John P. Hussman, Ph.D.
In my view, we are likely witnessing the peak of the third equity valuation bubble in the past 14 years, the first two which saw major indices plunge by at least 50%. It’s important to recognize that market peaks are a process, not an event. Internal deterioration has actually been developing since early July, and became measurable in early August (see A Hint of Advance Warning). This process has been quite like what we observed in 2007, when deterioration became measurable in July of that year (see Market Internals Go Negative). Despite an initial selloff, the major indices recovered to a marginal new high in October 2007 before continuing lower.
On the valuation front, based on measures that we find most reliably correlated with actual subsequent market returns (and many widely-quoted measures are not), equities are more overvalued than at any point in history except 2000, at more than double their historical norms, and the best-correlated ones are within 15% of the 2000 peak (see Ockham’s Razor and the Market Cycle to review a variety of these). With market internals still struggling and credit spreads widening, elevated valuations have now been joined by a subtle but measurable shift toward increasing risk aversion. In prior cycles, that shift has typically discriminated between overvalued markets that continued higher from overvalued markets that fell like a stone. Again, if that evidence eases, the immediacy of our concerns will ease as well. That wouldn’t make stocks any less overvalued, so a certain line of defense will be important in any event.
Generational
Dynamics |
Forecasting America's Destiny ... and the World's
John J. Xenakis |
Last week, on one of days when the Dow Jones Industrial Average reached a fresh all-time high, I heard one of the male anchor on CNBC say something like: "The Dow Jones has reached an all-time high 48 times this year. That's the highest number since 1929." The female anchor said, "What are you saying????" and quickly changed the subject.
|
In fact, the near-parabolic spike in stock prices is only one of the ways that Wall Street is signaling danger. According to Friday's Wall Street Journal, the S&P 500 Price/Earnings index (stock valuations) on Friday (December 5) has shot up to 19.54. This is far above the historical average of 14, indicating that the stock market is in a huge bubble that could burst at any time.On October 16, I warned that wild stock market swings, which are similar to the wild swings that occurred in October 1929, were particularly dangerous, because the next wild swing could be sharply downward by hundreds of points.
|
Now the Bank of International Settlements (BIS) is confirming this view in its quarterly report:
|
"These abrupt market movements (in October) were even more pronounced than similar developments in August, when a sudden correction in global financial markets was quickly succeeded by renewed buoyant market conditions.
|
This suggests that more than a quantum of fragility underlies the current elevated mood in financial markets. Global equity markets plummeted in early August and mid-October. Mid-October's extreme intra-day price movements underscore how sensitive markets have become to even small surprises."
|
The BIS pointed out that the US dollar has been strengthening significantly in recent weeks against the euro, the yen, and other emerging market currencies. This is happening because the Federal Reserve is cutting back on quantitative easing ("printing money"), at the same time that the European Central Bank (ECB) and the Bank of Japan (BOJ) have been significantly increasing their quantitative easing programs. On Friday, there was an unemployment report of a larger-than-expected rise in U.S. jobs in November, and this sent the dollar to multi-year highs against the yen and euro.
|
Many companies in emerging economies have been going increasingly into debt, just as American companies did in the mid-2000s, leading to the financial crisis. However, many of the emerging market company debts are denominated in dollars, and so a significant strengthening of the dollar means, in effect, that the amount owed is growing substantially, relative to the country's own currency. This could force these businesses into bankruptcy, creating a chain reaction of further bankruptcies. Also, it could force many hedge funds and businesses to liquidate their assets, such as stocks and bonds, in order to pay their debts, causing a chain reaction of asset sales, causing a stock market plunge.
|
According to one currency analyst, Kit Juckes at Sociéte Générale, this could have an effect as early as Monday morning:
Reuters and AFP and Bank of International Settlements (BIS)
"It's the warning that the rising dollar could bring more (emerging markets) trouble in its wake - as it did in the 1990s - that is going to challenge FX [foreign exchange] markets tomorrow [Monday] morning while we're all thinking about what the U.S. non-farm payroll data mean for Fed rate hike timing."
|
(Reuters) - Sudden swings in financial markets recently suggest they are becoming more fragile and sensitive to unexpected events, the global organization of central banks said on Sunday, warning that a rising U.S. dollar could have a "profound impact" on emerging markets in particular.
"This suggests that more than a quantum of fragility underlies the current elevated mood in financial markets," it said in its quarterly review. "Global equity markets plummeted in early August and mid-October. Mid-October's extreme intra-day price movements underscore how sensitive markets have become to even small surprises."
Emerging market economies expected to be hardest hit because "the outsize role that commodities and international currencies play there makes them particularly sensitive to the shifting conditions," he said.
Emerging economies have racked up to $3.1 trillion in dollar-denominated debt by mid-2014.
A continued appreciation of the dollar would therefore increase debt burdens, Borio said.
At the same time, some of these economies are dependent on commodity exports and have therefore come under intense pressure over falling prices.
DYI Comments: If one believes in markets "regressing back to the mean" as we do here at DYI the U.S. market as measured by dividends is 135% above fair value. This has become nothing more than a speculator's market looking for another speculator to sell off overpriced shares until they run out of fool's. How high can this market go is anyone's guess as the Bank of Japan has now open up the flood gates for QE. It appears that the European Central Bank (if the Germans will go along) may do the same. At any rate, this is and has been for many months a speculator's market.
Current S&P 500 dividend yield 1.85% (1 / 1.85) = 54 times dividends PD
Average dividend yield (mean) since 1871 is 4.42% (1 / 4.42) = 23 times dividends PD
(54 - 23) / 23 x 100 = 135%
THE GREAT WAIT CONTINUES
DYI
No comments:
Post a Comment