The least tempting stock market charts ever

Topic: a negative view of the Swedish stock market chart

Conclusion: not quite a bargain is it? -50% would be more than reasonable.


Does this series of charts look tempting to you?

(The Swedish OMX stock market index)

First, in the very short term, there seems to be a psychological barrier around 1650. After 3 attempts buyers are giving up. The break out in April looks more and more like a false, last hurrah.


Observing the index from a slightly longer distance, the similarities with the last peak are striking. Even more alarming is that we didn’t manage to get above the levels of 18 months ago. If stocks are this weak when US indices are hitting all time highs every day, there’s something rotten in the state of Sweden.


Seen from the beginning of the cyclical bull market, the double top of 2015-2017 looks even more ominous. Maybe there’s room for a third top before normality ensues, maybe we’ll go right through 1250. No matter, I think 1250 is where we’re going to start with. We’ll cross the bridge of “bounce back to the 1600s, or crash trough to triple-digit territory” when we get there.


In a 2-decade perspective, the current formation looks surprisingly tiny, like a “no volatility, great moderation tremble”, rather than a true wash out and re-set of the greatest monetary scandal in history.

My guess is that the latter is what we have before us.

The question is “just” how many more rounds central banks have left before they’re empty. In any case, looking for bargains here when stocks haven’t even visibly corrected in the chart just doesn’t make any sense to me. It’s as if Under Armour first raised prices by 200% and then put up signs with “SALE -5% OFF“. Tempting?

What to do about it? Get out of stocks unless you have insight in some very specific individual companies. Go cash, or buy something that’s currently unloved such as gold, gold mines, uranium or soft commodities.

Read more about the case for a -50% leg on the US stock market here LINK

NB: My next post will NOT be about financials or the stock market.

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Stocks about to rally! Is diversification a four letter word?

Topic: The case for a 25% upside for stocks in the coming 6 months

Style: ironic, humorous, short


1 The trend is your friend

I mean, what are the odds of this trend suddenly reversing?

Some say it’s just getting started.

Remember that stocks went nowhere between 1996 and 2009, and 2000 and 2012 or was it 2013? That’s a long time going nowhere so it’s about time we had a rally, no?

2 Stocks are cheap

We’re not even at a recent bottom in PE ratio, let alone an ocular average PE for the recent history. With zero interest rates, massive stimulus, not to mention the internet and general automation boosting productivity, PE-ratios should be well above average, right?

3 Profits are going up

Not that fundamentals are that important, except over very long time periods, but the trend for profits is up. In addition profits have hit a temporary plateau while they wait for the most recent monetary stimulus to translate into higher profits.

With both higher earnings multiples and higher earnings in the cards, a 25% immediate increase in S&P 500 is actually a quite modest expectation

4 Interest rates are low

This chart speaks for itself, I hope. With interest rates this low, there is no alternative to stocks. Retirees can’t live off of a 2.2% return. Nominal!

True inflation eats up all of that if not more, not least since housing costs are rising. And… look at the chart, can you honestly say you don’t think rates are going lower?

5. Dividend yields are real, and they are at a low point in history and thus likely to rise

OK, admittedly the DIV yield is lower than the interest rate, but rates are fixed and nominal, whereas dividends increase with the economy (if not faster owing to the superior selection of stocks in the top index).

By the way, with rising profits, either dividend yields will increase or stocks will rise. And then there is the potential of multiple expansion as well! Please note that DIV yields are abnormally low. Hence, they are likely to rise.


There are of course numerous more reasons to expect higher profits and share prices, such as increasing automation (robots are way cheaper than humans), solar energy (once expensive oil is out of the way, profit margins can expand), profit margins are at historical highs, digital companies like Alphabet, Netflix, Facebook, Amazon etc are not burdened by production costs, 18tn USD of newly minted money globally over the last few years, the 5tn Chinese One Belt One Road initiative, a permanent shift higher in valuation multiples as we now realize stocks are the superior investment alternative… The list goes on and on.

No matter, in the next post, that I urge you to read in conjunction with the one you have before you, I’ll go through a few highly speculative and hypothetical challenges to the upside case. We’ll talk demographics, pensions, debt, currencies, consumption, inflation, and maybe even throw in some debt ceiling and foreign tax repatriation arguments for good measure.

Check it out here.


Could there actually be an alternative to being all in on the stock market? Isn’t diversification a four letter word? Stay tuned to find out. Subscribe, read my book, check in again, tell a friend.

 

 

What if the new new things were slightly delayed

The bull has many legs
3D printing, AI, robotics, automation, CRISPR/Cas9, millennials, cheap and clean energy… there are lots of reasons for a great bull market. Maybe a bull market to eclipse all previous bull markets.

-In 2025, that is (well, starting before, but really booming by then).

But…
  • Until then, perhaps Trump’s rule won’t be that smooth (which president’s is?)
  • Perhaps retiring baby boomers mean less umph in the economy and stock markets (selling stocks to finance retirement, less borrowing, less consumption, scaling down home ownership, car churn…).
  • Perhaps interest rates won’t keep falling. Perhaps debts won’t keep rising.
  • Perhaps the highest median valuations in the history of stock markets won’t rise further. Perhaps record high profit margins won’t either.
  • Perhaps after Trump’s honeymoon months, the typical new-president-after-a-2-termer correction ensues. Perhaps, as per usual, the 7-8th years of the decade show “a bit” of turbulence (like 1987, 1997-8, 2007-8 [and, yes, it goes back further]). 
  • Perhaps Variant capital’s idea of surplus capital being eaten up by capex and rising inflation means less stock market strength. 
  • Perhaps China/Russia/US won’t be as fast friends as they been the last quarter century.

What if all those things converged and happen at the same time? What if Trump’s honeymoon came to an end in the 7-8th year of the decade? What if interest rates bottomed out? What if inflation came back and ate up surplus capital coincident with higher capex and a resurgence for commodities? What if the baby boomers born 1945-50 started retiring and consuming less around the same time, while millennials lived with their parents a while longer?

What if those things reinforced each other and caused falling margins and falling valuation multiples at the same time as slower sales and negative sentiment and negative cycle phenomena? What if increased innovation means faster churn of companies, i.e. fiercer competition, and consequently productivity surplus increasingly going to consumers again?

Perhaps then the great bull market would have to wait a few years and let a bear market clear out some cobwebs left over from the ongoing bull market first.

Perhaps we won’t see two bull markets in a row. Perhaps ever rising stock markets aren’t a human right. Perhaps things aren’t different this time

Perhaps.