Interesting little statistic

From Wall Street Breakfast (on SA)
All three major U.S. equity indexes rose to new highs on Thursday, in an alignment that hasn’t occurred since December 31, 1999. The records punctuate a march that defies stocks’ sharp downdraft at the start of the year…

On the one hand it points out again how wrong all the guys were who were talking about end of the world in February (and again with Brexit). On the other hand, Dec 31, 1999 was just a couple of weeks before the internet bubble broke. Back to the first hand, at that time stocks like AOL, Yahoo and Amazon were rising $50 per day, one day after another, while this current market is slowly climbing a wall of worry, 2 steps forward and 1 step back.

Saul

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Back to the first hand, at that time stocks like AOL, Yahoo and Amazon were rising $50 per day, one day after another, while this current market is slowly climbing a wall of worry, 2 steps forward and 1 step back.

Also, stock valuations today are nowhere close to the irrationality we experienced in 2000 just before the fall.

Wiseguy

Also, stock valuations today are nowhere close to the irrationality we experienced in 2000 just before the fall.

I remember Bezos saying at the time “I’m honored by the investors’ faith in us, but we’re just a book store, and 200 times revenue is a bit overvalued!” (or something equivalent)

Saul

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The talking heads often don’t know how to read the data.

2007 was NOT a bubble! It just looked like one to some people. Here is the right view, 40 years of S&P 500:

http://invest.kleinnet.com/bmw1/stats40/^GSPC.html

The index has been rising at around 9% per year for the past 40 years. 2000 WAS a bubble, you can see how in 1995 prices started to rise much faster than the historic average. In 2000 the collapsed and the S&P 500 went back to “fair value.” From late 2002 to 2007 the index rose at it’s average historical rate. The crash in the housing market brought down the financial system, it was NOT a stock market bubble imploding! From the 2009 bottom the market is recovering at a better rate than average but nothing that should scare the pants off investors.

Tune out the noise, the Zacks, the CNBCs, the Cramers, and all the other noise makers. 99% of what passes for news, isn’t. It’s NOISE. If you want news, read the earnings reports. Analyze the earnings reports. Most everything else is gossip, opinion, or worse.

Denny Schlesinger

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I remember Bezos saying at the time “I’m honored by the investors’ faith in us, but we’re just a book store, and 200 times revenue is a bit overvalued!” (or something equivalent)

Elon Musk said something similar about TSLA not to long ago.

Denny Schlesinger

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On the one hand it points out again how wrong all the guys were who were talking about end of the world in February (and again with Brexit)

Most US economic indicators are looking good. Also, last year many (if not most) stocks had actually experienced correction. The index was pushed ahead by handful of stocks and that sets up a nice sector rotation which can help the index move further up. More importantly, I think the low interest rates makes stock valuation cheaper.

I guess I can use periodic volatility.

From the 2009 bottom the market is recovering at a better rate than average but nothing that should scare the pants off investors. </>

One of the significant worries during post “Brexit” couple of days was one of the investment banks in Europe could blow up. The rumored candidate was Deutsche Bank. DB is the biggest owner of derivatives and suffering lots of losses because of that and if it goes down it could cause massive counter party risks taking many other banks.

That was one of the reasons Citi went down much harder compared to other banks (BAC, JPM, etc).

Oh BTW, DB saga is hardly over.

The ZIRP and NIRP policies are unprecedented. There is no historical precedence to see how they played out eventually. So there could be some real shocks. Between 2019 to 2022 a very massive amount of corporate debt will mature. While most of the debt may be re-financed but if they get refinanced at higher interest rate what they could do to the earnings, to certain asset values are unknown.

The reason I am mentioning this is because there are risks out there and we may get lucky and they may not materialize but “nothing that should scare the pants off investors” is bit of a stretch.

Let’s take a moment to dissect CM001’s post:

one of the investment banks in Europe could blow up.

…if it goes down it could cause

So there could be some real shocks.

While most of the debt may be re-financed…

if they get refinanced at higher interest rate what they could do to the earnings…

The reason I am mentioning this is because there are risks out there and we may get lucky and they may not materialize but “nothing that should scare the pants off investors” is bit of a stretch.

As investors we would do well to distinguish between “uncertainty” and “risk proper.” I had a hard time getting my head around the idea of what risk really is. The best explanation I’ve found was from Frank Knight which I link below.

If we replace the word “risk” with “uncertainty,” CM001’s post is spot on! It becomes a generic problem of how to deal with uncertainty, the ones CM001 mentions and other we can’t even imagine. After all, the future is uncertain, no one can predict it.

If Deutsche Bank is risky the solution is simple, avoid it. I avoid all banking with credit risk. Or buy it only on the deepest discount. I believe that the best remedy for uncertainty is to have a sturdy portfolio which means debt free and no speculative positions no matter how enticing. Think back to the 2008 bust. If the stock market was not in a bubble, not overbought, as I contend, why did stock prices collapse? Leverage! The derivatives players used huge amounts of leverage to play the game. When the mortgages started to default, the securities backing the derivatives became worthless and the issuers got “margin calls” or other similar requests for additional backing. The most readily available liquid assets were equities which they sold driving down the price for reasons that had nothing to do with value but solely because supply exceeded demand. If your portfolio had no debt and no speculative positions, you could watch the butchery from the sidelines! Gladiators killing each other!

My response to CM001’s uncertainties (which are real enough) is a sturdy portfolio.

Denny Schlesinger

Risk, Uncertainty, and Profit
Knight, Frank H.
(1885-1972)

But Uncertainty must be taken in a sense radically distinct from the familiar notion of Risk, from which it has never been properly separated. The term “risk,” as loosely used in everyday speech and in economic discussion, really covers two things which, functionally at least, in their causal relations to the phenomena of economic organization, are categorically different. The nature of this confusion will be dealt with at length in chapter VII, but the essence of it may be stated in a few words at this point. The essential fact is that “risk” means in some cases a quantity susceptible of measurement, while at other times it is something distinctly not of this character; and there are far-reaching and crucial differences in the bearings of the phenomenon depending on which of the two is really present and operating. There are other ambiguities in the term “risk” as well, which will be pointed out; but this is the most important. It will appear that a measurable uncertainty, or “risk” proper, as we shall use the term, is so far different from an unmeasurable one that it is not in effect an uncertainty at all. We shall accordingly restrict the term “uncertainty” to cases of the non-quantitive type. It is this “true” uncertainty, and not risk, as has been argued, which forms the basis of a valid theory of profit and accounts for the divergence between actual and theoretical competition. [Emphasis added]

http://www.econlib.org/library/Knight/knRUP1.html#Pt.I,Ch.I

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If Deutsche Bank is risky the solution is simple, avoid it

What you are suggesting may seem like a solution but in reality it is not. The financial crisis showed that there is no such thing as avoiding.

In fact I found out about DB’s extensive derivatives book when I was looking into an European technology company.

I don’t want to get into the difference between “risk” and “uncertainty”, measurable or not, etc. For me, the reality is these are real risks that can impact an ordinary investors portfolio.

Today the central banks are left with almost no tools to fight another financial crisis or any other major shock. So if you are someone in 60’s and you take a major hit to your portfolio there are chances you may not see them recovering in your life time.

The point I am trying to make is, we cannot use the recovery from the financial crisis as a template for the next one.

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The point I am trying to make is, we cannot use the recovery from the financial crisis as a template for the next one.

What do you suggest we do? My strategy is to have a “sturdy portfolio” for two reasons: 1) with no debt you cannot go broke, they can’t come to collect non-existant debts, and 2) essential well run businesses have a good change of carrying on. Plus, I own my home free and clear.

Denny Schlesinger

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What do you suggest

Let me try one more time… :slight_smile:
You mentioned “From the 2009 bottom the market is recovering at a better rate than average but nothing that should scare the pants off investors.”

Your statement implies the recovery is sort of normal, nothing to see and nothing to worry. My point being no it is not. The recovery is aided by great financial experiment. That recovery is aided in great part by central banks unprecedented QE and other measures which pumped very huge amounts of money in the financial market and helped financial asset prices to lift. That’s a model that cannot be relied on when the next crisis happens.

So, investors should worry the next time we may or may not get “Greenspan put” or “Fed Put”.

Separately,

A company not having debt itself doesn’t mean its safe or its valuation will not shrink or it cannot lose its customers etc. Even worse it doesn’t mean it will not take debt. We have see many companies (especially technology companies) have taken huge amount of debt in the last few years not necessarily for their business purposes but to return capital to investors.

So whether a company has debt today or not is sort of less relevant.

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Your statement implies the recovery is sort of normal, nothing to see and nothing to worry.

Yes and I have two reasons for believing it.

  1. Reversion to the mean. There is a lot of material about it on the web and my personal experience confirms it. Prices are not as mean reverting as pea sizes and prices have a different distribution (power law) than pea size (normal).

https://www.google.com/search?client=safari&rls=en&q…

  1. Ben Graham. According to Ben Graham short term the market is a voting machine but long term it is a weighing machine. In time prices tend to return to “fair value” and in a growing economy fair value increases with productivity.

As for your counter argument:

My point being no it is not. The recovery is aided by great financial experiment. That recovery is aided in great part by central banks unprecedented QE and other measures which pumped very huge amounts of money in the financial market and helped financial asset prices to lift. That’s a model that cannot be relied on when the next crisis happens.

No one knows if the “great financial experiment” was a success or not. All we have is correlation and that is not proof of causation. One of the great difficulties of economics is that large scale experiments cannot be done. It is entirely possible that the market would have done even better without the meddling, letting big banks go bankrupt might have been a good economic idea but, of course, the powers that be would not allow such a thing. I wonder if the Greek bailout was to bail out Greece or to bail out the German banks that had made the loans. I wonder why AIG was “saved.” Was it to bail out Hank Paulson’s previous employer?

Separately,

A company not having debt itself doesn’t mean its safe or its valuation will not shrink or it cannot lose its customers etc.

I don’t know why you bring this up. I certainly didn’t allude to company debt, only to investor debt and speculative debt. Debt has its proper uses and its misuses. :wink:

Denny Schlesinger

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Reversion to the mean

According to Ben Graham short term the market is a voting machine but long term it is a weighing machine.

What is the time frame? The bounce back after financial crisis doesn’t fit those narratives. We have gone through decades where the market stayed range bound. If the market goes down and then stays down for a decade, it is not going to be of any help for average investor. They will accept their losses and move away.

If the market goes down and then stays down for a decade, it is not going to be of any help for average investor. They will accept their losses and move away.

I’m not taking any responsibility for the average investor! LOL

Statistics show that the average investor underperforms the market and, worse, they underperform the mutual funds they invest in. It’s really crappy to be average.

Denny Schlesinger

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Your on the Fool. Unless you are trading in and out of stocks, or taking large binary risks, you are not average and will outperform the market.

Tinker

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