Down with Slogans!

One of my New Year’s resolutions is to wage a war on slogans.  I hope to help my readers to see how they can gain edge through a Contrarian approach to slogans.  This will take a series of posts with different subtopics and examples.  Partly it is my effort to put down pieces of a longer work in progress.  Partly it is inspired by Barry Ritholtz’s excellent series (which I expect will be a successful book at some point) The Apprenticed Investor.  You can and should read these articles.

So what is my mission?  Here is a typical conversation among those analyzing the market.  It may occur on CNBC, on professional sites, on blogs, or on forums.

A:  I think that this is not like a typical Fed tightening sequence (or inverted yield curve, or economic recovery cycle, or energy spike, or trade deficit, or many other things).

B:  Are you suggesting that something is different?

A:  Well, it does seem to be different…..

B:  Gotcha!!  You said the magic phrase, "It’s Different this Time."  That shows that you are a hopelessly inexpierienced, clueless, newbie who does not realize that things are never different.

A:  (Apologetic and hanging head) Oh… well it does seem different.

B:  Don’t you know that we all got buried in the bubble because we thought it was different?

And so forth.

Here on "A Dash" my intention is to show readers how to tell when things really are different and why this is important to know.

Some of my kind friends over the years have said that I have a knack for taking complex topics and making them clear to my audience.  I am probably better at doing this in public speaking, but I am going to attempt it here anyway.

My normal method, familiar to professors teaching research methods, is to take a blindingly clear example unrelated to the problem at hand.  With understanding of this in mind, one then tries to show the audience the similarity to the current problem.  If someone thinks that the examples or method are too obvious, then a pat on the back is in order.  Anyone who gets it already is way ahead of most consumers of stock market research and analysis.

Let’s start by getting rid of the dismissive nature of the "This time it’s different" putdown.  There is no advantage in following the slogans of everyone else.  If you are a sophisticated player in the market, it is your mission to discover when it really is different.  It is my mission to suggest places where that might be true.

P/E vs S&P 500 (50 Years)

Take a look at this great chart of P/E versus the S&P 500.  It does a wonderful job of setting up the valuation question.  You can see what is wrong with it, even without looking for a better model.  The trailing P/E ratio method is poor both descriptively and prescriptivey — the two reasons we look for relationships.  It is exciting in that it explains why the parade of talking heads have been saying for years that the market is overvalued, and lets you judge the wisdom of their statement.

Take a look at the chart, courtesy of Mike Panzner via Barry Ritholtz, and then we’ll analyze it more carefully.

Link: P/E vs S&P 500 (50 Years).

As promised, today brings us to the 4th in our series of charts: P/E vs SP500click for larger chart courtesy of Mike Panzner, Rabo Securities I’ll get into the significance of what this means to the markets later, but for now, note where the P/E is over …

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Themes from 2005 — Dick Green of

Dick Green, President of, is an award-winning writer, picked this year by Smart Money as one of the top 30 market movers.

His Summary of 2005 highlights some key themes, and he then offers lessons from each.  (You might need a subscription for some articles, but you can find many of them here).

Dick draws some lessons from each theme.  I agree with the 2005 summary, and my own market outlook will also build on the 2005 events.

Here are the themes:

1) The U.S. economy proved extremely resilient to exogenous shocks.

2) Earnings growth was very strong and corporate balance sheets shined.

3) Value returned to the overall stock market despite rising interest rates.

4) Inflation remained surprisingly constrained.

5) Pervasive pessimism persisted throughout the year.

Dick (like me, Chicago-based) sees misplaced fears and pessimism, especially from "journalists based in the slow-growth Northeast.  He warns investors not to get caught up in the fashion of the moment or specific data points.

It is great advice.

Don’t Fret the Inverted Yield Curve

For those interested in the complete text of the David Malpass report I mentioned yesterday, you can find it here, along with a lot of other good reading in the section on markets.

Link: Don’t Fret the Inverted Yield Curve.

David is one of the world’s best economists. Following by David Malpass, Cheif Economist, Bear Stearns. Equities weakened on Tuesday and bond yields fell further, pushing longer-term yields below shorter-term yields. We disagree with the view that …

Dr. John Rutledge on the Inverted Yield Curve

John Rutledge’s experience combines a strong academic background and front-line investment experience.  His writing is authoritative and persuasive.  If you missed him on CNBC, you can read his explanation here.  My readers will find both the argument and the implications for stocks to be familiar.  The explanation of the need to understand "why" is especially good.

Link: Inverted Yield Curve.

I did a spot on CNBC Wake Up Call at 6:30 this morning; hope you were still sleeping. The topic was the inverted yield curve. Yesterday, the yield on the ten year Treasury dipped below the yield on the two year, reversing the "normal" relationship …

Hussman: Fed Action Won’t Boost Stocks

The problem with the comparisons John makes is that all of his "price/peak earnings" periods are not equal.  A valuation approach that completely omits interest rates leaves out the biggest asset allocation comparison faced by both managers and individuals.  Here’s the story, then I’ll elaborate.

Link: Hussman: Fed Action Won’t Boost Stocks.

Excerpt from John Hussman’s latest weekly essay: …attention has turned to the prospect that the Fed has finished, or is just about to finish, its tightening cycle. Isn’t that alone a great reason for bullishness here? …If you …

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Yield Curve? Don’t Worry, Be Happy — at Least for Now!

After scaring the daylilghts out of the average investor yesterday, CNBC today found some economists who did a good job of explaining why indicators do not always indicate.  My readers will recognize the same points I was trying to make yesterday.

  1. You cannot interpret an indicator without some idea of how and why it works.  That means a causal model.  Multiple commentators said that what really drives recessions is not the shape of the yield curve, but the LEVEL of rates.  The current situation contrasts sharply with, for example, 2000.  David Malpass, Chief Global Economist at Bear Stearns, points out that when the curve was flat in 2000 it was at a 6.4% level not the 4.3% of today.  Malpass has had the best handle on the economy for several years now.
  2. The indicator is "broken" because of artificial impacts on the long end.  The WSJ cited a Fed study suggesting that the impact of Asian bank buying was about 75 bp and CNBC said as much as one percent.  Several sources made the point I repeatedly raised yesterday, that this foreign buying is good for the U.S. citizen and our markets.
  3. Most importantly, other economic indicators are very solid.  Yield curve inversion is only one indicator.  It is a necessary but not sufficient condition, as Barry Ritholtz pointed out yesterday.  Past instances of false positive signals were discussed on and in several CNBC interviews.

Bottom line:  Traders and market strategists would do well to give the economists their due respect.  As Steve Liesman of CNBC pointed out today, the large group consensus economic predictions, like the Blue Chip group, show no recession forecasts.  None!  The group calls for a little slowing but growth of 3.4%.

We are in a prolonged sweet spot for investors.  GDP growth has been excellent.  Inflation has been low.  Corporate earnings continue to set records—and the market has not kept up.

Yield Curve — an Indicator, not a Cause

Understanding the causal relationship is crucial in using any indicator.  Lacy Hunt says that reducing M2 growth will slow the economy, but what does this have to do with the slope of the curve?  Meanwhile, there was a lot of economic and media commentary today citing the same arguments I made yesterday.  I’ll summarize below, but first review the Hunt argument:
Link: Explaining Yield Curve Inversions.

The Yield Curve briefly inverted — twice — Monday. As we noted yesterday, the deeper and longer a curve remains inverted, the more potentially significant it is. That factoid has been overlooked by many commentators. Following yesterday’s post about …

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Some Strong Support for Barry from Studies

There is very strong support for the yield curve association, and I’ll link to some sources below.  Barry’s analysis is more carefully qualified than that of most of the talking heads on CNBC.  Until now, I have always believed in the yield curve as an indicator, and I well know the peril in asking whether "this time is different."  That is where the causal modeling comes in. To review, here is the initial post:

Link: Inverted Yield Curve: Its different this time (not).

The yield curve, as measured by the ratio between the 10 and 2 year treasuries, is merely a few ticks away from inverting. This is something worth paying close attention to. What’s the significance of an Inversion? It reflects a decreasing demand for …

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More Overreaction in Energy Stocks

The higher volatility in these stocks makes no sense, but it comes with the territory.  Here’s the story, and I’ll explain more below.

Link: Energy ETFs Leak Oil.

Bloomberg reports that Crude oil fell on expectations that milder temperatures in the U.S. will help preserve stockpiles of winter heating fuels that are above average levels. Warmer weather is forecast for most of the U.S., with temperatures in…

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