John Hussman has a very nice "open letter" out to the FOMC this morning, and it should be required reading not only for The Fed (which probably will ignore him and not read it) but also, far more-importantly, by anyone who has exposure to the market.
He makes a very clean argument that our market is currently in a massive bubble, and backs it up with facts and figures. But there is one point that he is pounding the table on that I have made for the last four+ years and yet it has been resoundingly ignored.
That is the fact that it is not The Fed that has powered the rally -- it is the fraud in valuations that was made possible by Kanjorski's hearing in 2009 during which FASB was basically told to allow mark-to-unicorn "or else."
The problem with pumping up a bubble through bogus valuations is that unlike doing it with "liquidity injections" the destruction of the former is assured since the valuations are fantasies. What's even worse is when you allow people to believe that it is "liquidity" that led to the behavior and valuation change when you know, or should have known, that was utter crap either because you are scared of the truth becoming known or worse, you start believing your own press releases.
Unfortunately as John points out after-tax profits compared against GDP are at utterly ridiculous levels -- by a near double. This strongly implies that simple mean-reversion, without any sort of overshoot and without any multiple contraction at all, cuts the market in half.
So the question becomes, are these "profits" sustainable or even worse, are they real?
We're going to discover the answer to both of those questions in the coming months, and I suspect that we're not going to like the answer one little bit.
What's worse is the number of moon-shot moves that we've seen. John points to the IPOs that have doubled, but I am far more concerned about the so-called "established" firms that have seen 200, 300, even 500% moves over the last couple of years yet these firms have no or few earnings behind them.
We always hear that "this time it's different" and yet historically it never is. If you remove those moonshots from the market entirely what would be the outcome? 20, 30% contraction perhaps? More? Now add the profit reversion and where are you?
Dave Rosenberg, one of the chief pumpers of the market, says "oh no, don't worry." Hmmmm...
Here's the problem with that sort of "analysis" -- it presumes that The Fed "adding" to its balance sheet is an actual positive for the market. Dave poo-poos the impact of the fact that the market is up 25% this year with a single-digit growth in earnings and revenues of the companies in that market -- price performance that has no justification in either current or forward earnings and sales expectations.
Dave is one of those guys who ought to know better -- or who actually does know better. That is, he either knows or should know that everything in the economy at a wide-angle enough view is a balance sheet and worse, a Fedhead himself has said there is no evidence that QE works.
So if you're doing something that there is no evidence for, the reaction is "good" in the market, yet the reaction is ridiculously out-sized compared against what you can actually show in real results what do you have, analytically?
Answer: A massive and unstable bubble.
Salesforce.com Inc. (CRM) introduced an overhauled version of its mobile software, seeking to ensure clients and partners will be able to use more features of the company’s sales, marketing and customer service software.
Ok. Sounds like this is a good company. But that's not the question -- the question is whether you should consider investing in it.
Salesforce is projected to report a 34 percent climb in revenue to $1.06 billion for the quarter that ended in October, according to the average of analysts’ estimates compiled by Bloomberg. Earnings excluding some items are projected to rise 4.8 percent to 9 cents a share.
So let me see -- revenues are climbing (a lot) but profits, that is, earnings, are going up at a much slower rate.
And on a five year forward projection P/E/G is over 6. At 9 cents/share per quarter x 4 quarter we have 36 cents/year of earnings but the stock sells for around $58 this morning.
Or 161 times, roughly, earnings.
Note that earnings are rising at just under 5%, so you're paying thirty-two times the growth rate -- that's not a P/E/G of 6, it's one of 32!
This company is not alone in this sort of "valuation." Amazon is even worse, not to mention Farcebook and LinkedIn.
Of course the premise all of these folks sell you is that they're going to take over the world. The article referenced sounds an awful lot like that. It always does.
But in order to justify this sort of thing on an industry basis all of these pumped-up pieces of crap have to take over the world at the same time.
The problem is that the world isn't that big -- that is, there's nowhere near enough GDP to actually fulfill these claims.
This is exactly what happened in 1999, and in fact today it's worse than it was then. And just like in 1999 utterly nobody in the mainstream media is pointing out that if you look at the maximum reasonable amount of GDP that these firms can constitute (after all you have to actually produce something with your company that uses these products and services -- right?) you wind up with a mathematical impossibility at the valuations being expressed -- by a factor of 10 or more.
How far does this crap go before it collapses? Hell if I know. But what I do know is that what is impossible won't happen, and therefore we are simply counting out time before someone stands up, raises their hand and asks the impertinent question: How is it that you can possibly justify where your stock trades, given the actual and believable rates of expansion squared against the actual economic output you can capture?
That's the day the market crashes.
Not corrects a bit, crashes.
Because when you're overvalued by a factor of 10 or more what comes is not a correction.
It's a crash.
Note from the call: All top 10 emerging markets are weak.
Deterioration in the back half of the quarter was huge and the forecast for next quarter is worse.
This is not a US government shutdown story folks, although some will try to spin it that way.
Say what you want about Chambers, he tends to shoot pretty straight. And while he of course is optimistic about his own company and its prospects (you damn well ought to be as a CEO!) unlike many he will not BS you when it comes the reality.
Ignore this at your considerable peril -- you get to choose between a market closing at a new record high and the CNBS pumpers all out along with the FedHeads while the CEO of what is arguably the best Internet technology provider just told you that factually sales suck and are expected to continue to suck.
This one is good for the icon this morning..... after you spit your coffee all over the keyboard:
Higher debt costs will reduce buybacks and dividend increases that have boosted returns in the four-year bull market, investors say. Companies that repurchased the most shares or regularly increased payouts beat the benchmark for U.S. equity by more than 27 percentage points since 2009. S&P 500 members returned $82.4 billion to shareholders in dividends last quarter, up from $71.2 billion a year earlier, Bloomberg data show.
Yeah, and that's all that will happen, right?
Look folks, it's simpler than being propounded.
This is a 30 year pattern of decreasing interest rates. This has driven the S&P 500 "price" from ~100 to 1,600. The reason is that businesses and government entities have been able to continually roll over their debts rather than pay them off and with each "turn of the crank" the cost goes down in relative terms.
If you look at this chart with a discerning eye you will discover that every major market blowup has come from a cyclical counter-trend higher in rates. 1987, the mid-1990s recession, 2000 and 2008 -- all came from those cyclical counter-moves.
Now that trend has reversed. It hasn't reversed because people want it to reverse, it has reversed because it cannot be otherwise.
The last time we saw this sort of reversal and change the market had 50% or more fluctuations in value but we came into that period with reasonably-low debt both as a level of GDP and in absolute terms. That debt had been worked off in the late 1940s and 50s, having been incurred in WWII. This time we're coming into this secular shift with record high debt levels.
In an environment of generally-decreasing interest rates you can "make money" by turning the crank on leverage because with each turn your relative service cost goes down. This leads to rapidly rising asset values because it appears that debt has no cost in real terms; it keeps getting cheaper and cheaper to refinance at each rollover.
This appearance is false as all you have done is defer your payment (or default) -- you may get away with deferring it for a long time, but it does not go away when it is rolled over!
Now the secular environment is reversing. The secular trend for the next 30 years will be one of higher rates, with cyclical counter-trend moves lower.
In such an environment being in debt strangles you and the more you try to take on the tighter the noose becomes around your neck.
No, this change does not come overnight, and it also isn't recognized overnight. In fact there will be every attempt to ignore, sweep under the carpet and explain away that which is inevitable when it comes to the impact on cash flow from operations and profitability -- right up until the accountants and auditors remind you that your checks can bounce and, if you keep this crap up, they will.
Where We Are, Where We're Heading (2013) - The annual 2013 Ticker
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