Stock Bubble, be warned

DarkDusk

Hello everyone,

I'm not going to spend much time at this but I'm just expressing my opinion on the recent movements in the stock market. From my analysis, the result of heavy money printing by the Fed is becoming more clear as time passes. People say there is no inflation at the moment - I tell those people to look at the stock market. There is enormous inflation in stocks right now and it is inevitable that yet another bubble in stocks is going to burst. I think we'll see a correction of roughly 10% by year end and this will force the Fed to double down on QE, devaluing the dollar even more and making the bubble bigger. The Fed will not be able to re-inflate prices forever however. I foresee a bigger crash than 2008 on the horizon and people should be conscious of the effect of central banks' monetary policy in recent times.

A picture tells a thousand words though...


This is a bit out-dated, the S&P is now above the 1650 mark. The way the media is reacting to this is nearly identical to the last crash - the market sentiment is good, the Fed will keep the fire lit. I'm afraid that people will soon find out that printing money does not turn a stock market, or an economy around. We will likely see a crash in the dollar also. Commodities will act like they always have - the inflation in stocks will leak into commodities like oil, food, silver and gold - that's when inflation will be felt by the general public (the end product of inflation is in commodities, most of the time it starts in stocks). The mainstream media do not understand that inflation doesn't have to happen in food for it to be called inflation, because the inflation always comes from somewhere else first.

Reality bites. The world economy has been kept afloat by cheap money since 2008 - a fake and too big to fail "recovery". QE is like giving drugs to an addict, it feels good for the addict, but has a negative effect on him. Now I'm not saying the bubble will burst tomorrow, the Fed will try to keep this going for as long as they can until reality hits. The Fed has no exit strategy that will work without totally destroying the bond market and causing rampant inflation.

Looking for other people's opinions on the future of stock prices, other asset prices and the outlook of the world economy.

TheBikeGuy

Nice post but I have to say I disagree that the stock market is a bubble. I agree that the fed is pumping up the market but this is nothing like 2000 and 2007. Firstly your graph predicting that a crash is due because the current high S & P is in a similar position to when it crashed in 2000 and 2007, i.e the 1500/1600 mark. However past performance is no indicator of future direction, just look at a similar situation from the mid 1980's to early 1990's

http://finance.yahoo.com/echarts?s=%5Egspc+interactive#symbol=%5Egspc;range=19850320,19910320;compare=;indicator=volume;charttype=area;crosshair=on;ohlcvalues=0;logscale=off;source=undefined;

Similar to the current situation shown in your graph, this time period had two peaks (Sep 1987 and July 1990) followed by two crashes before another peak formed (March 1991). However no catastrophic collapse occurred a third time, despite the chart showing a pattern, indeed the S & P rose by roughly 80% in the following years

http://investing.money.msn.com/investments/stock-charts/?showchartbt=Redraw+chart&compsyms=&D4=1&DD=1&D5=0&DCS=2&MA0=0&MA1=0&CP=1&C5=6&C5D=1&C6=1991&C7=4&C7D=30&C8=1996&C9=0&CF=0&D7=&D6=&PT=7&symbol=%24us%3AINX&SZ=0&nocookie=1

Past performance, particularly chart studying, is no indication of future events!

Furthermore looking at the historical P/E ratio of the S & P show that the current valuation is quite fair, some could argue undervalued compared to the historical average

http://www.multpl.com/

A ratio of 19.17 is hardly bubble territory, particularly compared to real bubbles like 2000 and 2007 (valuations of 40 and 60 times earnings being the average respectively)

There may very well be a negative reaction once the fed tapers off QE but I think it will be quite small, certainly nothing compared to 2000 and 2007, while further advances until said correction occurs will negate it for anyone invested now, as they will continue to benefit from a rising market.

DarkDusk

I'm puzzled by why you have used the P/E ratio to show there is no bubble... There is virtually no correlation between high P/E ratios and falling stock prices.Here is a link to the same website with the information presented on a table. Starting with the dot-com bubble, you can see that the P/E ratio did not rise above the norm until AFTER the bubble. Look at the housing/stock crash in 2007, the exactly same thing happened - the P/E ratio peaked AFTER the bubble burst. This graph will make it more clear for you, the graph you should have given me:


The graph you gave me is EXTREMELY misleading. The graph above shows the P/E ratio along with the S&P price. A simple glance at that will instantly tell you that high P/E ratios do not tell you if stocks ARE in a bubble, they tell you that stocks HAVE BEEN in a bubble. If you base your investments on this ratio I'm afraid you will get fairly burnt in the long run...

"A ratio of 19.17 is hardly bubble territory, particularly compared to real bubbles like 2000 and 2007 (valuations of 40 and 60 times earnings being the average respectively)"
Well, the ratio was 21.46 in January 2008, care to explain the usefulness of this ratio?

"However past performance is no indicator of future direction"
The P/E ratio sure is not!

TheBikeGuy

The P/E ratio is most definitely a indicator of a bubble. In a bubble market expectations vastly and quickly outstrip earnings growth, therefore the P/E ratio rise.

Using your own graph you can see the sharp rises in P/E ratio before the 1929, 1987 and 2000 crashes, this is not a coincidence.

From 1980 to 1987 the average P/E ratio rose 194%, low and behold a crash was the result.

When a company like Webvan in 1999 with revenue of $113 million has a valuation of $15 billion that is a bubble.

When a tech company today like Cisco has a P/E ratio of 13, I find it hard to take your claims of a bubble seriously.

The case could be argued for companies like linkedin and facebook, although these are the exception in todays market, rather than the norm in a bubble.

You have no interest in a discussion, only trying to prove how your ideas are the only possible acceptable choices, so you can argue with yourself as far as im concerned. If economics and stock investing was as simple as spotting a similar pattern on a chart or observing that QE is raising the stock market (which every investor knows) then we would all be millionaires. Best of luck

DarkDusk

Sometimes the P/E ratio is an indicator of a bubble, yes, but many times it has been wrong about predicting bubbles - so I (and you) should not depend on it.

There is no correlation between the current P/E ratio of a stock and its 1-year or 10-year return. The P/E ratio only explains 20% of stocks' 10-year returns in the S&P 500 from 1872 to 2005. For the same period, but for 1-year returns, the P/E ratio only explains 3% of stocks' returns. 68% of monster drops (>10%) occurred when the ratio was less than 16. The ratio is flawed because it encourages you to invest when earnings are falling - what is the reasoning in that?

Just to make things clear, I'm not saying the market is in a bubble right now, but that it is entering bubble territory and caution should be taken by investors.

DarkDusk

Just saying that a sharp correction is due very soon, probably by the end of the summer. The S&P has moved above its 200-day MA dramatically since October 2012 and its only a matter of time before the two meet again.

hfallada

Paul Krugman of Nytimes said it was a bubble months ago. The interest rates are just so low in the US that people have to pump money into the stock market. US companies dont have large signs of growth but yet their stock prices are very high

neil.p.b

Indices have had a chance to correct sharply recently but didn't, they were slowly walked down in a very controlled manner and will most likely again very soon but I am talking a few percent off them, nothing major. The fact that the DOW and S&P have broke all time highs recently and the FTSE will do so shortly is in in itself a good enough reason for the rally to continue throughout the rest of the year (with small corrections along the way), bulls didn't win that battle just to give up straight away!. I've got sometime Q1 2014 as the time for a bigger correction, happens to coincide with Bernanke stepping down! Can't post charts atm unfortunately.

hmmm

I don't know. The US economy is recovering well, unemployment is down, confidence is up, business investment is up. Europe doesn't look great, and Japan is in the middle of a monetary experiment that appears to be working.

Stock market valuations look to be at or about their average levels, and I see few of the usual signs of a bubble - P/Es in the mid to late 20s, ordinary people buying stocks, crazy valuations on companies. In fact, most people don't realise the market is up 30% worldwide in the past 12 months - once you see the usual crowd of economic charlatans appearing on TV to tell us "now is a good time to buy" is probably as good a warning as you're going to get.

Plus to be honest, the doom and gloom hysteria from a bunch of 21 year old bloggers sitting in their bedrooms is helping to dampen down enthusiasm for equities, which suits me fine.

Here's a view that deserves a listen
http://finance.yahoo.com/blogs/daily-ticker/market-benefit-doubt-invest-stocks-barry-ritholtz-134711287.html

Personally I'm bullish long term, but cautious short term.

arrowloopboy

It will do what its going to do,as it has in the past and will in the future,if its a bubble,so what,look for shorts,i think a lot of ye are over analysing ,if you keep saying its going to rain,you will be right eventually,that shouldn't stop you from going outside,just carry an umbrella (stops).
This tread looks a bit like a cock mesureing contest,who cares who calls the situation right,unless you've skin in the game,what does it matter.
What ye should be doing is putting a plan together for what to short if the sh1t hits the fan.

DarkDusk

The opportunity to buy is coming very soon. The S&P has stretched further above the 200 DMA than any other time in the last 30 years. It's above 10% at the moment and we should see a correction of at least 10% down to the mean. This will be the perfect time to buy because the Fed will most definitely increase QE to support the market.

Parabolas always crash...

Roonbox

DarkDusk wrote: »

The opportunity to buy is coming very soon. The S&P has stretched further above the 200 DMA than any other time in the last 30 years. It's above 10% at the moment and we should see a correction of at least 10% down to the mean. This will be the perfect time to buy because the Fed will most definitely increase QE to support the market.

Parabolas always crash...

You mean the opportunity to but stocks is coming or gold?

arrowloopboy

Roonbox wrote: »

You mean the opportunity to but stocks is coming or gold?

He means to buy the s/p after this correction he's predicting ,if he's that sure he should probably consider some short positions,in doing so,he'll get to say he made a shed load of cash ,rather than look I was right,been right counts for nothing if you don't capitalise,simples.

ranger4

I believe markets very close to Healthy correction, Over 12 months of gains for stock markets and heading into summer lull, 7-10% correction only around the corner.

monster_mouse

ranger4 wrote: »

I believe markets very close to Healthy correction, Over 12 months of gains for stock markets and heading into summer lull, 7-10% correction only around the corner.

7 - 10 % is nothing when you consider the markets are up about 30% since Obama got reelected

as for the OP , I suspect he is trying to convince himself that gold and silver a due a rebound and thus equities must tank , same guy was predicting silver @ $ 40 by the middle of this year , its around half that

Roonbox

arrowloopboy wrote: »

He means to buy the s/p after this correction he's predicting ,if he's that sure he should probably consider some short positions,in doing so,he'll get to say he made a shed load of cash ,rather than look I was right,been right counts for nothing if you don't capitalise,simples.

The reason i asked is because a 10% correction would only bring us back to where we were in Jan, that is not a collapse. So I was guessing that he is not talking about the SnP.

DarkDusk

arrowloopboy wrote: »

He means to buy the s/p after this correction he's predicting ,if he's that sure he should probably consider some short positions,in doing so,he'll get to say he made a shed load of cash ,rather than look I was right,been right counts for nothing if you don't capitalise,simples.

I have no interest investing in the stock market. I am long physical silver at the moment, that is my current investment portfolio. Also, I think it would be unwise to go short because there is no way in knowing how far higher prices will go, but it is a certainty that prices will correct like they always do.

@Monster_Mouse When inflation occurs in the stock market, this inflation eventually leaks down into commodities, so I don't know what you are on about with me needing "convincing". It is a proven fact. After 2007/2008 all the inflation that was in the stock market eventually ended up in gold and silver - throughout history precious metals have accounted for money printing and today is no different. Some people believe that inflation will go through the roof the day after Bernanke announces another QE program, that is totally incorrect. It takes time for inflation to leak down into commodities and consumer goods.
As regards to my predictions, gold and silver have had corrections for ridiculous reasons such as Cyprus having to sell their gold - this is bullish for gold because it ends up in stronger hands. Right now, there is enormous physical buying of gold and silver - a transfer form the weak hands (speculators and hedge funds etc.) to strong hands (emerging economies, individual investors) who will hold onto their investments.

I think the S&P may have peaked at the 1650 mark now, there doesn't seem to be anything that will push it further imho. Correction is overdue as ranger said.

euroboom13

DarkDusk wrote: »

I have no interest investing in the stock market. I am long physical silver at the moment, that is my current investment portfolio. Also, I think it would be unwise to go short because there is no way in knowing how far higher prices will go, but it is a certainty that prices will correct like they always do.

@Monster_Mouse When inflation occurs in the stock market, this inflation eventually leaks down into commodities, so I don't know what you are on about with me needing "convincing". It is a proven fact. After 2007/2008 all the inflation that was in the stock market eventually ended up in gold and silver - throughout history precious metals have accounted for money printing and today is no different. Some people believe that inflation will go through the roof the day after Bernanke announces another QE program, that is totally incorrect. It takes time for inflation to leak down into commodities and consumer goods.


As regards to my predictions, gold and silver have had corrections for ridiculous reasons such as Cyprus having to sell their gold - this is bullish for gold because it ends up in stronger hands. Right now, there is enormous physical buying of gold and silver - a transfer form the weak hands (speculators and hedge funds etc.) to strong hands (emerging economies, individual investors) who will hold onto their investments.

I think the S&P may have peaked at the 1650 mark now, there doesn't seem to be anything that will push it further imho. Correction is overdue as ranger said.

boom or bust.....That is the question

there is no visible stock market boom.(isolated incidents..no bling)

There is however a boom in oil producing countries (and gold rush countries) (flash cars ,bling,skyscrapers)

Why? they are overpriced (oil/gold) bust due

stocks are repeating 1933 recovery......more to come....some stocks are at bust stage ....but crash recovery stock making leaps and bounds....bling coming but no signs yet...hold in there.....bust comes after bling....small pull back for summer break with a strong christmas run

Like the way your thinking but i believe your wrong.....good luck

(have some money shorting [EMAIL="gold@ $1700"]gold@ $1700[/EMAIL] and [EMAIL="oil@.$112"]oil@.$112[/EMAIL] past few months...have made alot of money on recovery stock)

DarkDusk

euroboom13 wrote: »

stocks are repeating 1933 recovery......more to come....some stocks are at bust stage ....but crash recovery stock making leaps and bounds....bling coming but no signs yet...hold in there.....bust comes after bling....small pull back for summer break with a strong christmas run

Like the way your thinking but i believe your wrong.....good luck

(have some money shorting [EMAIL="gold@ $1700"]gold@ $1700[/EMAIL] and [EMAIL="oil@.$112"]oil@.$112[/EMAIL] past few months...have made alot of money on recovery stock)

1933 recovery? I hope not! It took the S&P over 20 years to reach the point at which it busted in the 30's! With that trend, you'll be waiting until 2030 to get your money back!

Well done on making money on your shorts. Silver's current price is much lower than when I bought it in paper price terms. If you look at physical prices, premiums for coins have skyrocketed by over 100%. Most of the silver american eagles are being sold for more than 35% of the paper spot price. It is obvious that the physical price is diverging from paper and I'm glad I am not involved in the paper market because of that.

Link to Adverts.ie: http://www.adverts.ie/for-sale/q_silver+american+eagle/

Edit:
A very interesting graph that may indicate that gold is no where near overvalued/bubble stage:



Also, gold is very undervalued when you look how much it backs currency:
http://fm.cnbc.com/applications/cnbc.com/resources/files/2013/04/23/Hinde%20Capital%20Chart.jpg

DarkDusk

Two more graphs, one relating to the RYT theory and one to TIPS.

euroboom13

Good luck with that.

1932/33 was a speculators dream 4x.....33 till 49 slow ...
.......some blue chip stock is 2013 GOLD......

the only good silver is The Lone Rangers horse.:)

DarkDusk

euroboom13 wrote: »

Good luck with that.

1932/33 was a speculators dream 4x.....33 till 49 slow ...
.......some blue chip stock is 2013 GOLD......

the only good silver is The Lone Rangers horse.:)

No offence, but could you write in a more legible manner? I find it very difficult to read/understand what you are saying.

euroboom13

DarkDusk wrote: »

No offence, but could you write in a more legible manner? I find it very difficult to read/understand what you are saying.

What i am saying is that gold/oil/silver is a very bad investment at this moment in time.

I am also saying that 1933 was considered a bull year for equity.Infact one of the best bull rally years ever and i see a repeat year 2013/4.I also commented that from 1933 till the next bull rally 1949, was very steady with little or no gains.I am implying stocks are good this year 2013.

I also said that the only silver i liked personally was "the lone rangers" horse (also called SILVER)

Hope that clears it up for ye...If not i will try and graph it for you.
good luck

ranger4

euroboom13 wrote: »

What i am saying is that gold/oil/silver is a very bad investment at this moment in time.

I am also saying that 1933 was considered a bull year for equity.Infact one of the best bull rally years ever and i see a repeat year 2013/4.I also commented that from 1933 till the next bull rally 1949, was very steady with little or no gains.I am implying stocks are good this year 2013.

I also said that the only silver i liked personally was "the lone rangers" horse (also called SILVER)

Hope that clears it up for ye...If not i will try and graph it for you.
good luck

Do you believe Indices/stocks will have healthy 5-7% correction during june-july to bring aboard cash on sidelines before resumption with bull rally possibly in Q3.

atkin

Just using the logic 'what goes up must come down' leaves me wary of investing in the US .I would be inclined to wait for a correction not crash at this point.

delux

There are some stocks that I really know well (i've been in and out of them for years) which are a bit overcooked at the moment and i'm waiting for them to come back a bit before i buy in again. However there are some smaller UK companies releasing great trading statements these days which I have no hesitation buying in to. I find these stocks hold up well even if the indices drop.

DarkDusk

delux wrote: »

There are some stocks that I really know well (i've been in and out of them for years) which are a bit overcooked at the moment and i'm waiting for them to come back a bit before i buy in again. However there are some smaller UK companies releasing great trading statements these days which I have no hesitation buying in to. I find these stocks hold up well even if the indices drop.

They may be releasing good statements, but how would these companies be performing without QE from the Bank of England/ Fed? People need to understand that recent rises in the stock market have not been caused by good fundamentals, but by money printing to keep the economy alive.

DarkDusk

atkin wrote: »

Just using the logic 'what goes up must come down' leaves me wary of investing in the US .I would be inclined to wait for a correction not crash at this point.

Correction will come soon, yes. We're not close to the crash yet though imho, the Fed should be able to inflate this bubble more for another while.

zpehtsfd

DarkDusk wrote: »

They may be releasing good statements, but how would these companies be performing without QE from the Bank of England/ Fed? People need to understand that recent rises in the stock market have not been caused by good fundamentals, but by money printing to keep the economy alive.

US companies are flush with cash so they are spending these billions repurchasing there own shares through buyback programs (figures are the highest in the last 10 years). Reducing the amount of shares issued increases the bottomline so it's no surprise that earnings have been good. Also take into account the mass layoffs / downsizing you can see how companies are beating analysts lowered expectations.

The fundamentals are good now but we will very soon reach an inflection point where companies will have to increase the topline considerably to continue posting good earnings numbers. QE infinity looks like it's not helping stimulate the economy much so i think it all ends bad. The hard part is trying to time it. Just give me AAPL @ $500 so i can short it. GLTU

DarkDusk

zpehtsfd wrote: »

The fundamentals are good now but we will very soon reach an inflection point where companies will have to increase the topline considerably to continue posting good earnings numbers. QE infinity looks like it's not helping stimulate the economy much so i think it all ends bad. The hard part is trying to time it. Just give me AAPL @ $500 so i can short it. GLTU

You're right, the QE is not stimulating the economy. It IS stimulating the stock market though, and has been ever since 2008. I think the Fed will end up buying corporate bonds at some stage in the future, when they find out that buying gov. bonds won't work.

Apple has turned into a sh!t company ever since Jobs passed away. It's a real shame that he isn't still around, all Apple can come up with now is "smaller", "lighter" and "thinnner" versions of original products. They are already way behind in the mobile market with the HTC One miles ahead of competition. Also, the iPhone needs a redesign, it just looks plain ugly to me! (HTC One is ****!ng beautiful!)

GLTY

delux

You're right, the QE is not stimulating the economy. It IS stimulating the stock market though

A few posts above you said good company reports were due to the QE action now you're saying it's not stimulating the economy? Seems like a contradiction.
Do you even know how it's stimulating the stock market?

delux

They may be releasing good statements, but how would these companies be performing without QE from the Bank of England/ Fed? People need to understand that recent rises in the stock market have not been caused by good fundamentals, but by money printing to keep the economy alive.

This is the contradiction post you gave earlier about the QE keeping the economy alive.
But anyway, you need to realise that every company does not depend what the Fed does. Give companies and society in general some credit. Regardless of QE there will be companies gaining market share, increasing profit margins and expanding into new countries. They would be doing this with or without fed action. Of course QE has an impact on the economy though.

DarkDusk

delux wrote: »

This is the contradiction post you gave earlier about the QE keeping the economy alive.
But anyway, you need to realize that every company does not depend what the Fed does. Give companies and society in general some credit. Regardless of QE there will be companies gaining market share, increasing profit margins and expanding into new countries. They would be doing this with or without fed action. Of course QE has an impact on the economy though.

What I'm trying to say is, QE has not helped to reduce unemployment, in the US specifically. QE may have prevented the US economy from collapsing, but is not helping it to grow.

Of course, there are some good companies out there, but the reality is the US economy would collapse without QE. That's why i'd be uncomfortable investing in US stocks, and I'm looking at stocks in emerging economies instead. When the next financial crisis hits, most investors will have lost confidence in the US, and unlike 2008, they will not pour their money into the dollar and US bonds (instead Asia/Europe/Australia etc).

atkin

Old Chinese proverb....Keep your exit door open. Ha ha

DarkDusk

atkin wrote: »

Old Chinese proverb....Keep your exit door open. Ha ha

Well, the central banks's doors are welded shut, and only a C4 will be able to open them!

euroboom13

ranger4 wrote: »

Do you believe Indices/stocks will have healthy 5-7% correction during june-july to bring aboard cash on sidelines before resumption with bull rally possibly in Q3.

i am wishing for a strong early june with a sligth sell off till oct,and a santa rally.....but only because i dont think we have seen pre- summer highs yet,otherwise id be taking profit..watching closely next few weeks.............strange times