WTF Is Going On In The Stock Market This Year?!

Trying to figure out why stocks went up or down on any given trading day is a fool’s errand (yet that obviously doesn’t stop the mainstream media). There are a few major narratives, however, that I believe to be responsible for what is now the worst start to any year in stock market history, at least to some degree or another.

So here are what I consider the stock market’s trending topics so far in 2016:

  • The first and most obvious has to be the continuing crash in the price of oil. Why is this a big deal? Because the longer prices remain depressed the more the market may be telling us weak demand for oil is just as important as elevated supply. In other words, the global economy may be weaker than most people thought just a couple of months ago.
  • The oil crash and lack of any rebound at all so far is also a big deal because it’s unlikely that growing problems in energy credit will be contained within the energy sector. It’s more likely that energy is just the canary in the coal mine for a turn in the overall credit cycle. Furthermore, credit usually leads equities.
  • Another narrative I’m seeing much more of lately is the idea that sovereign wealth funds are liquidating their holdings of risk assets including both corporate bonds and equities. This is also related to the energy issue as many of the sovereign wealth funds attribute all of their wealth to the high oil prices of recent years. With oil now under $30, that wealth is now at risk as are all the assets they have accumulated over that time.
  • Outside of oil, investors are also increasingly worried about a dual credit/currency crisis in China. Yes, trade with China only makes up a small amount of our economy. But, as the second largest economy in the world, it is also a key trading partner for all of our key trading partners. To assume any weakness in China would be “contained” is probably naive in this day and age of increased globalization.
  • It’s also becoming more and more obvious that our own economy is not doing so hot lately. Industrial production and growth in retail sales have fallen to levels not seen since the last recession. Additionally, both the stock and bond markets are currently suggesting recession is a growing possibility.
  • Finally, I’m also starting to see more discussion surrounding the idea of herding in the markets. The growth in price-insensitive buyers (including indexing, risk parity, trend following, momentum, etc. along with corporate buybacks and central bank buying) in recent years is greater than anything we have ever seen before and they have been at least somewhat responsible for pushing the valuations of risk assets to extremes also never seen before.
  • What are the consequences of this sort of herding? The very same psychology that causes an investor to embrace these strategies in the first place, eventually leads them to abandon them when they fail to work as they hoped. It’s fear and greed at work in strategies as opposed to assets. We may now be entering the fear/liquidation cycle for price insensitive buyers which will inevitably lead to greater volatility and liquidity challenges.

How much of these market narratives are real versus imagined by market participants? And how much is now priced into the markets?  Those are the trillion-dollar questions. The more successfully you can answer them, the more successful you will be in navigating the rest of the year.


Like Clockwork They’re Bashing Buffett Again

Once again, it’s becoming popular for the media to bash Warren Buffett’s lackluster performance.

If you’ve not been hiding under a rock for the past few months, though, you’re well aware of the fact that there are just a handful of stocks responsible for the gains in the major indexes this year. Outside of these few, the vast majority of stocks have actually declined in 2015.

Certainly, Warren is not the sort of investor to buy the FANGs. Facebook, Amazon, Netflix and Google trade at an average p/e of 360 making them entirely off-limits to any self-respecting value investor.

This is no revelation. What is interesting, however, is every time the media sees fit to bash Buffett in this way, he ends up getting the last laugh.

They bashed him during the financial crisis for being too bullish. The big, bullish bets he put on back in 2008 and 2009, though, have paid off incredibly well since then.

And, in a more similar fashion to today’s bashing, the media tarred and feathered Warren back in 1999 for being, “out of touch,” in sitting out the dotcom boom. In a cover story, Barron’s wrote:

To be blunt, Buffett, who turns 70 in 2000, is viewed by an increasing number of investors as too conservative, even passe. Buffett, Berkshire’s chairman and chief executive, may be the world’s greatest investor, but he hasn’t anticipated or capitalized on the boom in technology stocks in the past few years.

This ran in December, 1999, just a few months before the boom famously turned to bust. Once again, Warren hasn’t, “anticipated or capitalized on the boom in technology stocks,” and his performance has suffered as a result.

But, after successfully practicing his own brand of investing for over half a century, do you think he’s worried about his short-term underperformance? Or worried about them teasing him about it?

I’d actually be surprised if he didn’t see this sort of criticism in the media as a contrary indicator and marvel at its cyclical regularity.


Mr. Market To Carl Icahn: “Danger Ahead”? LOL!

Early this week, Carl Icahn put out a video to express his concerns regarding risk assets called, “Danger Ahead.” The video, directed by my friend Jim Bruce (writer/director of “Money For Nothing“), is very well done. I encourage you to go watch it at

In it, he discusses what he believes to be ‘fallacious earnings,’ driven by faulty accounting, a merger boom and buyback bonanza. And for these inflated earnings, he claims investors are now paying ‘bubbly valuations,’ in both stocks and high-yield bonds at a time when liquidity has been falling dramatically. He ultimately blames the Fed’s zero interest rate policy for exacerbating all of these issues.

I’m glad to see someone of Icahn’s reputation willing to stand up and tell it like it is. But what I’m most impressed with, though, is Carl’s clear desire to try to help the little guy – which seems to be the whole purpose of the thing. He recently tweeted:

Today he warns:

I’ve seem this before a number of times. I been around a long time and I saw it ’69, ’74, ’79, ’87 and then 2000 wasn’t pretty. A time is coming that might make some of those times look pretty good… The public, they got screwed in ’08. They’re gonna get screwed again. I think it was Santayana that said, “those who do not learn from history are doomed to repeat it,” and I am afraid we’re going down that road.

What I find most astounding, is the popular reaction to the video:

Screen Shot 2015-10-02 at 10.07.17 AM

Here you have one of the greatest investors of all time going out of his way to produce a short video intended to help the little guy and the response is dismissal and ridicule. And I haven’t read one article that actually addresses the substance of the Icahn video. They all resort to logical fallacies that support preexisting biases. Could there be a better contrarian signal that Carl is actually onto something AND that the markets haven’t fully priced it in yet?



“The United States stock market looks very expensive right now. The CAPE ratio, a stock-price measure I helped develop — is hovering at a worrisome level…. above 25, a level that has been surpassed since 1881 in only three previous periods: the years clustered around 1929, 1999 and 2007. Major market drops followed those peaks.” -Robert J. Shiller, Nobel Prize-Winning Economist and Author of “Irrational Exuberance”

Popular response: the CAPE ratio is flawed and valuations don’t matter anyway; stocks are only worth what someone else is willing to pay.

“George Soros Just Made A Huge Bet That US Stocks Might Fall” –Business Insider

Popular response: he’s not betting stocks are going lower; it’s just a hedge against his long exposure.

“Yellen’s [recent] comments suggest, and I agree, that we are in an asset bubble.” –Carl Icahn

Popular response: 1999 was a bubble; this isn’t a bubble.

Rationalize. Rationalize. Rationalize.

Time and time again investors flat out deny what’s staring them dead in the face: stocks are extremely overvalued and at risk of yet another major decline. The last time I can remember investors rationalizing bearish data points as much as they are today was during the height of the internet bubble. ‘P/E’s don’t matter any more; it’s a new economy,’ was the battle cry back then. Today it’s, ‘it’s impossible to value a stock or the market,’ and ‘this is nothing like the internet bubble.’

To an outsider, someone who has nothing to do with the markets, the logical fallacies must be painfully obvious.

Criticizing the CAPE is a classic straw man. Tobin’s Q Ratio, a valuation measure used by the Fed, along with Buffett’s favorite yardstick, total market capitazliation relative to GNP, both confirm that the stock market is extremely overvalued, using three totally unrelated valuation methods. Another thing the bulls fail to mention is that these three measures are highly correlated to future 10-year returns for stocks and suggest the potential risk at this point is far greater than the potential reward. These are just facts!

And comparing today’s market to the internet bubble is a clear Red Herring. Just because today’s market is not exactly like that of 1999 doesn’t prove that we’re not in a bubble today. In fact, it’s totally irrelevant. Today’s market should be judged on the full measure of the data available to us. And just like Shiller says, there have only been a very rare number of times stocks have been this overvalued: 1929, 1999 and 2007. These are just facts!

Then we get into the Ad Hominem attacks. ‘Shiller’s just a professor; he’s not a market practitioner so he doesn’t know what he’s talking about’ or ‘Soros and Icahn are just like all the other hedge fund big wigs out there using the media to make short-term profits; you can’t read anything into what they do or say,’ not to mention the attacks on John Hussman that completely ignore the merits of his research on its own.

I get it. It’s extremely difficult to listen to reason when the madness of the crowd is simply deafening. At the end of the day, though, it’s all just a huge sign that investors are desperate to believe, to keep hope alive that 30%-per-year profits can happen again this year and the next.

So if you didn’t know what a mania was before now, just take a look at the financial blogs and social media sites. The rationalization is everywhere. And it may be the best indicator of all that we are, indeed, in the midst of yet another bubble.


King Midas And The Media

I tweeted this yesterday because Buffett invests for the full cycle. His outperformance usually comes during bear markets (for a variety of reasons including the quality of the companies he’s invested in, the “margin of safety” he demands from his purchases and the fact that he keeps some significant powder dry to take advantage “fear”).

During bull markets he just hopes to keep pace but during the final euphoric phase of bull runs he tends to lag (again for similar reasons including his focus is on larger, more established companies rather than the young, high-flyers that typically soar during these periods; the “margin of safety” he demands is simply not available when valuations are stretched and his growing cash position becomes a performance anchor).

Long story short, his underperformance during the later stages of bull runs is something the world’s greatest investor consciously tolerates in order to be in position to take advantage of the flipside of the cycle. Still, the media loves to rib him for it – every time. So I was curious to see if it could be quantified as a contrarian indicator.

Thank you, Jason Goepfert! Jason ran a scan of headlines related to Warren Buffett ‘losing his touch’ and found:

Sure enough, spikes in these stories tended to occur near market turning points, including near the peaks in 2000 and 2008, the trough in 2002 and lesser intermediate-term corrections in 2010 and 2012.

Screen Shot 2014-08-16 at 9.23.50 AMHowever, aside from the Forbes article I tweeted yesterday we aren’t seeing much of a confluence of these sorts of stories in the media… yet. But I’m sure Jason will let us know if and when they do start to pile up.

For more of these kinds of sentiment studies check out where Jason regularly publishes some superb work.