It’s always popular to initiate the bearish bandwagon after the market has taken a 5-10% dip from recent highs (which it currently has), but I’m finding many of the arguments to be incredibly compelling – and from a handful of very credible sources.
On June 20, Barry Ritholtz posted a couple of technical charts that don’t appear to be very promising. The first chart shows the market cap of the NYSE + NASDAQ actual chart and the long-term trendline of the two. The market clearly shows three types of movements relative to the trendline – market cap floating above, below, or right on. These secular movements last anywhere from 100-200 months each. According to the chart, in 2008 we breached the long term trendline, and unless history is going to be changed, we’ll see the market trade below the trendline for another 70-170 months. The second chart is a near 100 year chart of Market Cap/GDP. Its showing a clear downtrend since the market peak in 1999, and the next big leg down should be starting any day now (not any week now).
On Pragmatic Capitalism, JJ Abodeely warns investors about the problems associated with looking at Forward P/E ratios. Just about every stock market bull right now is using the forward P/E, 20-year low argument to say that stocks are far from overvalued. Many companies, however, saw abnormal tax breaks and additional profits due to govt stimulus over the past two years. [AT&T for instance, added about $6B to its reported profits for FY 2010 due to an effective tax rate of -6%. That’s $6B that will be evaporated from next year’s earnings. And this is just one company!] So the gist of the article is that forward earnings for a single company is much more logical than forecasting the earnings of 500 companies. Unless you take into account the YOY drop in earnings for each company like ATT, forward earnings are pointless, and even dangerous. Another point in the article is that a company’s reported operating earnings are never what it actually reports. And historically speaking, operating earnings are 16% higher than reported earnings. So when an analyst forecasts earnings based on operating projections, predictions are mistakenly high.
Mike Shedlock has been bearish since I started keeping up with his blog about a year ago, and it seems he’s been pretty bearish since the market topped back during the dot com bust. He very accurately said around 2005 that it would take 7 years for housing prices to bottom (its been about 6.5 and they still haven’t bottomed), and he’s been bullish on gold during its great bull run. On Feb 7, he first put up an article that caught my eye titled “Negative Annualized Stock Market Returns for the Next 10 Years or Longer? It’s Far More Likely Than You Think” He then proceeds to present some absolutely fantastic data showing that investments in market bubbles – when P/E ratios are well in the upper 20’s – will yield negative returns for the better part of not 10, but 20 years. This would basically mean that the market correction from 1999 should continue with another leg down even after two bull runs from 2002-2007 and from 2009-2011. The next leg down, depending on the severity, would likely be the last, however. And on June 20, he states that he thinks Berkshire, at 1.15 P/B is still overvalued, and that C and BAC at 0.5 P/B are both overvalued.
Comstock Partners’ latest “Special Report” was titled, “Why We Believe we are in a Secular Bear Market.” It was released on June 16. Their analysis is very economic-based, citing continued deleveraging from the US consumer and monetary and fiscal policy that closely resembles Japan from 15 years ago. Oh, and by the way, Comstock called the market crash in 1999.
I’ve also seen other highly respected individuals suggest a frothy market – Robert Shiller, who provides a lot of the ammo for the Mish article above, thinks a recession is nearly unavoidable, while TMFBabo, who has been the #1 CAPS player over on the Motley Fool for about a year now, has recently stated that he’s going to avoid the market over the next several months to pay down his debt with his real money portfolio.
Personally, I’ve shifted to about 25% cash and bonds now, and I might shift that to closer to 35%. Probably 85% of the individual stocks I’m still sitting with are dividend payers, while the rest of my equity holdings are mutual funds or index funds.