Black Monday Revisited? Booming Bonds? The Tokyo Bull?
PUN WINSTON
I'm a Torontonian and I follow the TSE300 moreso than the
Dow Jones or S&P500, but I'd be foolish not to monitor the
major American markets since the TSE300 tends to follow
the two giants very closely.
Firstly, I'm curious to know why many believe that inflation
will soon rise up to consume the market. The PPI and CPI
have remained pretty low for quite awhile now and have only
recently increased by 0.4%. Also, the money growth (M1 and M2)
in the past couple years has also been slow, averaging around
4-5%. Indeed, I don't see how inflation will become a problem -
at least for another year or so...
Secondly, I'm worried about the P/E ratio and dividend yields
of both the S&P500 and the TSE300. The P/E ratio for the
S&P500 composite index is hovering at a dangerously high 23
and the dividend yield is also at an uncomfortable 3%. Indeed,
the markets cannot sustain this for very long and I was wondering
if anybody has any predictions on the coming bear market. Is
this perhaps Black Monday revisited?
For the past week, the bond market has been booming as inflation
was shown to be comfortably under control. Although Wall Street
had been expecting a rise of only 0.3%, the core index, excluding
the volatile food and energy sectors, rose a slight 0.1% against
expectations of a 0.3% rise. :)
Any ideas how long long term rates will continue to drop? Is
this just the beginning of the end of the fall? Has long term
rates hit rock bottom? Again, any ideas out there?
I am heavily invested in the Canadian resource sectors as well
as the Pacific Rim. However, I believe that the resource sector
has just about reached it's peak, and I believe to pull out before
the fall. The Tokyo exchange, the 225-share Nikkei average was
up 520.33 (!!) points or 2.68% (!!) over the week at 19,967.27!
(geez) on Thursday. The Nikkei last closed above 20,000 only a
few weeks ago...Brokers said the bullish sentiment was still
intackt after Thursday's trade, but I'm wondering how much longer
can this heady rise continue.
Thanks in advance for any replys.
Jim ---'---(@
Maurice E. Suhre
>
> Firstly, I'm curious to know why many believe that inflation
> will soon rise up to consume the market.
Oh hell, I'll take a stab. The gap between the short term rates and the
long term rates indicates the difference between the Fed's action (short
term rates), and what the market thinks is eventually going to happen.
There is also some reason to believe that the Bush administration was
frantically trying to pump the economy to get re-elected, but started too
late. Their pump priming efforts will show up as an inflation spurt.
Unless Clinton and Co can tax it back down :-)
I haven't seen a chart, but Richard Mogey said (on his 4/10 program) that
the bonds appear to be working out a double top in prices. That means
that the interest rates will be rising. This suggests a correction in
stocks. Richard's stats suggest a 4-8 month lag from the top in bond
prices to the stock market correction.
He is still waiting (and me with him) for the McClellan Oscillator to
signal that correction.
Eventually, consumer confidence will return along with purchases and a
rise in debt which will expand the money supply. Inflation will begin to
rear its ugly head, the Fed will raise interest rates to control the
situation. It's happened before, and I expect the same tune to replay.
With the stock market at record valuation levels based on historical
dividend yields, P/E's, and essentially any valuation method used, the
obvious direction would be down.
Of course, I can't speak for "many", but I think this represents the
general line of thinking. Usual disclaimers and IMNSHO of course.
--
Maurice Suhre
su...@trwrb.dsd.trw.com
Marc Randolph
>In article <C5AnF...@ecf.toronto.edu> pun...@ecf.toronto.edu (PUN WINSTON) writes:
>> Firstly, I'm curious to know why many believe that inflation
>> will soon rise up to consume the market.
> ^^^^ ^^^^^^^
>Oh hell, I'll take a stab. The gap between the short term rates and the
>long term rates indicates the difference between the Fed's action (short
>term rates), and what the market thinks is eventually going to happen.
>There is also some reason to believe that the Bush administration was
>frantically trying to pump the economy to get re-elected, but started too
>late. Their pump priming efforts will show up as an inflation spurt.
Why?
I don't understand why everyone believes there has to be inflation.
Before the 1940's (or was it 1950's?), there was basicly no inflation.
Is it how much debt people run up that causes inflation (see below)?
This would semi-explain the no inflation period in the 40's. Most people
didn't have as much credit available to them back then.
>I haven't seen a chart, but Richard Mogey said (on his 4/10 program) that
>the bonds appear to be working out a double top in prices. That means
>that the interest rates will be rising. This suggests a correction in
>stocks. Richard's stats suggest a 4-8 month lag from the top in bond
>prices to the stock market correction.
But if alot of people believe this, as soon as they see the top of the
bond market, they will get out of stocks in hopes of avoiding
the correction... thereby causing the correction to come very early.
I don't think you can predict a time frame like that.
>He is still waiting (and me with him) for the McClellan Oscillator to
>signal that correction.
I've heard of this Oscillator, but never actually seen it. Is it in
Barron's or the WSJ?
>Eventually, consumer confidence will return along with purchases and a
>rise in debt which will expand the money supply. Inflation will begin to
>rear its ugly head, the Fed will raise interest rates to control the
>situation. It's happened before, and I expect the same tune to replay.
I can see why inflation would rise some due to an increase in
money supply, but wouldn't it be limited by the amount of credit
available to consumers... or are you saying that consumers can
get almost as much credit as they want (I know, I could probably get
a hundred credit cards and charge each one to the max... is that the
type of thing you are refering to?).
Marc
--
---
Marc Randolph mar...@tamsun.tamu.edu -or- mar...@zeus.tamu.edu
Maurice E. Suhre
>In article <1993Apr12.1...@gumby.dsd.trw.com> su...@meltami.dsd.trw.com (Maurice E. Suhre) writes:
>>Their pump priming efforts will show up as an inflation spurt.
>Before the 1940's (or was it 1950's?), there was basicly no inflation.
Back in the "good ole days", our dollars were backed by *gold* and there
was a limit to how many could be created.
>>Richard's stats suggest a 4-8 month lag from the top in bond
>>prices to the stock market correction.
> But if alot of people believe this, as soon as they see the top of the
>bond market, they will get out of stocks in hopes of avoiding
>the correction... thereby causing the correction to come very early.
>I don't think you can predict a time frame like that.
Everyone is entitled to their opinions. Time will tell. However, The
Foundation for the Study of Cycles is not widely followed, IMHO. The
rise in interest rates starts the market decline clock ticking. It
ticked in 1987 and not enough people were listening (including me).
Fortunately, I had bought a house the year before and was too tapped
out to be much in the market. Also, a lot of funds remain "fully"
invested as a matter of policy as outlined in their prospectuses.
>>He is still waiting (and me with him) for the McClellan Oscillator to
>>signal that correction.
> I've heard of this Oscillator, but never actually seen it. Is it in
>Barron's or the WSJ?
No. The McClellan oscillator is computed from Advance/Decline data.
Some day I'll do a complete posting about it. Until I do, I'd better
quit mentioning it :-)
> I can see why inflation would rise some due to an increase in
>money supply, but wouldn't it be limited by the amount of credit
>available to consumers...
It isn't just the consumer demand. Businesses start borrowing more to
keep up with the demand. That isn't quite so bad as an increase in
money supply with a corresponding increase in goods and services won't
be inflationary.
I would like to point out that in discussion of the causes of inflation I
know less than I do about some other matters. And the other usual
disclaimers.
--
Maurice Suhre
su...@trwrb.dsd.trw.com
CHEDLEY_AOURIRI
|>...
|> rise in debt which will expand the money supply. Inflation will begin to
|> rear its ugly head, the Fed will raise interest rates to control the
|> situation. It's happened before, and I expect the same tune to replay.
I do'nt think inflation will come back any time soon. For a very simple
fundamental reason: EXCESS CAPACITY.
Worldwide, we currently have excess capacity in everything: labor,
factories, plants, capital, real estate,...that is causing a spiraling deflation.
So, even if the central banks start printing money, inflation will not
come back soon. Because you do not have the situation of too much money
chasing too few goods.
Indeed, the hope of most governments (US, Japan, Germany,..) is that
lowr interest rates and money printing will find its way to employ
more people and revive the economic doldrums... or pay down the huge
government and private debt loads.
Of course, this provides a nice cushion to the over-valued US stock market,
as those who have money do'nt really know what to do with it...
--
..CHEDLEY..
..!{uunet|tektronix|ogicse}!littlei!chedley che...@carthago.intel.com
------------------------------------------------------------------------
Standard Disclaim: The above statements and opinions are strictly mine,
and do not represent any company or organization's position.
......................................................................
Greg Marciniak
is that the direction has grave implications for people caught on the wrong
side of the equation.
The general argument for increasing inflation (product price inflation),
is that, at the current accumulations of debt and interest costs to carry the
debt, the U.S. govt will literally run out of tax revenues to pay the interest
in less than five years. Some estimates are 3 to 4 years. If that doesn't
scare you, I don't know what would. At this point, many people believe that
the politicians will take the path of least resistance and print more money.
The question arises, how exactly will they get this money off the presses
and into the public's hands? There are only two ways, private borrowing and
government spending. These are the ways that money is created in our system.
Government spending will create money only if it is thru deficit spending.
Otherwise it will only recirculate existing money thru the tax system or from
foreign sources. This will occur if the Federal Reserve buys government debt
from its magic checkbook, and the government spends it into circulation.
Product price inflation will occur if the supply of dollars exceeds the
products available after some time lag. Milton Friedman says it takes about
two years to show up.
The other and normal way is to make it conducive for private borrowers
to borrow money. That is what has been happening with the drop in interest
rates over the last two years. It has done no good. We are clearly in a
deflationary environment. Just look around at the drops in prices of real
estate, pc's and other consumer products. Even with the huge deficits
i.e. money creation out of thin air- prices are deflating. It has only started
in my opinion. In a deflationary, contracting environment, people do not want
to go into debt. This chokes off the other avenue of money creation resulting
in more deflation as debt is written down and assets are marked down.
Deflation, like inflation feeds on itself and is self-reinforcing.
The only way out of this situation at this point would be massive government
spending as is being done in Japan now. Like any bankrupt corporation, the
U.S. needs a massive new loan ( huge increase in deficit spending ) to
overcome the inertia of the ship of state; to change the mentality.
This is clearly not in the cards.
The conclusion then is deflation....and pain. It is probable that this
will continue as the White House becomes a slave to their new master- the
bond market. The bond market will probably force deflation just as the
bankrupt corporation will be forced into liquidation by the creditor bank.
The real question is will the politicians tell the bond off and monetize
the debt.
Greg Marciniak
Steven McDermott
su...@meltami.dsd.trw.com (Maurice E. Suhre) wrote:
>
> Eventually, consumer confidence will return along with purchases and a
> rise in debt which will expand the money supply. Inflation will begin to
> rear its ugly head, the Fed will raise interest rates to control the
> situation. It's happened before, and I expect the same tune to replay.
> With the stock market at record valuation levels based on historical
> dividend yields, P/E's, and essentially any valuation method used, the
> obvious direction would be down.
I agree that when short-term interest rates start going up, that the market
will start going down. But I think that the yield curve will flatten
because the long bonds come down, not the other way around. I'm not
convinced by the argument that rates have never been so low: that's just
the flip side of "things are different this time." When everybody seems to
think that rates "can't possibly go any lower" they probably will. I'm also
not convinced that an increased money supply means inflation, at least
initially. Americans have been paying down their debt. And I think enough
people are worried about their economic well being that this trend will
continue. Actually I think the attention Perot's deficit talk received
probably had more influence on paying down consumer debt than on reducing
the federal deficit. Or at least stemmed the rising tide (which is all that
Clinton's "deficit reduction" budget hopes to do).
Of course, *eventually* consumer confidence may in fact outstrip fear of
debt and then you might very well see increased demand and pressure on
prices. But I think right now most peole and companies are realizing that
the easiest way to make money is to reduce interest payments on debt. Its
money in the pocket. For those that never learned this lesson, the wave of
refinancings is becoming a great teacher. Look at the number of Geo Metros
on the road, a small sign that conspicuous consumption is on the decline.
my .02
Michael L. Siemon
> I don't understand why everyone believes there has to be inflation.
>Before the 1940's (or was it 1950's?), there was basicly no inflation.
???
From the 1870's to the 90's there was a deflation of about 48%; then
prices remained quite stable for the next decade, slowly rising over
the following decades, with some fairly extreme values after the US
got involved in WWI (24% inflation in 1917, 12% the next year ...)
and continuing inflation into the early 20s, when prices were again
stable for the 8 years preceding the Great Crash. Thereafter, deflation
took hold again till about 1933 or 34, then stability till WWII, with
peak inflation in the couple of years adjustment after the war (12% in
both of 46 and 47, slowing to 6% in 48). Prices continued to rise (25%
in all) over the 50's, and slightly faster in the 60's (total 30% rise.)
I won't remind you about the 70's and after :-) [This is all based on
GNP deflator values from the Historical Statistics of the US; other
price series show similar values.]
Globally, the "fall" of the dollar since its '86 highs against other
currencies has been associated with only very slight dollar rises in
commodity prices, which may be taken as evidence of our going through
another deflationary period.
Depending on just exactly WHAT economic causes you see behind any of
this, it is not unreasonable to forsee stable prices for the next decade.
But, again, that depends on what you take as "driving" the economy --
there have been vastly confident predictions of hyperinflation "any
day now", by people who THINK they understand money supply, for the
last decade. I used to collect coins; if one buys coins mail-order,
one gets on some remarkably peculiar mailing lists and can read huge
quantities of doom-saying junk mail ...
--
Michael L. Siemon "Stand, stand at the window
m...@panix.com As the tears scald and start.
m...@ulysses.att.com You shall love your crooked neighbor
-standard disclaimer- With your crooked heart."
Larry Rogers
PUN> Firstly, I'm curious to know why many believe that
PUN> inflation will soon rise up to consume the market. The PPI
PUN> and CPI have remained pretty low for quite awhile now and
PUN> have only recently increased by 0.4%. Also, the money growth
PUN> (M1 and M2) in the past couple years has also been slow,
PUN> averaging around 4-5%. Indeed, I don't see how inflation
PUN> will become a problem - at least for another year or so...
Inflation fears are just paranoia as far as I can tell.
Internationally and nationally there is little to justify them.
Growth could lead to mild inflation and an increase in interest rates,
but nothing staggering.
PUN> Secondly, I'm worried about the P/E ratio and dividend
PUN> yields of both the S&P500 and the TSE300. The P/E ratio for
PUN> the S&P500 composite index is hovering at a dangerously high
PUN> 23 and the dividend yield is also at an uncomfortable 3%.
PUN> Indeed, the markets cannot sustain this for very long and I
PUN> was wondering if anybody has any predictions on the coming
PUN> bear market. Is this perhaps Black Monday revisited?
No. First, black monday was more than it was painted up to be. The
market has gained back all that it lost and much more and has been
stable for six years since. We cannot compare this to 1929. It was a
correction, albeit a major one. Most analysts are predicting a
correction this year from what I am reading. But profits are doing
quite well, and a 3% dividend is right in line with equivalent yields
in investments with no potential for capital gains (CD's, money
markets). The P/E's are so high because we just came out of a bad
period and the expectations are that profits will improve. So far,
those predictions are right on the money for the most part.
PUN> For the past week, the bond market has been booming as
PUN> inflation was shown to be comfortably under control.
PUN> Although Wall Street had been expecting a rise of only 0.3%,
PUN> the core index, excluding the volatile food and energy
PUN> sectors, rose a slight 0.1% against expectations of a 0.3%
PUN> rise. :) Any ideas how long long term rates will continue to
PUN> drop? Is this just the beginning of the end of the fall?
PUN> Has long term rates hit rock bottom? Again, any ideas out
PUN> there?
The bond market is nervous. The analysts have altered predictions
weekly. Sort of like the weather man looking out the window to give
the weather. Rates are historically low, but international pressures
should probably keep them that way. Prediction, hovering around 6.8
to 7.1, moving big time on every negative or positive report, for what
my predictions are worth.
PUN> I am heavily invested in the Canadian resource sectors
PUN> as well as the Pacific Rim. However, I believe that the
PUN> resource sector has just about reached it's peak, and I
PUN> believe to pull out before the fall. The Tokyo exchange, the
PUN> 225-share Nikkei average was up 520.33 (!!) points or 2.68%
PUN> (!!) over the week at 19,967.27! (geez) on Thursday. The
PUN> Nikkei last closed above 20,000 only a few weeks
PUN> ago...Brokers said the bullish sentiment was still intackt
PUN> after Thursday's trade, but I'm wondering how much longer can
PUN> this heady rise continue.
I think it will continue to do well. The Nikkei was waiting for some
good news and has been hit with alot. However, remember the cliche,
buy on the rumor, sell on the news. The assumption is that the
stimulus Japan is going to use will help their companies alot. If
profits do not boom nearly immediately (which they will most likely
not), an adjustment is in order. It will never drop below 18K though
and could top out back up in the 30000 range.
However, long term, the Japanese are in excellent shape. There
infrastructure is strong, their workforce is educated, they have
everything they need to be internationally competitive. Personally, I
think the Nikkei will kick butt over the next three years, leaving the
US market in the dust.
Cheers, Larry
--
@@ Larry Rogers *
@@@ larry_...@dg.com * Big Brother
@@@ &&& la...@boris.webo.dg.com * is Watching
@@ && Data General 508-870-8441 *
The opinions contained herein are my own, and do not reflect the
opinions of Data General or anyone else, but they should.
"Sometimes we are the windshield, sometimes we are the bug"
Dire Straits
Norbert Schlenker
>correction this year from what I am reading. But profits are doing
>quite well, and a 3% dividend is right in line with equivalent yields
>in investments with no potential for capital gains (CD's, money
>markets).
And no potential for capital loss, either, we should add.
I've asked this question before and never got a good answer: If short
rates at 3% and long rates at 7% justify a P/E of ~25 and a dividend
yield of under 3% on the S&P 500, then why didn't 3% short and 5% long
rates through the 1950s justify P/Es over 18? What is so different
this time?
> The P/E's are so high because we just came out of a bad
>period and the expectations are that profits will improve. So far,
>those predictions are right on the money for the most part.
A possible explanation, to be sure. I think the expectations are
punk, though. Where is IBM going to make money? Where is Philip
Morris going to make money? Where is Procter & Gamble going to
make money? For every company like GE (which I hear this morning
announced 10% higher quarterly earnings), we have three whose wares
are under serious price pressure.
>I think it will continue to do well. The Nikkei was waiting for some
>good news and has been hit with alot. However, remember the cliche,
>buy on the rumor, sell on the news. The assumption is that the
>stimulus Japan is going to use will help their companies alot. If
>profits do not boom nearly immediately (which they will most likely
>not), an adjustment is in order. It will never drop below 18K though
>and could top out back up in the 30000 range.
Great stuff. I love predictions, especially ones I disagree with
vehemently. I predict the Nikkei will fall. Far. 10,000 would
not surprise me. The P/E on the Nikkei is 75+ at current levels,
and earnings are falling. If the Nikkei sticks at 20,000, the P/E
will be over 100 in six months. With the yen rising and Mickey
Kantor in Washington, their exporters are in serious trouble.
I'd buy puts.
>However, long term, the Japanese are in excellent shape. There
>infrastructure is strong, their workforce is educated, they have
>everything they need to be internationally competitive. Personally, I
>think the Nikkei will kick butt over the next three years, leaving the
>US market in the dust.
Personally, I think the Japanese will kick butt over the next three
years. But their stock market sucks wind.
Norbert
n...@cs.princeton.edu
Red Herring
>In article <1993Apr12.1...@gumby.dsd.trw.com>,
>su...@meltami.dsd.trw.com (Maurice E. Suhre) wrote:
>>
>> Eventually, consumer confidence will return along with purchases and a
>> rise in debt which will expand the money supply. Inflation will begin to
>> rear its ugly head, the Fed will raise interest rates to control the
>> situation. It's happened before, and I expect the same tune to replay.
>> With the stock market at record valuation levels based on historical
>> dividend yields, P/E's, and essentially any valuation method used, the
>> obvious direction would be down.
>
>I agree that when short-term interest rates start going up, that the market
>will start going down.
Eventually, yes. It all depends on what is driving the market.
Today, it's low interest rates, tomorrow it could be corporate earnings,
or a leverage buyout binge (no, not with the current administration
in the White House).
Short-term rates kept going up throughout '87.
--
------------------------------------------------------------------------------------------
Disclaimer: Opinions expressed are mine, not my employer's.
------------------------------------------------------------------------------------------
Bill Reid
>
>I've asked this question before and never got a good answer: If short
>rates at 3% and long rates at 7% justify a P/E of ~25 and a dividend
>yield of under 3% on the S&P 500, then why didn't 3% short and 5% long
>rates through the 1950s justify P/Es over 18? What is so different
>this time?
>
via 401K plans; in the 50's the best (only) "investment" deduction
with tax-deferred gains was the home mortgage deduction
2) Demographic changes: we now have a much larger percentage of
people working than in the 50's, with a rising average worker age
(compared to a declining average age in 50's), both of which increase the
cash available for investment in pre-tax plans due to a declining
percentage of household income going to home mortgages
3) The direction and momentum of interest rate changes are
substansially different today than 35-40 years ago - today's
rates are downward sloping compared to relatively flat in the
50s
I could list several more, but if these don't satisfy you, you must be
devoted to an idea rather than searching for answers...obviously, things
ARE different now, otherwise we would not have an SP500 P/E of ~25
compared to the lower P/Es of yore. The factors which determine future
market direction are available in statistical abstracts and your
local paper business section. You can continue to focus on a small set
of static figures which mean relatively little, or concentrate on the
dynamic changes in the entire system which truly determine supply and demand
in the market.
--
| The above opinions do not necessarily reflect the views |
(signed_long) - | of Pyramid Technology, even though I do most of the |
William Ernest Reid | work around here and come up with all the good ideas. |
Red Herring
>
>I think it will continue to do well. The Nikkei was waiting for some
>good news and has been hit with alot. However, remember the cliche,
>buy on the rumor, sell on the news. The assumption is that the
>stimulus Japan is going to use will help their companies alot. If
>profits do not boom nearly immediately (which they will most likely
>not), an adjustment is in order. It will never drop below 18K though
Of course it will, once the goverment stops propping it up
above that level.
>and could top out back up in the 30000 range.
>
>However, long term, the Japanese are in excellent shape. There
>infrastructure is strong, their workforce is educated, they have
>everything they need to be internationally competitive.
Japan's infrastructure sucks, and if an educated workforce
were what it took to compete, the Soviet Union would be #1,
and East Germans would be extending unemployment benefits
to their hapless Western counterparts.
Much of Japan's past success came from near-zero real interest
rates that they kept artificially low by manipulating the real
estate and stock markets. Having access to cheap and abundant
capital is a tremendous competetive advantage, yet did not prevent
most Japanese industries from steadily losing ground to their U.S.
counterparts. That game is over, and the piper is already knocking
at the door.
> Personally, I
>think the Nikkei will kick butt over the next three years, leaving the
>US market in the dust.
>
>Cheers, Larry
>--
> @@ Larry Rogers *
> @@@ larry_...@dg.com * Big Brother
> @@@ &&& la...@boris.webo.dg.com * is Watching
> @@ && Data General 508-870-8441 *
>
>The opinions contained herein are my own, and do not reflect the
>opinions of Data General or anyone else, but they should.
>
>"Sometimes we are the windshield, sometimes we are the bug"
> Dire Straits
Broward Horne
In a previous article, goyk...@apollo.hp.com (Red Herring) says:
>>I agree that when short-term interest rates start going up, that the market
>>will start going down.
Just answer me this, because I sure as HELL can't think
of an answer!
If foreigners were buying 30% of our federal debt,
and the major players were Germany and Japan,
and Germany's capital is getting sucked down by East Germany,
And Japan's implosion and stimulus are sucking THEIR capital,
where the HELL is that extra money coming from, that's
driving interest rates down?
Because I REALLY, REALLY want to know.
I have my own theories, but I'll save y'all unpleasant dreams.
Norbert Schlenker
>1) Tax laws now allow pre-tax and tax deferred investment in market
> via 401K plans; in the 50's the best (only) "investment" deduction
> with tax-deferred gains was the home mortgage deduction
Interesting hypothesis. Savings rate figures belie this, however.
>2) Demographic changes: we now have a much larger percentage of
> people working than in the 50's, with a rising average worker age
> (compared to a declining average age in 50's), both of which increase the
> cash available for investment in pre-tax plans due to a declining
> percentage of household income going to home mortgages
Plausible. Skeptics would claim that "larger percentage of people
working" simply means that women have been forced into the workforce
to finance the typical middle class lifestyle, and that "declining
percentage of household income going to home mortgages" is simply not
true when one considers the explosion in home equity loans. I'll have
to think about this (typical Usenet: post first, think later :).
>3) The direction and momentum of interest rate changes are
> substansially different today than 35-40 years ago - today's
> rates are downward sloping compared to relatively flat in the
> 50s
I assume you mean that interest rates have come down over the last
three years, both on the long and short ends. Can you honestly see
any further reductions? I can, but I have a fairly unorthodox
point of view. That point of view involves deflation, which implies
lower interest rates. Deflation does not imply higher stock prices,
though.
>I could list several more, but if these don't satisfy you, you must be
>devoted to an idea rather than searching for answers
I'm interested. List away. (I confess I'm pretty devoted to my ideas.)
>...obviously, things
>ARE different now, otherwise we would not have an SP500 P/E of ~25
>compared to the lower P/Es of yore.
Or things aren't different now, and a 25 P/E means the same as it
always has before: rampant speculation.
> The factors which determine future
>market direction are available in statistical abstracts and your
>local paper business section. You can continue to focus on a small set
>of static figures which mean relatively little, or concentrate on the
>dynamic changes in the entire system which truly determine supply and demand
>in the market.
I confess I'm intrigued. What dynamic changes do you see that indicate
a higher market ahead? I see things that indicate the market should go
lower. Brand names exploding, higher taxes and more regulation ahead,
a bigger deficit, trade friction. I'm nervous. Why aren't you?
Norbert
Richard Ottolini
The social security surplus plus interest of $75 billion is buying a quarter of
the *new* debt. (Only about 9% of the overall $4500 billion).
There is a huge pool of money in pension and mutual funds. They may have
anywheres from a 5% to 100% cash position depending on fund type.
Much of this cash buys the safest high-yield paper which is perceived to
by goverment bonds.
Bill Reid
>In article <186...@pyramid.pyramid.com> br...@pyrhard2.eng.pyramid.com (Bill Reid) writes:
>>1) Tax laws now allow pre-tax and tax deferred investment in market
>> via 401K plans; in the 50's the best (only) "investment" deduction
>> with tax-deferred gains was the home mortgage deduction
>
>Interesting hypothesis. Savings rate figures belie this, however.
Not sure what you mean here, because I can't see the relation of
the savings rate and money in the market. I also have my own way
of calculating the savings rate, which among other things
includes the social security
surplus (and boy, has that made some people mad here in the past!).
>
>>2) Demographic changes: we now have a much larger percentage of
>> people working than in the 50's, with a rising average worker age
>> (compared to a declining average age in 50's), both of which increase the
>> cash available for investment in pre-tax plans due to a declining
>> percentage of household income going to home mortgages
>
>Plausible. Skeptics would claim that "larger percentage of people
>working" simply means that women have been forced into the workforce
>to finance the typical middle class lifestyle,
I agree with the skeptics. Doesn't change the numbers, which will
most predictably decline in the future, a downside.
and that "declining
>percentage of household income going to home mortgages" is simply not
>true when one considers the explosion in home equity loans. I'll have
>to think about this (typical Usenet: post first, think later :).
>
I seriously believe that the explosion represents people taking
advantage of lower interest rates to reduce their monthly payments
or some equivalent reduction of household income going to home
debt service. This has occurred just in the last few years, and
is just another reason the long-awaited demise of the market
hasn't occurred.
>>3) The direction and momentum of interest rate changes are
>> substansially different today than 35-40 years ago - today's
>> rates are downward sloping compared to relatively flat in the
>> 50s
>
>I assume you mean that interest rates have come down over the last
>three years, both on the long and short ends. Can you honestly see
>any further reductions? I can, but I have a fairly unorthodox
>point of view. That point of view involves deflation, which implies
>lower interest rates. Deflation does not imply higher stock prices,
>though.
>
We ARE in a mild deflationary environment now, have been for several
years, despite deflator numbers or the CPI. There could be
further reductions as a result, but you are correct if you say
that much of the gain the in stock market attibutable to this
factor has already been realized. Rampant deflation, if it occurs,
will collapse the market as surely as in the '30s.
>>I could list several more, but if these don't satisfy you, you must be
>>devoted to an idea rather than searching for answers
>
>I'm interested. List away. (I confess I'm pretty devoted to my ideas.)
>
How about one other thing: look the health and organizational
efficiency of the securities industry. I always keep track of the
revenues and profits of stockbrokers as a general market
indicator. Compare today with 1987. What is the difference,
and what does it mean?
>Or things aren't different now, and a 25 P/E means the same as it
>always has before: rampant speculation.
>
No, I really don't agree here. Although rampant speculation has
been a factor in market crashes before, I really don't think rampant
speculation is what is driving the market now. Maybe my definition
of speculation is different than yours, but people investing
in mutual funds to get a higher rate than CDs does not
qualify. Pension fund managers raising the portion of their
portfolios devoted to the stock market by 25% in 1987 DOES
qualify.
>I confess I'm intrigued. What dynamic changes do you see that indicate
>a higher market ahead? I see things that indicate the market should go
>lower. Brand names exploding, higher taxes and more regulation ahead,
>a bigger deficit, trade friction. I'm nervous. Why aren't you?
>
I am nervous, particularly about higher taxes, the deficit, and
possible wholesale reductions in government spending. But I see
these as predictable factors that can be factored into a
portfolio strategy that MIGHT include stocks (depending on
your risk level).
I have had pretty much the same outlook on the market since 1988: kind
of a mixed bag, a plateauing of the bull market of the 80's, not really
that bad, not really that good. We ARE reaching a point
where you can safely predict the conditions will come about in the
next couple years for some type of bear market.
And you have to be sharp nowdays
in sector and stock selection to make money, but that doesn't mean
the sky is going to fall tomorrow, or that fundamental value
metric like the P/E ratio is a CAUSATIVE factor.
Red Herring
>
>In a previous article, goyk...@apollo.hp.com (Red Herring) says:
>
>>>I agree that when short-term interest rates start going up, that the market
>>>will start going down.
The above quote does not belong to me, but since you asked....
>
>
> Just answer me this, because I sure as HELL can't think
> of an answer!
>
> If foreigners were buying 30% of our federal debt,
> and the major players were Germany and Japan,
> and Germany's capital is getting sucked down by East Germany,
> And Japan's implosion and stimulus are sucking THEIR capital,
OK, that does indeed reduce the supply of capital.
>
> where the HELL is that extra money coming from, that's
> driving interest rates down?
Believe it or not, from an avalanche of higher taxes and regulations
soon to be unleashed on the U.S. economy by Bill Clinton and Hillary
Rodham. That should take care of the demand side.
The excess liquidity will end up chasing financial assets - stocks,
bonds, T-bills, real estate, arts. In fact, the process is well
underway (just yesterday Merril Lynch reported profits well above
the street's expectations), and we may have a Japanese-style bull
market ahead of us.
Of course, all bets are off if the inflation flares up again.
>
> Because I REALLY, REALLY want to know.
>
> I have my own theories, but I'll save y'all unpleasant dreams.
>
michael.s.habeck
>>correction this year from what I am reading. But profits are doing
>>quite well, and a 3% dividend is right in line with equivalent yields
>>in investments with no potential for capital gains (CD's, money
>>markets).
>
>And no potential for capital loss, either, we should add.
>
>I've asked this question before and never got a good answer: If short
>rates at 3% and long rates at 7% justify a P/E of ~25 and a dividend
>yield of under 3% on the S&P 500, then why didn't 3% short and 5% long
>rates through the 1950s justify P/Es over 18? What is so different
>this time?
The higher inflation of the past years have conditioned people to
expect a certain rate of return on their money. When they don't see
the amount of cash coming out of their investments, they don't
adjust their expectations, they adjust their risk. Whether or not
they realize that they are adjusting their risk is another
question.
>>I think it will continue to do well. The Nikkei was waiting for some
>>good news and has been hit with alot. However, remember the cliche,
>>buy on the rumor, sell on the news. The assumption is that the
>>stimulus Japan is going to use will help their companies alot. If
>>profits do not boom nearly immediately (which they will most likely
>>not), an adjustment is in order. It will never drop below 18K though
>>and could top out back up in the 30000 range.
>
>Great stuff. I love predictions, especially ones I disagree with
>vehemently. I predict the Nikkei will fall. Far. 10,000 would
>not surprise me. The P/E on the Nikkei is 75+ at current levels,
>and earnings are falling. If the Nikkei sticks at 20,000, the P/E
>will be over 100 in six months. With the yen rising and Mickey
>Kantor in Washington, their exporters are in serious trouble.
>
>I'd buy puts.
>
>>However, long term, the Japanese are in excellent shape. There
>>infrastructure is strong, their workforce is educated, they have
>>everything they need to be internationally competitive. Personally, I
>>think the Nikkei will kick butt over the next three years, leaving the
>>US market in the dust.
>
>Personally, I think the Japanese will kick butt over the next three
>years. But their stock market sucks wind.
>
My prediction: the Nikkei will gain 25% over the next 6-9 months
and then crash back to around the 15,000 level.
Reasoning: government spending to prop up the economy will look
good at the beginning, but since it really is just a drop in the
bucket of the Japanese economy, the bull market will go bust when
things don't drastically turn around. Hope springs eternal until
reality comes crashing in.
Mike Habeck
John Cooper
>
> [history of inflation/deflation/stability in American
> economy delete]
>
>Globally, the "fall" of the dollar since its '86 highs against other
>currencies has been associated with only very slight dollar rises in
>commodity prices, which may be taken as evidence of our going through
>another deflationary period.
>
>Depending on just exactly WHAT economic causes you see behind any of
>this, it is not unreasonable to forsee stable prices for the next decade.
>But, again, that depends on what you take as "driving" the economy --
>there have been vastly confident predictions of hyperinflation "any
>day now", by people who THINK they understand money supply, for the
>last decade. I used to collect coins; if one buys coins mail-order,
>one gets on some remarkably peculiar mailing lists and can read huge
>quantities of doom-saying junk mail ...
If you don't particularly trust the predictions in one direction or the other,
and want to protect yourself against both inflation and deflation over the next
half a dozen years, is there any investment that's reasonably strong in both
areas?
From what I have seen, it appears that anything that is a great inflation hedge
is dangerous in a deflationary economy (i.e. houses, precious metals), and
anything that gives good consistent returns during deflation gets overrun by
inflation (i.e. long-term bonds, dividend stocks, money lent to others). The
stock market in general is a good investment as long as the economy is in
a reasonably good state, but it's risky in both inflation and deflation.
The only things I can think of that hedge both ways offer security but very
poor growth (i.e. money market funds, short-term bonds).
Is there nothing to do when you can't make up your mind which way the wind is
blowing?
Thanks,
--
John Cooper | My opinions, may not be employer's.
Sybase, Inc. |
| "If you don't like the news go out
sybase!co...@sun.com | and make some of your own."
Jerry Wieber
>When I hear "things are *different* now! high p/e's aren't a problem!
>don't worry, be happy! get your money in the stock market now Now NOW!!"
>then I know it is time to get worried. When they say it in the WSJ, I
>know it's time to sell short :-)
Which leads to the question: what stocks are good short candidates?
Starbucks immediately comes to mind. Some of the recent (very successful)
IPO's are also interesting....
-Jerry
--
__________
UUCP: uunet!cs.umd.edu!jerryw SPOKEN: Jerry Wieber |/ `-. | U of Md
INTERNET: jer...@cs.umd.edu \_|.|-,
` -
Mark Hittinger
>If you don't particularly trust the predictions in one direction or the other,
>and want to protect yourself against both inflation and deflation over the next
>half a dozen years, is there any investment that's reasonably strong in both
>areas?
>Is there nothing to do when you can't make up your mind which way the wind is
>blowing?
There are some convertible bonds issued by gold mining companies. As a bond
it is a goodie during deflation. As a convertible, you can convert it to
stock in the gold mining company and benefit from inflation.
There are about 6 or 7 that I know of. Barrons talked about them last month.
Looks like deflation continues, but gold stocks are up 33%. Can we go
from deflation straight to the bankruptcy of the federal government
without an interim period of inflation? A lot of us are sweating this
one out right now. It seems unavoidable now that the feds will go
bankrupt after 1995. Clinton had a window but seems to have squandered
it.
Happy hoarding!
Jason Hsu
> In article <1993Apr15....@duphy4.physics.drexel.edu>
la...@duphy4.physics.drexel.edu writes:
> Which leads to the question: what stocks are good short candidates?
> Starbucks immediately comes to mind. Some of the recent (very
successful)
> IPO's are also interesting....
>
times book value to 6), and has a dividend yield of a fraction of 1%.
Matt Kennel
OK. But the Home Depot in my neighborhood has been insanely packed
every time I've been there ,
to the point that there is no parking.
Simply put, there is no competition. Price Club isn't it,
and Sears isn't it. Everybody knows they WILL find their item at
Home Depot. Every other consumer store these days seems deserted.
Furthermore, alot of smaller industrial companies shop at H.D. to get
the stuff they need.
Admittedly my neighborhood in San Diego is definitely a pick-up truck and
carpenter type of town, but the country is full of those. (How many
Home Depots are there in Texas?)
Nearly everybody in the store buys something, with typical purchases
between $20 and $100, and I've probably spent $150 there myself in a
few months. (and Im a renter)
The stock is still probably too high, admittedly, but the business seems
sound.
(Starbucks OTOH has only expensive mall coffee. I had a
cup in store yesterday, and it was mediocre. The beans are good but
expensive. And there are already Starbux (plural?) everywhere).
-----
As risky as investing long in stocks is, speculating short is even harder.
The problem is psychological, rather like hot-rodders playing "chicken".
Everybody's buying on the bandwagon for hot stocks, and everybody knows at
some point it will collapse, but nobody wants to get out until the deluge.
Unreality can continue for a long long time, and then break all at once
for no particular reason, which means you'll never figure out exactly
when it is, and if you're wrong, you can get hosed really bad.
(don't play zero-sum games)
----
This reminds me of two somewhat contradictory quotations:
The computer from Wargames: "A strange game. The only way to win is
not to play at all."
J.P. Morgan: "Never bet against America".
--
-Matt Kennel m...@inls1.ucsd.edu
-Institute for Nonlinear Science, University of California, San Diego
-*** AD: Archive for nonlinear dynamics papers & programs: FTP to
-*** lyapunov.ucsd.edu, username "anonymous".
Broward Horne
In a previous article, n...@hart.Princeton.EDU (Norbert Schlenker) says:
>Plausible. Skeptics would claim that "larger percentage of people
>working" simply means that women have been forced into the workforce
>to finance the typical middle class lifestyle, and that "declining
>percentage of household income going to home mortgages" is simply not
>true when one considers the explosion in home equity loans. I'll have
>to think about this (typical Usenet: post first, think later :).
Two-income families.
Many have one wage earner that's marginal now.
Personally, I believe Clinton's tax increases will REDUCE the
number of women ( and some men ) in the workplace, and further
reduce Federal revenues.
>I assume you mean that interest rates have come down over the last
>three years, both on the long and short ends. Can you honestly see
>any further reductions? I can, but I have a fairly unorthodox
>point of view. That point of view involves deflation, which implies
>lower interest rates. Deflation does not imply higher stock prices,
>though.
with the dollar dropping so rapidly, wouldn't it just be a
matter of time before imports ( of which we now have a GREAT,
GREAT deal ) appear to drive inflation indicators up?
Broward Horne
In a previous article, msha...@cbnewsd.cb.att.com (michael.s.habeck) says:
>My prediction: the Nikkei will gain 25% over the next 6-9 months
>and then crash back to around the 15,000 level.
>
Close to mine. A top around 25,000, then down to 10,000.
Maybe less, if Smoot-Kantor gets passed. :)
faj...@cc.usu.edu
Any stock with the name "Steak" in it.
Jack Teh
Norbert Schlenker
>I seriously believe that the explosion represents people taking
>advantage of lower interest rates to reduce their monthly payments
>or some equivalent reduction of household income going to home
>debt service. This has occurred just in the last few years, and
>is just another reason the long-awaited demise of the market
>hasn't occurred.
This is a weak prop. Every study I've seen indicates that the decline
in interest rates has taken more money out of savers' pockets than it
has put into debtors'. (The difference, of course, has gone to make
up the shortfalls in bank portfolios.) In response, the savers are
now desperately plugging money into anything that yields more than 3%,
especially long bonds and stocks.
>How about one other thing: look the health and organizational
>efficiency of the securities industry. I always keep track of the
>revenues and profits of stockbrokers as a general market
>indicator. Compare today with 1987. What is the difference,
>and what does it mean?
Why don't you tell us? Were brokerage houses considered to be
in serious trouble in August '87, at the top? I suppose I could
go look at the fiche from then to see when Mother Merrill topped
out, but asking on a worldwide network is just so much more fun!
>No, I really don't agree here. Although rampant speculation has
>been a factor in market crashes before, I really don't think rampant
>speculation is what is driving the market now. Maybe my definition
>of speculation is different than yours, but people investing
>in mutual funds to get a higher rate than CDs does not qualify.
In my books, it qualifies. In spades. The people investing in mutual
funds today have absolutely no idea what they are getting into. The
pitches are all "Can't survive on what the bank pays you? Put your
money in our government bond fund. Perfectly safe, all obligations of
the U.S. Treasury." Where's the info that explains to these people
that they will lose the equivalent of half a year's (or even two
year's interest in the case of long bonds) interest payments if rates
tick up half a point? Where are the warnings that plugging money
into electric utilities (where else can you get 5-6% dividend yields
on something so SAFE as the electric company?) is pretty damn stupid
if (1) interest rates rise or (2) if public utilities commissions
nationwide adopt Illinois attitudes or (3) if Al Gore gets his way?
>And you have to be sharp nowdays
>in sector and stock selection to make money, but that doesn't mean
>the sky is going to fall tomorrow, or that fundamental value
>metric like the P/E ratio is a CAUSATIVE factor.
I don't think P/E is causative either. I merely find it descriptive.
Today's P/E tells me the market is too high. Obviously, many other
people think that just isn't so. Psychology is all, and the crazies
are currently in your camp. I disagree, but that's what makes a
market.
Norbert
Doug Deprenger
Then they deserve whatever fate awaits them. They should know better.
Bill Reid
>In article <186...@pyramid.pyramid.com> br...@pyrhard2.eng.pyramid.com (Bill Reid) writes:
>Every study I've seen indicates that the decline
>in interest rates has taken more money out of savers' pockets than it
>has put into debtors'.
It has reduced interest income no doubt. And there's also no doubt
that your friendly neighborhood mortgage shark...er, broker is
capitalizing on the trend to refinancing by slipping in those "fees"
and other nonsense. But let's be reasonable: at some level, declining
interest rates reduce the cost of doing business for businesses and
the cost of living beyond your means for individuals. This is usually
regarded as a "good thing".
>(The difference, of course, has gone to make
>up the shortfalls in bank portfolios.) In response, the savers are
>now desperately plugging money into anything that yields more than 3%,
>especially long bonds and stocks.
You could say they are being rational instead of desperate. But aside
from the name-calling, you have just described a fundamental principle
of human economic behavior. You could exploit it to your advantage if
you cared to quantitize it rather than malign it. The same is true
of your statement about bank portfolios: some people are actually
making some good money as we speak by buying bank stocks.
>
>Were brokerage houses considered to be
>in serious trouble in August '87, at the top?
Better than that Norb, they were in trouble in January `87, and the
trouble just got worse as the year progressed until `88, when
what could only be called a collapse finally bottomed out. Very
different from the current earnings and revenue growth being
reported by the industry. WHEN (not if) you start to see the brokerage
industry going south again, you have ONE good short-term indicator that the
market break you've been predicting for the last 5 years is about
to occur.
>>Maybe my definition
>>of speculation is different than yours, but people investing
>>in mutual funds to get a higher rate than CDs does not qualify.
>
>In my books, it qualifies. In spades. The people investing in mutual
>funds today have absolutely no idea what they are getting into.
Sorry, your definition IS different. If people not understanding
investments qualifies as rampant speculation, call everybody who
has bought whole life over the last 40 years wild-eyed lunatics.
My definition: MASS GREED. My definition of GREED: an unreasonable desire
to get rich quick, by means that have no logical, practical, or
historical basis. Applies more to the 80's and 20's than now (does
this mean the 90's will be more like the 30's?).
>I don't think P/E is causative either. I merely find it descriptive.
>Today's P/E tells me the market is too high.
It's one vector into understanding the market, but the predictability
can be made more granular by comparing the earnings yield (what
stock investors are usually after) with other investments of equivalent term
(such as a 3-month bond or whatever). Then make it even better by
looking at the direction and rate of change between the two (some
simple calculus can be used to describe this relationship).
>Obviously, many other
>people think that just isn't so. Psychology is all, and the crazies
>are currently in your camp. I disagree, but that's what makes a
>market.
>
If you can find anything I've said that would indicate I'm a crazed
stock-loving lunatic, maybe psychology IS a factor in this discussion,
but it really only has limited relevance in the market.
All I've said is: look beyond one static indicator (and eschew
name-calling) to sharpen your investment skills.
As far as my own long-term predictions, I've been saying since 1989
that the 90's market would be reasonably strong early in the decade,
experience a bear market correction towards the middle-late period, and
end up at about 3200-3300 on 12/31/99. But I don't think you can
invest profitably with this information, so I focus on shorter-term
and more predictable indicators and strategies, and I wouldn't be
suprised if events turn out differently than expected (they have before!).
Jeff Privette
Where are the warnings that plugging money
|> into electric utilities (where else can you get 5-6% dividend yields
|> on something so SAFE as the electric company?) is pretty damn stupid
|> if (1) interest rates rise or (2) if public utilities commissions
|> nationwide adopt Illinois attitudes or (3) if Al Gore gets his way?
|> ^^^^^^^^^^^^^^^^^^^^^^^^^^
Easy there, big guy... I'm not sure what exactly you mean by "gets his way",
but the civil energy conservation measures advocated by Gore have repeatedly
been shown (in theory and in practice) to IMPROVE utilities' profits, not
hinder them as on might think. I cannot recall complexities of the reasons why,
however it is related to the utilities having to make interstate energy
purchases during peak draw times. Incidently, this information is widely
available (I believe a report was commissioned by either the Bush Admin. or
the National Science Acad.) but it did not come from '92 election propoganda.
John Cooper
>jh...@eng-nxt11.cso.uiuc.edu (Jason Hsu) writes:
>: Home Depot. It has dropped, but merely from white-hot to broiling hot (9
>: times book value to 6), and has a dividend yield of a fraction of 1%.
>
>OK. But the Home Depot in my neighborhood has been insanely packed
>every time I've been there ,
>to the point that there is no parking.
>
>Simply put, there is no competition. Price Club isn't it,
>and Sears isn't it. Everybody knows they WILL find their item at
>Home Depot. Every other consumer store these days seems deserted.
>Furthermore, alot of smaller industrial companies shop at H.D. to get
>the stuff they need.
Home Depot has competition where I live (the eastern side of the San Francisco
Bay Area). It's formerly called Home Club, though it recently changed its
name to something I forget but still containing "Home" in the title. The local
one here, while admittedly not packed to the gills like the local Home Depot,
nonetheless has a healthy number of customers. And while Home Depot has a
larger overall selection, I have definitely found items in Home Club that
I could not find in Home Depot. I have also found some items in both stores
to be cheaper at Home Club. Home Depot has better service in the aisles, but
Home Club has helped me out better with special orders.
Norbert Schlenker
>The same is true
>of your statement about bank portfolios: some people are actually
>making some good money as we speak by buying bank stocks.
Correction: They have made good money. I did. Let me assure you
that I've sold a bunch. If recent action is any guide, a lot of
other people have too. Easy money in these leveraged bond funds
is over.
>>Were brokerage houses considered to be
>>in serious trouble in August '87, at the top?
>
>Better than that Norb, they were in trouble in January `87, and the
>trouble just got worse as the year progressed ...
Now I begin to wonder. I decided I could blow ten minutes at the
library looking up old microfilm of Barron's in 1987, and I just
don't see what you think you described. Mother Merrill topped out
in April and was within 10% of its 52 week high in the first week
of October. That's not much of a warning. Mother Merrill had
terrific earnings during every quarter, including the 3rd quarter
results (released after the crash). No warning there either.
What did you see?
Norbert