The reason I revisit the index above is due to last Thursday’s “3-Things” post in which I presented two arguments concerning the potential for a 50-70% decline in the markets. John Hussman’s view was simply a valuation argument stating: “To offer some idea of the precipice the market has reached, the median price/revenue ratio of individual S&P 500 component stocks now stands just over 2.45, easily the highest level in history. The longer-term norm for the S&P 500 price/revenue ratio is less than 1.0. Even a retreat to 1.3, which we’ve observed at many points even in recent cycles, would take the stock market to nearly half of present levels.”
The most basic link in finance is that between risk and reward. Just like alchemists who once sought a path to gold from lead, a great deal of modern finance was built around finding a shortcut between them. Discovering the great asymmetry where risks would be low but rewards sky high was the Holy Grail of later 20th century mathematics…… great deal has been made about regulation in the years since the crisis, particularly that it has been effective in reducing or eliminating the same behaviors that caused it. This is post hoc ergo propter hoc fallacy, for regulations never, ever stand in the way of Wall Street (or Lombard Street) on a mission. If there was a realistic path back to the mythical asymmetries of post-1995 balance sheet expansion, does anyone really believe that it has been Dodd-Frank holding them all back all this time? In addition to the mass of Ivy League mathematicians they hoarded, the big banks also amassed an army of Ivy League lawyers by which to plow through any obstacles to reaching the Holy Grail. Money is no object when the object is “money.”
There has been much talk on the TV these last few months: (i) how valuations don’t matter, (ii) how it is about sector rotation, and (iii) how making America great again is going to unleash financials, industrials, materials, energy, etc. Furthermore, it is argued, that since we have moved from dirty to digital, smokestacks to server racks, margins have expanded and rendered useless any historical comparison of today’s valuation multiples to the 1980s or aghast, the dirty 1960s-1970s – pre-steroid era…pre-concussion protocol…hide yo kids, hide yo wife…they’re canceling CFA Level II study courses around here… In the mid-60s, at the height of “dirty”, U.S. profit margin from current production hit 14% (with a trailing P/E of 18x). It declined to a low of 7% in the late ‘80s (P/E of 18x), rose to 14% in 2006 (P/E of 18x), declined substantially during the crisis, and is 14% as of 3Q16 (but with a P/E of 22x). The profit margin trend has no doubt been up since computerization in the 1990s, but cyclicality remains. So, “digital” profit margins today are the same as they were 10 years ago, before the iPhone, and the same as 50 years ago, before Apollo 11 landed a man on the moon with processing power less than an iPhone. The difference is the price paid today for those margins is 20% higher. I get it, this time is different because it’s not different…
The resulting uproar crosses ideological and partisan lines in ways that highlight the President’s role – and his value – as the Great Disruptor. From the worst and most craven apologists for all-things-Clinton, to the little Lenin of neoconservatism and all the usual suspects of right-wing NeverTrumpdom, the chorus of outrage rises like the howling of dogs baying at the moon. David Frum, former neocon enforcer at National Review and now an editor at left-neocon headquarters over at The Atlantic, is apoplectic. A washed up liberal actor who’s long past his expiration date indulges in a little uncharacteristic flag-waving. And the wave of virtue-signaling “patriotic” Trumpophobia rolls on….
The Mail on Sunday today reveals astonishing evidence that the organisation that is the world’s leading source of climate data rushed to publish a landmark paper that exaggerated global warming and was timed to influence the historic Paris Agreement on climate change. A high-level whistleblower has told this newspaper that America’s National Oceanic and Atmospheric Administration (NOAA) breached its own rules on scientific integrity when it published the sensational but flawed report, aimed at making the maximum possible impact on world leaders including Barack Obama and David Cameron at the UN climate conference in Paris in 2015. The report claimed that the ‘pause’ or ‘slowdown’ in global warming in the period since 1998 – revealed by UN scientists in 2013 – never existed, and that world temperatures had been rising faster than scientists expected. Launched by NOAA with a public relations fanfare, it was splashed across the world’s media, and cited repeatedly by politicians and policy makers. But the whistleblower, Dr John Bates, a top NOAA scientist with an impeccable reputation, has shown The Mail on Sunday irrefutable evidence that the paper was based on misleading, ‘unverified’ data.
Almost a decade after it all began, the Federal Reserve is finally talking about unwinding its grand experiment in monetary policy. And when it happens, the knock-on effects in the bond market could pose a threat to the U.S. housing recovery.Just how big is hard to quantify. But over the past month, a number of Fed officials have openly discussed the need for the central bank to reduce its bond holdings, which it amassed as part of its unprecedented quantitative easing during and after the financial crisis. The talk has prompted some on Wall Street to suggest the Fed will start its drawdown as soon as this year, which has refocused attention on its $1.75 trillion stash of mortgage-backed securities.
Just last week, Americans were reassured (twice) that everything is awesome in the US labor market as ADP and BLS data showed jobs-jobs-jobs everywhere. However, along with wage stagnation (and a rising unemployment rate), there is a bigger problem, as Deutsche Bank warns, aside from soft earnings, hiring at America’s biggest companies is slowing down for the first time since 2010. Casting some serious doubt on just how strong the hiring environment is, Yahoo’s Myles Udland notes that Deutsche Bank illustrates that employment at big US companies is plunging for the first time since the recession.
When it comes to mindless excess in the war on terror, it is difficult to compete with the 70+ fusion centers bankrolled by the Department of Homeland Security. They began to be set up around the nation shortly after 9/11 as federal-state-local partnerships to better track terrorist threats. But the centers have been a world-class boondoggle from the start.
The company currently has a “valuation” of $17.8 billion, established behind closed doors at its last round of funding. The hope is that the IPO price will value the company at $20 billion to $25 billion. That’s some serious moolah.Now that we have its S-1 filing with the SEC, we can get a feel for the risks. Snap was founded in 2011. For years, it had no revenue model. In 2015, it started putting ads on its service and booked $58.7 million in advertising revenues, most of it in the second half. And it had a loss of $381.7 million. OK, it’s a startup. Fine. In 2016, with its ad platform fully operational, revenues rose to $404.5 million, of which 98% was from advertising. And its net loss exploded to $514.6 million.
When Gen. Michael Flynn marched into the White House Briefing Room to declare that “we are officially putting Iran on notice,” he drew a red line for President Trump. In tweeting the threat, Trump agreed….The Saudis have been bombing the Houthi rebels and ravaging their country, Yemen, for two years. Are the Saudis entitled to immunity from retaliation in wars that they start? Where is the evidence Iran had a role in the Red Sea attack on the Saudi ship? And why would President Trump make this war his war? As for the Iranian missile test, a 2015 U.N. resolution “called upon” Iran not to test nuclear-capable missiles. It did not forbid Iran from testing conventional missiles, which Tehran insists this was.