Tag Archives: stock market

Playing The Bubble Game: Investing In The 21st Century

Summary: Investment commentary these days overflows with mentions of bubbles. The concept is vital to understanding our economy yet encrusted with myths in the minds of most investors. This post cuts through those to the known history and theory of bubbles. As usual with economics, this gives us clues about the future – but only clues.  {Second of two posts today.}

  • We’re in an era of bubbles, but they’re masked by myths.
  • Understanding their history and dynamics can guide our investing.
  • Bubbles create high risks not easily managed.
  • Failure to prepare for these risks has created serious losses, and will do so again.

Bubbles

Bubbles in history

“You Can’t Cheat An Honest Man.”
Title of W. C. Fields’ 1940 movie, harshly and cynically describing the essence of bubbles.

Bubbles are an inherent aspect of free market systems, easily produced in classroom exercises. Whether managing a nation or a portfolio, they must be understood.

Those who lived through the giant 19th century UK and US investment bubbles would find our bubbles quite familiar. Journalist and promoter Charles Mackay participated in several, and the scars from them led to his bitter polemic Extraordinary Popular Delusions and The Madness of Crowds. See more about this history in “Charles Mackay’s own extraordinary popular delusions and the Railway Mania” by the brilliant Andrew Odlyzko (Prof Mathematics, U MN).

Then and now, bubbles have common characteristics.…

Read the rest at Seeking Alpha. Post your comments there.

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Effects Of The Coming Market Crash On The Economy – And Perhaps On You

Summary: For the past year I’ve warned that the economy is slowing. For the past three months I’ve warned that a recession is coming. Now let’s consider the likely effects, and how you can prepare.

  • The odds of a stock market crash are high.
  • Are you at or near ground zero, to be hurt by the crash or its after-effects?
  • Will you be affected by its ripples — or the recession that probably causes the crash?
  • Here are the likely worst affected industries and regions. Prepare now if you’re in them, or if you are over-weight their stocks.

Stock Market Crash

A crash is coming soon. I believe (aka guess) it will happen in 2016, when stocks are knocked down by the combination of a recession, liquidation of margin debt, and collapse of valuations.

Valuations are a particular weak spot of stock. Now near record high levels, they are among the most mean-reverting of economic series on a generational basis (i.e., they collapse and then return to the average of the past 10 or 20 years). Stock prices might drop roughly by half, as they did after the last two bubbles popped.

What does a stock market decline do to the economy? Let’s count the ways.

Read the rest at Seeking Alpha. Post your comments there.

Corporate profits are the market’s foundation, shaping a new America

Summary: Corporate profits have rising to an amazingly large share of our national income, powering the stock market while GDP and household income lag far behind. This has played a large role in shaping the New America of the 21st C. What caused this rise? What might reverse it? See my column at Wolf Street for answers.

Corporate Profits Are the Stock Market’s Foundation.
What Will Break Them?
The hidden Key to Regime Change in the Stock Market.

The daily flow of economic statistics misleads even sophisticated analysts into watching the short-term trends while forgetting the long-term basics that often determine events – as we see today, with analysts chattering about beats of quarterly earnings and expectations for Friday’s employment report.

The first plays a pointless manipulated game. The second concerns an impossible-to-accurately-predict, heavily revised, slow-changing metric (non-farm payroll growth has been 1.7% – 2.2% year-over-year for the past 15 months).

Larger factors drive the stock market, creating the macroeconomic foundation for bull and bear markets. One of the most dramatic trends of the past generation has been the rise in corporate profits. It has helped reshape America, powering a three decade long bull market. What created it? What will end it?

Read the rest at Wolf Street!

First signs of dreams shattering in Silicon Valley

Summary: Next is this series about the the boomers’ third financial bubble is this by entrepreneur Mark St. Cyr, describing how current events in Silicon Valley show the early signs of dreams shattering, events that precede a crash.

 

Crying Towels:
Silicon Valley’s Next Big Investment Op

by Mark St.Cyr • From his website
14 October 2015

Posted with his generous permission

 

Nothing focuses the mind more than either the lure of riches or, the loss of them. And there has been no other group caught up more in the lure for riches than: the disruption class.

Disrupting is what it’s been all about over these last few years. However, there’s another disruption on the technological horizon heading right towards Silicon Valley itself, and that brewing storm is – disruption of the disrupt-ers.

The once emblematic IPO cash-out that lured many is beginning to morph into the loss of IPO dreams that resemble wash-out with every passing earnings cycle. For a glimpse into the event horizon that is the future. All one needs to do is look no further than what myself and a few others have dubbed the “canary in a coal mine” of all that’s Silicon Valley: Twitter™.

Nothing against Twitter per sé. What I take issue with is its valuation vs its ability to produce net profits. And that goes not just for Twitter, but everything “social” in general.

I’ve stated from the get-go Twitter is a great, innovative platform. But worth Billions, upon Billions of dollars? Sorry, far from it. One of my assertions has always been; would you pay for it if they charged you? What if charging you meant you could type more than 140 characters? Would that be enough to entice? Usually the answer from my own unscientific (as well as gut) research came back with a resounding no. And here lies the problem that’s symptomatic of many others that will once again come to light and be amplified this earnings cycle. More so than the last in my opinion.

Twitter is (again, in my opinion) a real-time microcosm of what’s about to hit the whole Valley. i.e., A real shite storm, and here’s my reasoning…

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While we sleep, corporate execs strip-mine America

Summary: Nothing shows how America’s reins are held by the 1% than our out-of-control corporations, enriching their executives at the cost of the future of their businesses — and ours. Here’s another status report on this sad but fixable story.

Executive Pay

The Q2 Buybacks Report by FactSet is, as usual, sobering reading. During the 12 months ending in June, companies in the S&P 500 spent $555.5 billion repurchasing their shares. For the first time since October 2009, buy-backs exceeded free cash flow (cash flow after capex); they’re borrowing to buy back shares.

For the past two years buybacks have run at the fantastic rate of ~$120 B per quarter — the same rate as in 2006-2007, with tech companies the leaders. In 2014 they spent 95% of their profits on buybacks and dividends (building the future is somebody else’s problem in corporate America).

Investors applaud this as a boost to share prices. Surprising to the naive, a decade of buybacks has reduced the S%P 500’s share count by only 2%. Share buybacks are one part of the triangle trade that transfers vast fortunes from shareholders to senior executives using stock options:

  • executives exercise their options when shares rise (i.e., the company sells shares to executives at a discount to current prices),
  • the executive sells those shares to the public,
  • the company buys back those shares from the public.

Net result: the company has less money, their executives have more, the share count is unchanged.

This is an example of how America’s senior executives have learned to treat running companies — even running them into the ground, as Carly Fiorina did at HP — as a sideshow to their real job of financial engineering (for their personal profit). During their boom the Japanese called these financial games zaitech (cursing it after their crash in 1989). Stock options, tax avoidance, earnings manipulation, mergers and acquisitions (almost all of which fail; see articles at CBS and HBR) — these are the paths to success for execs in New America.

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The stock market gives us its 2 classic warnings. Will we listen?

Summary: Again the US stock market skates on the edge of an abyss, this time without the Fed holding a safety net. We’ve seen this combination of peaking economy and overvalued stocks; it never ends well. Too bad we don’t learn from history. But I suspect we’ll soon get another opportunity.

The Fed is like the chaperon who orders the punch bowl removed just when the party is warming up.”
— Attributed to William McChesney Martin Jr., Chairman of the Fed from 1951–1970. Those days are long gone.

Pigs running off a cliff

(1)  The biotech party

Here’s the weekly StockCharts view of the exchanged traded fund for the S&P Biotech Index (XBI). The heart of the bubble, it has the classic parabolic rise of an investment mania. Now down almost 30% from its July record high. Propelled by vapors and dreams, we need not consult Nostradamus to guess at what comes next. For details see Don’t ask if there’s a biotech bubble. Ask why we have another bubble.

EFT of the S&P Biotech Index

(2) The social media mania, and Tesla

The stock media stocks are the frothy edge of the bubble. Their boom began with the IPO of Facebook (FB) on 18 May 2012 at $38. It peaked at $99 in July, now at $89 (down 10% from peak). While Facebook has carved out a dominant and profitable niche, most of its scores of competitors remain little but dreams given form by Venture Capitalists — many doomed to die as independent companies when Wall Street has squeezed the last drips of juice from the mania.

Here’s the weekly chart of the Global X exchange-traded fund for the social media industry (SOCL), now fallen 20% from peak to its long-term support — with nothing below but the void. For details see The advertising glut dooms the social media industry.

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Who will get hurt from the next stock market crash? Not just investors…

Summary: There is an exception to Saturday’s post, which said that a stock market crash would have only minor economic effects on America. Just as an oil crash hurts oil producing regions, such as Texas, a stock market crash hurts areas that produce stock certificates. Printing this “paper” is the most profitable part of the San Francisco Bay economy, putting it in the cross-hairs for the inevitable crash.

Stocks Crash

Sector crashes often harshly affect industries and regions even when the national impact is minor or even beneficial. An oil bust hurts not just oil exploration and production companies, but also regions focused on that industry (e.g., Texas) — while helping everybody else. Similarly a stock market crash will hurt companies that trade stocks (brokerage firms) and those that print stock certificates (Tesla Motors) — and areas that manufacture stock certificates, like the San Francisco Bay Area.

Silicon Valley and the entire Bay area form a 21st century version of a gold rush. Money floods in and fortunes are made — but instead of exporting pretty rocks it exports papers promising future riches. This should be obvious by now. I walk through the details in these posts…

These industries will not disappear, any more than finance did after the 1970s crashes, or the oil industry did after the 1980s bust. But the people in these industries and the areas in which they cluster will suffer from the fall to Earth (except those people at the top, and those who got in early).

The fall can be quite far. Here’s the price graph of the iShares Nasdaq Biotechnology Index (Symbol IBB), as it rose from $80 to $340 in five years. Try not to see the bubble when you look at it (that requires an investment professional’s eye). Do not ask how many of its 145 constituent stocks are profitable. The ETF’s profile is here.

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