorgan has $2.3 trillion under management. “For positions to unwind, a trigger is needed. And the trigger was all this policy news.”
Over the past months, the psychology of the markets has been changing in a way we haven’t seen in many years. The bears, are all convinced that Greece, Spain and the rest of Europe will drag the world into the abyss. We have been rather bearish on the PIIGS situation, but have changed our view during the past month, as we simply have been encountering the shift in psychology in the markets. The crowded trade is being a Euro sceptic. This has proved rather costly during June, especially when it comes to the Spanish equities space. Too many “smart” shorts have entered doomsday short positions, and are now feeling the pain. Although we don’t expect the equities markets to go massively higher in the short term, one shouldn’t rule out a break out to the upside later this autumn. If SPX starts flirting with the old highs, many will start sweating, especially as the “crowd” has abandoned the equities space over the past years. Some more on the tilted psychology via Gresham’s Law.
This can happen in two ways. In the first (and most relevant) instance people can simply overdo the downside and realize that the depths of a depression are not a permanent condition of reality. The second may perhaps come later; as it is – for want of a better word – greed. We expect that the memory of debt-deflation would have to be purged from the mind of the investor before the latter can have a chance of taking hold once more. The world still has a case of ‘2008 on the brain’ / ‘2009 on the mind.
Hussman of Hussman Funds on the anatomy of the Bear….
In the first week of March, the U.S. stock market established a set of conditions placing it among the most negative 2.5% of historical observations (see Warning: A New Who’s Who of Awful Times to Invest) – a short list that includes the major peaks of 1972-73, 1987, 2000, and 2007. Since then, we’ve seen an increasing set of indicator syndromes that are associated with historically hostile market outcomes, maintaining us in a hard-defensive stance that is as rare as it is imperative. Last week, the market reconfirmed the “exhaustion syndrome” that I discussed several months ago (see Goat Rodeo). Prior to 2012, there were 112 weeks in post-war U.S. data where our investment strategy would have encouraged a similarly defensive position with that syndrome in place. Following those instances, the S&P 500 plunged at an average annual rate of -47.5%.
The trend-following components of our market action measures remain negative here, but it is important to note that those components are moderately – probably a small number of positive weeks – away from an improvement that could shift us from such a tightly defensive stance. While our outlook would not become bullish by any means, this shift would rein in the “staggered strike” put option hedges we presently hold in Strategic Growth. These positions (which raise the strike prices on the long-put portion of our hedges) substantially improve performance during market plunges, but make us vulnerable to the loss of put option premium during “risk on” advances such as we saw last week. That is uncomfortable even if the puts only represent a very small percentage of assets (as they do here).
Guest post by Peter Tchir of TF Market Advisors.
The term “perma” seems to get attached to anyone who has an opinion for more than a couple of weeks, but yes, I have changed my view on Europe. By the end of LTRO2 when most of the world was bullish we were bearish. It was painful for a bit, but we saw the signs as early as March 2nd, and accelerating by March 16th that Spanish debt was struggling. We remained bearish for quite some time but gradually shifted to a bullish bias. Too early as we had to ride it down further, but got more bullish on the back of two main catalysts – Grexit and JPM.
How did Grexit Make Me Bullish?
The fact that Europe was finally starting to face up to the possibility of Greece exiting became a positive for me. The people I have spoken to at the German Ministry of Finance and senior Greek politicians all admitted that until recently almost no time had been dedicated to what a Greek exit would look like.
In spite of all the negotiations around the bailout, neither side had taken a serious look at what it could mean. Both side were living in a world of assumptions about how it would play out that had no basis in reality. Germany somehow had this vision of not having to make good on all its guarantees, that the ECB would get paid, and the “firewall” would stop contagion. All of those are laughable assumptions yet basically is what the “core” of Europe believed. So on June 2nd when we wrote our widely read Why a Grexit would make Lehman look like childs play piece, the basis for the bullish view was formed.
Know your bull and bear markets. Further insight on the secular bull and bear markets by Hussman Funds.
“The world economy has stepped back from the brink and we have causes to be a little bit more optimistic. But optimism should not give us a sense of comfort and certainly should not lull us into a false sense of security.”
IMF Managing Director Christine Lagarde, March 17, 2012
As we examine the present evidence relating to both the financial markets and the global economy, the aspect that strikes us most is the extent to which Wall Street continues to emphasize superficially positive data in preference for deeper analysis, to extrapolate short-term distortions as if they were long-term trends, and to misconstrue freshly printed wallpaper and thin supporting ice as if they were solid walls and floors.