Tuesday, March 26, 2013

Even the Bears Are Bullish Now

With Jeremy Grantham's valuation models suggesting that the average large cap and the average small cap US stock will underperform an A-rated 7-year non-callable tax-exempt bond, it strikes yours truly as the sign of a top or at least topping process when even the bears are bullish.  Here is a compendium:

Carter Worth of Oppenheimer is insistent that a correction is due-- but he expects it's onward and upward after that.  If so, how can he be sure that a correction is coming, and why should a client take the risk of missing the up-move just to catch what may be as little as a brief 6% decline that could be reversed in less than one bullish week?  (LINK)

More pertinent, Zero Hedge quotes Bob Janjuah- a well-known bear- as predicting new highs-- then the usual call for a crash.  But-- new highs!  So- stay in is the message, or at least buy the dip.  (LINK)

Perhaps most dramatic is the turnaround from the economic bears ECRI.  They have been talking recession since September 2011.  In their public commentary introducing their recession call back then, they referenced a dire state of affairs.  Something to the effect that if you thought the Great Recession was bad, just wait until you see how bad things will get soon.  Now they have changed their tune.  They allege that the US is still in a recession, but it's mild, and they point out that in 1945 and 1980, recessions were associated with bull markets in stocks.  But what the emphasize is the other modern recession with a bull, not bear stock market- 1927.  That's the one they highlight.  The message is clear:  buy stocks, a massive bull market may await (LINK).

The well-known bear Gary Shilling, who I believe was predicting a recession both in 2011 and definitely was predicting one for 2012, is out with a series of articles in BBG predicting deflation-- but now it's the "good" deflation.  It's the sunniest article, of many, I've ever seen out of him (LINK).  It's called The Benefits of Chronic Deflation.  But it's good deflation!

Richard Russell, who 1-3 years ago was calling our times a depression, worrying about his grandchildren, etc., and who a year-and-a-half ago was espying "gold fever" as gold got to its 2011 peak, is now-- what else-- bullish.  Why is he bullish?  Silly question.  Stocks are going up!  Gasp - the industrials are going up and- mirabile dictu- so are the trannies.  Thus, res ipsa loquitur- buy, baby, buy.  Did you evah-- they printed money, speculators speculated, they speculated in both industrials and transportation stocks-- so, many Dow points higher than when he was bearish, he is now bullish.

These are just some examples.  Rosie turned bullish a while ago.  So did Tyler of ZH.

The fly in the ointment is that the latest crutch to GDP, the newest potential bubble, is not housing and it is certainly not tech (that was so 20th century)-- it is Federalizing education by calling aid to students "loans".  The problem is that many of them can't pay the loans back.  This is turning into a decent-sized problem.  Then there is the issue that it was recently casually reported at the end of a (what else?) bullish BBG or Reuters article on the wonderful recovery in auto sales that something like 42% of new auto loans were subprime.

If interest rates were really too low, the ubiquitous "they" wouldn't have to resort to this sort of stuff to keep appearances up.  Students would get loans to go to school, then they would get jobs, and pay back or their loans.  Many of them would not want to waste time in school, because they would prefer just to be working and earning money rather than being bored in school at great  expense.  But from the standpoint of the current crop of politicians, getting these people in school means they are not counted as unemployed.

So it goes.

There are a few boring stocks I like, such as LNC, which trades way under book value with record and rising earnings and a low P/E.  But overall, there's lot of hopium.  The US economy- remember that- continues in its prescribed Reinhart-Rogoff pattern of moseying along with several more years of working through the horrible and spectacular collapse of the 2008 period; said collapse made a mockery of many years of financial statements and underlying assumptions about the economy.  Thus ZIRP and more ZIRP.

But overall, as Jim Rogers said very recently, those of us of a certain age just watch the bulls running.  We can't run fast enough anymore to run with them, and if you short a bull run, you're liable to get trampled, so you just go about your life and let the speculators go about theirs.


  1. "Deja vu all over again" as Yogi said. The same feeling of "WTF?" I had in the late 90s when my value strategy was left in the dust by stocks with divide-by-zero PE's and in the mid-00's when I was wondering how you could have a healthy economy based on building houses and taking on debt.

    Like you I've been noticing the bears capitulate one by one. I'm just waiting for someone to coin a new paradigm for why this time is different.

    As far as I'm concerned the EZ just gave a huge risk-off signal: when you take risk now, there really is risk. If that translates into people looking for safer banks and demanding higher yields on bank debt its game over in Europe. I'm astonished at the complacency. Where are the bank runs? Where is the flight to gold and silver? Are these people crazy? And here in the US we have the conceit that it won't affect us? And while every news story and blog is about Cyprus, Japan and China are still festering.

    Those of us who have been there, done that, are old enough to be focused on capital preservation. It's hard watching the parade go by but as far as the day of reckoning is concerned I'd rather be 3 years early than 3 weeks late. I'm sticking with what makes sense.

  2. I just read the Shilling article you cited. Wow. It boils down to "technology will save us".

    Meanwhile, he had this to say:

    "Japan has endured bad deflation over the last two decades after the housing and stock-market bubbles of the 1980s. But the lack of demand wasn’t caused by a dearth of employment and income, as in the U.S. in the early 1930s. Instead, it was a result of the government’s delay in cleaning up financial institutions, while consumers, and later businesses, refused to spend their incomes."

    Isn't that us right now with 1/5 of the country on food stamps, the NFIB reporting negativity in small businesses, and a Schrödinger's Cat banking sector?

  3. It is amazing to watch this happen; again. It seems that this iteration of "the top" will be much sneakier than the previous two. Otherwise smart people (many who were wary in '00 &'07) are being mesmerized by the making of new highs and the relative "low valuations", but only as compared to the bubble highs. Puplava and Saut are two saying we are probably in a new secular bull. Mostly rationalized by the new highs and "don't fight the Fed" type thinking.

    We may end up being wrong, of course. But I can't be convinced that we don't have at least one more big tumble coming to wring some more of the excess out and give us the kind of cheap valuations that are typical of the start of a new secular bull. Not many things are cheap now, and even things only get cheaper in a secular bear. It's really quite simple. I'll stick with Hussman's analysis, regardless of his terrible market track record of the last several years. He's rigorously subjective and disciplined.

  4. Thanks for the thoughtful comments (I've been out of pocket).

    Onlooker's point about the "low" valuations are worth a few more words from me. This argument was exactly what the AAPL fanbois kept tossing out at me when I turned cautious on AAPL last summer and very negative after the Maps mess (and other accumulated problems) with iPhone 5. Meamwhile, the iShares page for IWM shows its TTM P/E is about 27. 5-year growth rate (found elsewhere) is 5%. PEG is therefore about 5. This is probably as bad as the NAZ near its peak (eyeballs were growth proxies).

    The "low P/E" meme may well be the fooler if/when US stocks crack.

  5. Student loans going sour may not have the impact on the broader economy that the mortgage debacle did. They are all guaranteed or held by the USA, which will just print more money to cover any losses, if needed. The wasted time and resources spent getting a useless education is of course a negative factor, but the risk of contagion seems much smaller for student loans than past credit bubbles. Unless I'm mistaken, student loans are generally not securitized and held by lending institutions.

    A bigger factor in the slowdown may be tax increases. Many states raised taxes in 2012 (California in a big way - ouch!) and SS/Obamacare tax increases are hitting in 2013 or 2014. Plus, with the re-election of Obama, no tax relief is is sight.