Tag Archives: asset bubbles

Is The Stock Market Experiencing A Bubble?

Recently there have been a variety of discussions as to whether the stock market is experiencing a bubble.  Among the main drivers of such discussion is the stock market’s seemingly near-constant price advancements, frequent record-high closes, and the duration of the advance, all of which are against the backdrop of the (at best) slow-growth economy.  For reference, here is a daily chart of the S&P500 from 2009, with the 50dma and 200dma:

(click on chart to enlarge image)(chart courtesy of StockCharts.com; chart creation and annotation by the author)

EconomicGreenfield 11-21-13 SPX daily since 2009

One such article discussing whether the stock market is experiencing a bubble is the Saturday, November 16 Barron’s article titled “Bubble Trouble?”  An excerpt:

The S&P 500 is valued at 16 times projected 2013 operating profits of $109 and at 15 times estimated 2014 earnings of $120. Those price/earnings ratios are about equal to the long-run average. Even if next year’s earnings growth is closer to this year’s projected 5% than to the aggressive current estimate of 10%, the S&P 500 forward P/E is 15.6, which doesn’t look excessive at a time of near-zero short-term rates, a 2.71% yield on the 10-year Treasury note, and sub-6% average yield on junk bonds. The S&P 500 dividend yield is 2%, but the earnings payout ratio is historically low at about 35%, meaning companies have room to further boost dividends.

As well, Janet Yellen, during her testimony on Thursday, was asked about asset bubbles.  Here is what she said (as seen in the Bloomberg article of November 14 titled “Yellen Signals Continued QE Undeterred by Bubble Risk”) concerning the stock market:

“Stock prices have risen pretty robustly but if you look at traditional measures,” such as price-earnings ratios, “you would not see stock prices in territory that suggests bubble-like conditions,” she said.

My comments:

My posts concerning the existence of the stock market being an asset bubble date back to 2011.  I view the argument as to whether the stock market is experiencing a bubble based upon two general areas:  technical analysis and fundamental analysis.

While I believe there to be many reasons to believe stocks are in a bubble based upon technical measures, in this post I will focus on fundamental measures.

In particular, the common (and seemingly predominant) argument made that stocks are fairly or attractively valued is based upon a (forward) PE basis.  Various year 2014-2015 S&P500 earnings forecasts continue to portray attractive growth in earnings.  While, as indicated by the Barron’s article mentioned above, stocks don’t appear to be in a bubble based upon (forward) PE-based valuation measures, current levels of earnings are, in many ways, favorably impacted by various factors.

Even if one assumes that EPS is – or should be – the primary stock market valuation metric – these numerous benevolent factors within the current earnings environment seem to lack general recognition.  Whether these factors will persist – and whether they “deserve” to be accorded full valuation – should perhaps be the focal issue.

While a full discussion of these factors would be exceedingly lengthy and, at times, very complex, below are some of the more notable factors:

(Ultra) Low interest rates –  While, due to numerous factors, it is difficult to accurately quantify how much the (ultra) low interest rate environment has directly and indirectly bolstered earnings, the (ultra) low interest rate environment has had a (very) significant impact on earnings.  I discuss this in the ProfitabilityIssues.com posts of September 25, 2013 (“Corporate Interest Cost Savings“) and the July 29, 2013 post (“Impact Of Low Interest Rates On Corporate Profitability.”)

Lagging Revenue Growth – While S&P500 earnings have no doubt been robust, corporate revenue growth has consistently lagged.  This is problematical in many ways, both from a corporate performance standpoint as well as a general economic standpoint.  From a corporate performance standpoint, it raises many issues, including both the “quality of earnings” as well as to the sustainability of earnings.  From a general economic standpoint, it strongly appears as if employment growth, among other factors, would likely be considerably higher if revenue growth was higher.

Share buybacks – While, from an overall perspective, share buybacks aren’t a predominant factor, this is yet another area in which EPS has been significantly bolstered. (note:  this share buyback factor, as well as others, is also discussed in Lance Roberts’ post titled “Analyzing Earnings As Of Q3 2013.”)

Also of note is that various levels of profitability – including the S&P500′s operating margins, operating profits, and After-Tax Corporate Profits as a Percentage of GDP – are at or near record-high levels.  Cumulatively, these levels raise questions about the sustainability of corporate earnings growth.  As well, they raise the issue of what a decline in corporate earnings may look like.  These “decline” scenarios, although estimates, often look rather precipitous, especially if one starts thinking about such issues as long-term mean reversion as well as a “reversal” of the positive earnings factors mentioned above, such as the ultra-low interest rate environment.

As to the valuation of the stock market, when one uses stock market valuation measures other than PE, one often sees the stock market as either being (very) expensive or in “bubble” territory.  These other valuation measures include the Q-Ratio, market capitalization to GDP, CAPE (“Shiller PE”), etc.  (note:  these factors are discussed in Doug Short’s “Market Valuation Overview” updates as well as various of John Hussman’s commentaries, including that of November 11, 2013 titled “A Textbook Pre-Crash Bubble.”)

Cumulatively, on an “all things considered basis,” my analysis continues to indicate that not only is the stock market experiencing a bubble but – although it doesn’t necessarily outwardly appear as such – also that this stock market bubble is enormous.  While some choose to use (forward) PE ratios as the main determinant of whether the stock market is a bubble, I believe this is misleading.  

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 1781.37 as this post is written

Is The Collector Car Market Experiencing A Bubble?

The collector car market is one that I have followed on a casual basis over the years.

I find that it is an interesting market in many respects.  One of the more notable characteristics is its volatility.

Recently, there have been a variety of auction reports that I find very notable.

Specifically, here are some of the more notable recent auction results I have seen:

The Bloomberg Ferrari article has some notable commentary.  A couple of excerpts include:

The HAGI F index of private and public sales of rare Ferraris was up 54.52 percent for the year, the London-based Historic Auto Group said in a report in August.

also:

Hatlapa said that prices of the rarest Ferraris have risen at an average annual rate of 15 percent for more than 30 years.

Perhaps the main question is whether the collector car market is experiencing a “bubble.”  Unlike stocks and bonds, the collector car market lacks a well-organized, standardized history of valuation measures, and as such, “proving” whether a bubble exists (or doesn’t exist) and its extent is difficult.  How does one “value” rarity, styling, or nostalgia?  Why are certain Ferrari models worth so much more than other models?  Why are vintage Ferraris valued much more highly than other car brands? Much of the valuation in collector cars seems subjective and emotions-driven.

While I find many of these collector cars to be highly attractive and notable, like any other asset class bubbles can form.  While one can argue whether the entire collector car asset class is currently experiencing a “bubble,” there certainly seems to be (at least) “froth” in various segments.  As well, many “bubble” characteristics seem to be manifesting, including many frequent “record sales prices” achieved at auction and a rapid (upward) “revaluation” of various lower-priced cars.  Overall, I would say that the asset class is experiencing a bubble, albeit one that is not as astounding as various other current and past asset bubbles.

Another question is whether other “alternative” asset classes are experiencing bubbles.  While I have little familiarity with some of the other “alternative” asset classes such as art,horses, or yachts, I wouldn’t be surprised that some of these other alternative asset classes are also showing signs of “froth” or “bubbles.”

From a broader economic perspective, this collector car market and its “froth” / “bubble” status is an(other) example of how prevalent asset bubbles have become.

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 1656.40 as this post is written

The Impact Of Rising Interest Rates

With the recent increase in interest rates, perhaps the paramount question is what impact a rising interest rate environment will have on the economy.

First, for reference, here is a long-term chart of interest rates from 1962, as seen in Doug Short’s post of August 17 titled “Treasury Yields In Perspective” :

(click on chart to enlarge image)

Dshort 8-17-13 - treasuries-FFR-since-1962

As one can see, the overall trend in interest rates has been declining, dating back to the peak seen in the early-80s.

The impacts that these falling interest rates have had is extensive, and many of the impacts lack (full) recognition.  As I have previously commented, most recently in my February 6, 2013 post, “Falling interest rates over the last 20 years have been an “enabler” of much of our current day economy.”

While the list of ways in which lower interest rates have acted as a benevolent factor to the economy is exceedingly lengthy, one such notable area is the impact lower interest rates have had on corporate earnings.  I highlighted two estimates concerning the positive impact of declining interest rates on corporate profitability in my July 29 ProfitabilityIssues.com post titled “Impact Of Low Interest Rates On Corporate Profitability.”

Although there are various areas which benefit from increased interest rates, from an “all-things-considered” basis rising interest rates have many problematic aspects for our current-era economy.  While 10-Year Treasury Yields were above 5% as recently as 2007 – with no seeming adverse economic impact – I believe that the economy will have difficulties “absorbing” higher yields far before that 5%+ rate on the 10-Year Treasury is again reached.

The impact of the recent rising interest rate environment is particularly noteworthy, not only because of the historically-rapid speed of its ascent, but also because, as I have commented before, my analyses indicate that interest rates can rise to levels much higher than generally expected.  I have written extensively about my belief that there is an exceedingly large bond bubble; if one believes that such is the case, the implications concerning the level of future interest rates is disconcerting.  A “deflating” or “bursting” of such a large bubble will have widespread negative impacts on the economy and markets.

For reference, below is a chart depicting the recent movements of various (3-month, 2-Year, 5-Year, 7-Year and 10-Year) Treasury yields:

(click on chart to enlarge image)(chart courtesy of StockCharts.com; chart creation and annotation by the author)

EconomicGreenfield 8-21-13 interest rates

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 1642.80 as this post is written

The Bond Bubble – February 2013 Update

In previous posts I have discussed the Bond Bubble and its many facets.

Since my last post on the Bond Bubble (the July 25, 2012 post titled “The Bond Bubble – July 2012 Update“) yields of various Treasury maturities have started to increase.

Here is a chart depicting the recent movements of various (3-month, 2-Year, 5-Year, 7-Year and 10-Year) Treasury yields:

(click on chart to enlarge image)(chart courtesy of StockCharts.com; chart creation and annotation by the author)

EconomicGreenfield 2-6-13 Treasury Yields since 2011

It should be noted that current rates on 10-Year Treasury Yields, from a long-term historical view, remain extremely depressed.  This can be seen in the following chart of 10-Year Treasury Yields:

EconomicGreenfield 2-6-13 DGS10_2-5-13 2.00 Percent

In fact, even if one takes a view of interest rates from 1790-2011, one can see that the current era of ultra-low interest rates is very much anomalous.  While this era’s ultra-low rates are not necessarily “proof” of an asset bubble in bonds, other characteristics, including those discussed in previous posts, very much indicate that a truly enormous bond bubble exists.

While the duration of this “bull market” in bonds is outsized – and thus gives the appearance that ultra-low rates are not only normal – but such yields will remain depressed indefinitely – as with any asset bubble such seeming stability will prove illusory.  In fact, there are already various indications that the bond market bubble has seen its zenith.

What is particularly fearsome with regard to the bond bubble is its potential for damage once it “pops.”

The perils of this bond bubble and its future “bursting” can hardly be overstated.  As I mentioned in the April 6, 2010 post (“The Threat Of Rising Interest Rates“) :

Falling interest rates over the last 20 years have been an “enabler” of much of our current day economy.

As well, there remains the critical question that I mentioned in the October 4, 2010 post (titled “Thoughts On The Bond Bubble“) with regard to what the “natural” interest rate is:

Another critical issue with regard to the bond bubble is the following:  If one believes that there is a bond bubble that is serving to unduly depress interest rates, what might be the “natural” interest rate – i.e. one that may endure after the bond bubble pops?

While I have not spent considerable effort trying to ascertain the level of this “natural” interest rate, I have little doubt that such a “natural” rate on the 10-Year Treasury would be at least 5%-10% and most likely considerably higher (possibly multiples thereof).  Of course, such rates would have massive implications on a number of fronts.

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 1511.10 as this post is written

The Bond Bubble – July 2012 Update

In previous posts I have discussed the Bond Bubble and its many facets.

Since my last post on the Bond Bubble (the February 21 post titled “The Bond Bubble – February 2012 Update“) yields of various Treasury maturities have continued to decline and many have been establishing all-time lows in the last few days.

Here is a chart depicting various Treasury yields from 2007 as seen in Doug Short’s blog post of  July 24 titled “Treasuries Update:  More Historic Low Yields” :

It should be noted that current rates on 10-Year Treasury Yields are, from a long-term historical view, extremely depressed.  This can be seen in a monthly chart of 10-Year Treasury Yields dating back to 1994, on a LOG-basis, with a red trendline shown:

(click on chart to enlarge image)(chart courtesy of StockCharts.com; chart creation and annotation by the author)

Many investors, including those very prominent, currently believe that the biggest threat to the future value of bonds is inflation.  While I believe that the threat of inflation is a concern, there are various other factors that pose immense threats as well.

As I wrote in the August 15, 2011 post (“The Bond Bubble – Update“) :

While this Bond Bubble may have a little more “upside” left to it, I am of the belief that attempting to derive gains from bonds at this point is akin to “picking up pennies in front of a steamroller” – i.e. there is little to be gained, and much to be lost.

While the Bond Bubble continues, its risks to investors, financial markets and the economy in general has in no way diminished.

The perils of this bond bubble and its future “bursting” can hardly be overstated.  As I mentioned in the April 6, 2010 post (“The Threat Of Rising Interest Rates“) :

Falling interest rates over the last 20 years have been an “enabler” of much of our current day economy.

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 1337.88 as this post is written

The Bond Bubble – February 2012 Update

In previous posts I have discussed the Bond Bubble and its many facets.

Since my last update on August 15, 2011 (“The Bond Bubble – Update“), the yield on the 10-Year Treasury has roughly been in the 1.7%-2.4% range.  This is seen in the 3-year daily chart, LOG-basis, as shown below:

(click on chart to enlarge image)(chart courtesy of StockCharts.com; chart creation and annotation by the author)

It should be noted that current rates on 10-Year Treasury Yields are, from a long-term historical view, extremely depressed.  This can be seen in a monthly chart of 10-Year Treasury Yields dating back to 1994, on a LOG-basis, with a red trendline :

(click on chart to enlarge image)(chart courtesy of StockCharts.com; chart creation and annotation by the author)

From an even longer-term perspective, looking at a 222-year chart of long-term interest rates, which uses the 30-year bond when available, one can also gain a perspective on today’s abnormally low yields.  As seen on that chart, current yields on long-term interest rates have only been lower in one other time period in the 222-year history, with that other period being roughly 1940-1955.

Many investors, including those very prominent, currently believe that the biggest threat to the future value of bonds is inflation.  While I believe that the threat of inflation is a concern, there are various other factors that pose immense threats as well.

As I wrote in the aforementioned August 15, 2011 post:

While this Bond Bubble may have a little more “upside” left to it, I am of the belief that attempting to derive gains from bonds at this point is akin to “picking up pennies in front of a steamroller” – i.e. there is little to be gained, and much to be lost.

While the Bond Bubble continues, its risks to investors, financial markets and the economy in general has in no way diminished.

The perils of this bond bubble and its future “bursting” can hardly be overstated.  As I mentioned in the April 6, 2010 post (“The Threat Of Rising Interest Rates“) :

Falling interest rates over the last 20 years have been an “enabler” of much of our current day economy.

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 1361.23 as this post is written

A Note On Asset Bubbles

I would like to highlight the topic of asset bubbles and the numerous past posts I have written concerning them.  This topic is particularly apropos given that my analysis indicates that various asset bubbles are very “mature,” i.e. very close to ending or “popping.”   As well, I have been writing of my analysis concerning the building financial danger in the financial system, which also poses a grave danger to the sustenance of these asset bubbles. Among these mature asset bubbles are those in both the stock and bond markets.

There are two aspects of asset bubbles that are of great importance.  The first is the impact such bubbles have on investors.  The second is what impact these bubbles have on the overall economy.

It should be noted that asset bubbles are often widely seen as attractive and/or beneficial during their expansion phase.  For instance, during the housing bubble, few people were wary of the “bubble” trend; in fact, the vast majority – including professional economists and policy makers – thought such price appreciation was “great” (i.e. highly beneficial), and such appreciation was “natural” as opposed to constituting a “bubble.”  The vast majority also believed such house price appreciation would last indefinitely, with few risks posed.  Exceedingly few (especially on a percentage basis) predicted the “top” of the bubble or the economic ramifications of its aftermath.

My analysis continues to indicate that the peril presented by the current asset bubbles can’t be overstated.

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 1314.53 as this post is written

The Bond Bubble – Update

In previous posts I have discussed the Bond Bubble and its many facets.  In particular, I would like to highlight my post of October 4 2010, “Thoughts On The Bond Bubble.”

During the recent market tumult, bond yields have once again dropped sharply to very low levels, as seen by the yield on the 10-Year Treasury.  A couple of charts illustrate this.  First, a weekly long-term chart from 1962 as seen in Doug Short’s August 12 blog post titled “Treasury Yields in Perspective“, with 10-Year Treasury Yields shown in blue:

(click on chart to enlarge image)

Next, a 3-year daily chart of the 10-Year Treasury Yield:

(click on chart to enlarge image)(chart courtesy of StockCharts.com)

While this Bond Bubble may have a little more “upside” left to it, I am of the belief that attempting to derive gains from bonds at this point is akin to “picking up pennies in front of a steamroller” – i.e. there is little to be gained, and much to be lost.

While the Bond Bubble continues, its risks to investors, financial markets and the economy in general has in no way diminished.

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 1194.20 as this post is written

Janet Yellen’s Speech of June 2 2011 – Notable Excerpts

On June 2, Janet Yellen, Vice Chair of the Board of Governors of the Federal Reserve System, gave a speech titled “Assessing Potential Financial Imbalances in an Era of Accomodative Monetary Policy” (pdf)

While I don’t agree with many of her points and assertions, I nonetheless think the topic is very important.  As such, here are a few excerpts that I think are notable:

page 1 :

Monetary policy in the United States has been highly accommodative now for a number of years.  Since late 2008, the Federal Open Market Committee (FOMC) has kept the target federal funds rate close to zero and has purchased a substantial amount of longer-term Treasury and agency securities.  My reading of the evidence is that those securities purchases have proven effective in easing financial conditions, thereby promoting a stronger pace of economic recovery and checking undesirable disinflationary pressures.  Moreover, I believe that the current accommodative stance of U.S. monetary policy continues to be appropriate because the unemployment rate remains elevated and inflation is expected to remain subdued over the medium run.

page 2:

In the aftermath of the crisis, the primary objective of U.S. monetary policy was to promote financial conditions likely to spur spending on goods and services through a number of channels.  To this end, the Federal Reserve first lowered the federal funds rate and other rates at the short end of the yield curve and, once the zero lower bound was binding, sought to push down yields at the longer end through large-scale purchases of longer-term Treasury and agency securities.  We anticipated that lowering rates on these securities would place downward pressure on a range of private yields as well, in turn supporting home values, equity prices, and other asset prices.  After all, this is the primary mechanism through which monetary policy in its conventional form stimulates the economy.  But a sustained period of very low and stable yields may incent a phenomenon commonly referred to as “reaching for yield,” in which investors seek higher returns by purchasing assets with greater duration or increased credit risk.

page 4:

Misaligned asset prices are notoriously difficult to detect in a timely fashion, and no single metric or set of metrics can consistently and reliably identify stretched valuations.  Nonetheless, it is clearly worthwhile to track a wide range of metrics and to view them in the context of their historical norms.  Current conditions can be evaluated against a baseline of past experience, and then assessed in light of the various institutional and market factors that could conceivably account for deviations from historical ranges.  The Federal Reserve tracks a large number of indicators, and I will highlight a few examples.  Overall, these indicators do not obviously point to significant excesses or imbalances in the United States.

page 8:

Therefore, the risk of a rapid and disorderly deleveraging in the event of a swift change in market sentiment seems to be limited at this point.

page 8:

First, important classes of generally unlevered investors (for example, pension funds) are reportedly finding it difficult in the present low interest rate environment to meet nominal return targets and may be reaching for yield by assuming greater interest-rate and credit risk in their portfolios.

page 10:

If substantial evidence of financial imbalances on a broader scale were to develop, particularly if accompanied by significant use of leverage, I believe that supervision and regulation should constitute our first line of defense.  Indeed, in the wake of the crisis, our supervisory process has been significantly modified to take more explicitly into account possible financial stability implications and effects on the broader economy, a perspective that is frequently described as “macroprudential.”  Our concerns now extend beyond the capacity of individual institutions to protect their capital and balance sheets.

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 1279.56 as this post is written

The Groupon & LinkedIn IPOs – Broader Significance

On March 1 I wrote a post titled “The Stock Market Bubble – Various Aspects.”

In that post I highlighted a variety of factors that support my conclusion that the entire stock market is experiencing a bubble.

One of the factors listed was “Extremely rapid valuation increases seen in a variety of private (tech) companies to high valuations, despite any clear indication that fundamentals have changed proportionately.”

Since the writing of that post, we have had one very notable IPO, LinkedIn, as well as another pending IPO, Groupon, that serve to illustrate that point.  What is notable in many of the private tech companies’ valuations includes the current size of the valuations; the size of the valuation increases; and the rates at which the valuations are increasing.  All three of these aspects are (very much) outsized.

LinkedIn’s first day of trading, May 19, likely reminded some of the type of manic price action seen during tech IPOs of the late ’90s.  Here is the chart from May 19 in 1-minute increments:

(click on chart to enlarge image)(chart courtesy of StockCharts.com)

As seen in Barron’s, May 23, in an article titled “Is LinkedIn Already Tapped Out?” at a price of $93 the Market Capitalization was $8.7 Billion and 2010 Revenue was $243 million, with 2010 Profits of $15 million.  As seen in the article, “Twenty-seven months ago, LinkedIn was issuing options with an exercise price of just $2.32 – less than 1/40th of what investors paid last week.”

The Groupon jump in valuation is starkly illustrated by the following, as seen in a Wall Street Journal June 3 article titled “Groupon to Gauge Limits of IPO Mania.” From that article: “As of March 31, Groupon’s shares traded among institutional investors in private secondary trading at an implied valuation of $5.6 billion, according to Nyppex LLC, an intermediary in the secondary market.”

While Groupon has yet to go public, various sources have been predicting a resulting post-IPO Market Capitalization in the $20-$30 Billion range.  One revenue projection indicated 2011 revenue of $2.6 Billion.

I could write extensively about my thoughts concerning the fundamentals of both LinkedIn and Groupon; for now I will highlight one item (among many) that deserves particular attention – that of the outsized Price-To-Sales ratios.

Of course, there are many other private tech companies experiencing similar dynamics.  In aggregate, these huge, fast jumps in valuations – to (very) high valuations – should serve as a “red flag” that there is wildly excessive positive sentiment.

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 1283.31 as this post is written