Hussman & Hester vs Wall Street Finest.......

Once more brilliant "Anti Spin" & almost a rant from the usually polite Hussman.....Spot on with my take Of Course It Is Still A Good Time To Buy, Buy, Buy..... when it comes to Wall Street Finest.....

There maybe are legitimate reasons to buy stocks, but a favourable opinion from "Wall Street Finest" should definitely not play any role among your screening process .... Except you use them as a "contrary indicator".... ;-)

Einmal mehr deutliche Worte vom ansonsten doch recht zurückhaltenden Hussman....Eine erstklassige Ergänzung zu meinem früheren Posting Of Course It Is Still A Good Time To Buy, Buy, Buy.....

Grundsätzlich mag es ja durchaus gute Gründe die für Aktien sprechen geben, man sollte aber sicherstellen das die Einschätzungen der "Experten" beim Auswahlprozess keinerlei Rolle spielen....Es sei denn man nutzt sie als Kontraindikator.... ;-)

H/T Randy Glasbergen Collection

Misallocating resources John Hussman

On a valuation basis, the S&P 500 remains about 40% above historical norms on the basis of normalized earnings. The disparity between our valuation assessment and the putative undervaluation being touted by Wall Street analysts is so great that a few remarks are in order. First, virtually every assessment that "stocks are cheap" here is based on the ratio of the S&P 500 to year-ahead operating earnings estimates, and often comes with a comparison of the resulting "earnings yield" with the depressed 10-year Treasury yield. What's fascinating about this is that this is the same basis on which analysts deemed stocks to be about 40% undervalued just prior to the 2007 top, following which the market plunged by more than half.

To properly understand the price-to-forward operating earnings ratio, you have to recognize that operating earnings exclude a whole host of charges - what some observers correctly call "recurring non-recurring" charges. These include large and often quite regular losses that the companies deem, often on the thinnest basis, to be detached from their core business - even if the losses are directly related to their core business.

More on this topic in "Reported Earnings vs Operating Earnings"

Mehr zum Thema in "Reported Earnings vs Operating Earnings"

When you hear analysts say that the historical average P/E ratio is about 15, you have to recognize that this is the normal P/E based on trailing 12-month earnings after subtracting all writeoffs and other charges. Forward operating earnings are invariably much higher, and it turns out that the comparable historical norm, as I discuss in that 2007 piece, is only about 12. If you exclude the late 1990's bubble valuations, you get a historical norm closer to 11.5. The 1982 and 1974 market lows occurred at about 6 times estimated forward operating earnings

A final observation is crucial. Current forward operating earnings estimates assume profit margins for the S&P 500 companies that are nearly 50% above their long-term historical norms. While we did observe such profit margins for a brief shining moment in 2007, profit margins are extraordinarily cyclical. Investors will walk themselves over a cliff if they price stocks as if profit margins, going forward, will be dramatically and sustainably higher than U.S. companies achieved in all of market history.

They also ignore the large percentage of reported earnings that are actually quietly distributed to corporate insiders through the issuance of stock and options.

They blindly accept that "share repurchases" are somehow a pleasant distribution of earnings, whereas the majority of share repurchases are actually made by companies to do nothing more than offset the dilution from stock shares and options granted to insiders.

A good question to ask in the years ahead, immediately after profits are reported, is "how much of this figure is actually delivered to shareholders?" If you've been attentive over the past decade, the answer turns out to be much closer to the dividend yield than to the operating earnings yield that companies have reported.

For a moment, at least, it is good to be a corporate insider, particularly at major financial companies.

First, you get to report productivity gains and "operating profits" - not by making smart investments in productive assets, but instead by writing up debt thanks to Treasury intervention, by misstating your balance sheet thanks to FASB changes last year, and at industrial firms, by cutting the number of workers per unit of capital.

Next, you quietly write off large losses on bad investments and unrecoverable loans as "extraordinary expenses," to which investors pay no notice.

And to add insult to injury, you deliver a significant portion of the remaining profits to yourself as "incentive compensation," followed by buybacks of stock to offset the dilution, which investors actually cheer because they don't realize they've been taken for suckers.

Wall Street Earnings Expectations Ignore Economic Divergences Bill Hester / Hussman Funds

The graph below attempts to contrast the erosion in the global PMI indexes against the rising optimism of stock analysts.

Six series of data are plotted: the changes in earnings expected for the companies in the S&P 500 and the Euro Stoxx Index, and four PMI indexes for the US, the Euro area, Germany, and China. Each of the series is indexed to 100 in April, the month where most of the PMI data peaked.

Now take a look at the Chart showing the period between 2007 and 2008 using the same indices.... I highly recommend to read the entire links.... There is much more.....

Hier zum Vergleich der identische Chart für die Zeit von 2007 bis 2008...... Empfehle die kompletten Links zu lesen... Wie üblich findet man dort noch deutlich mehr "Anti Spin"......

UPDATE:

RARE INTERVIEW WITH JOHN HUSSMAN: WHY HE IS BEARISH RIGHT NOW PragCap

Stocks Expected To See 12% Increase In Revenues In Q2, 41% Increase In EPS, And A Summary Outlook From Rosenberg ZH

As for all of 2010, the consensus is at $82 operating EPS, and for a new record to be reached in 2011, at $96 — breaking the record of $88 three years ago. Good luck in seeing a further 30% increase in profits with nominal GDP rising at a 3.0-4.0% annual rate at best in the next six quarters and at a time when margins are already back to cycle peaks.

For the full John Hussman archive visit the blogroll.....

Für eine komplette Auflistung der gesammelten Werke von Joghn Hussman bitte Blogroll beachten.....

Where Is The Volume......?

Some very interesting charts & observations from William Hester. As i´ve written earlier i´m very sceptical ( quite an understatement ) regarding the health of the recent market rally..... I´ve added the latest from Rosenberg via Zero Hedge & another Chart via WSJ

Einige sehr aufschlußreiche Charts & Bemerkungen von William Hester. Wie bereits früher geschrieben bin ich extrem skeptisch ( leichte Untertreibung ) was die Verfassung der Märkte angeht. Ich habe zusätzlich noch was vom Rosenberg ( via Zero Hedge ) sowie dem WSJ hinzugefügt.

A Bear Market Lurks as Dow Nears 10000 WSJ

Rosie On Who The Market Buyers Are From this morning's Breakfast With Dave:

Is it the private client? Not really — stock funds actually had net outflows of $1.33 billion last week, while bond funds enjoyed an $8.2 billion net inflow.

Is it corporate insiders? Well, heck no — Robert Toll (CEO of Toll Brothers) just disclosed that he sold a total 1.6 million shares of his company’s stock yesterday.

UPDATE via Hulbert: They are selling a whole lot more of their companies' stock than they are buying. The net difference is even larger than it was two months ago, when I noted that insiders were already selling at a greater pace than at any time since the top of the bull market in the fall of 2007

For the week ended last Friday, according to Vickers, insiders sold 6.31 shares for every one than they bought. The comparable ratio two months ago was 4.16-to-1, and at the March lows the ratio was 0.34-to-1.

Is it buybacks? Not at all — in fact, S&P 500 companies bought back a mere $24.4 billion on stock repurchases in 2Q, down 72% from a year ago and the lowest in recorded history, according to Howard Silverblatt of Standard & Poor’s. ( great Chart via Floyd Norris )

So who’s doing the buying? Very likely it is still a combination of program trading, short coverings and portfolio managers desperately trying to make up for last year’s epic losses.

Without Phoenix Stocks, Volume Continues to Contract Wiliam Hester / Hussman

The most notable characteristic of a durable stock-market advance, which failed to appear in the recent advance, is a strong expansion of trading volume. When you adjust the trading volume data for a handful of mostly lower-quality financial stocks, the picture gets worse.

I noted in Trading Volume Separates Bull Markets from Bear Rallies that bull markets have typically begun on strong volume after selling had become exhausted. As Richard Russell has said - “volume should always be studied as a trend relative to what has preceded it”. The chart below updates one of the graphs for the elapsed time from that earlier piece. The vertical axis measures the six-month percent change in the S&P 500 from the bottom of each bear market going back to the early 1940's. The horizontal axis shows the percent change in volume over that same period.


Familiar durable bear-market bottoms stand out, like in 1982 and 1974. These rallies had strong returns that coincided with large bursts of trading volume during the first six months of the rally. There are a couple of examples, like 1998 and 2003, where bull markets had a good start on mediocre expansions in volume. But for the most part, in the cases where volume contracted the bull market beginnings have been uninspiring. More common is a strong increase in volume that coincides with gains of 20 to 25 percent during the first six months.

It's clear that this year's rally is an extreme outlier in the dataset, with above-average returns and a continued contraction in volume from the levels of trading in March.

Even so, some analysts have become optimistic because volume trends first leveled off, and then have risen marginally over the last few weeks.

But almost the entire rise in volume during the last month and half has come from a handful of stocks. Examples include Fannie Mae, Freddie Mac, Citigroup, AIG, and Bank of America

These are just five. There are a couple of other stocks that are interchangeable with these companies and would produce similar results – but the characteristic they all share is that they are financial stocks that only recently were on the brink of collapse. And since the Government's rescue of these and other financial firms, the group has risen up from the ashes. For ease of reference, we'll call these Phoenix stocks.



The rise in trading volumes in some of these stocks has been considerable. The shares of AIG now often trade with 15 times the volume they traded a year ago. Citigroup has traded at 12 times the amount from a year ago. This helps explain why the trades in these companies' shares are taking up a larger fraction of total share volume. The graph below shows the trading volume in the Phoenix stocks as a percent of total NYSE share volume since 2003. You can see that the trend of rising volumes in relation to total volume began during 2008, when volumes rose as the market capitalizations of these companies shares fell. Off of this year's March low, Phoenix volumes as a percent of total volume rose above 5 percent for the first time and then fell off slightly in June and July.

During the last six weeks, the trading in these stocks as a percent of total volume has jumped to almost of fifth of share trading.

Commentators and analysts have offered up a few explanations for the heavy trading in these shares – short covering, the focus of day traders, and institutional trend following programs. Each of those explanations is probably doing their part. Outside of highlighting the casino-like atmosphere that has gripped parts of the stock market, the amount of trading in these shares is less important than the role this trading is playing in the overall volume figures.

The graph below shows two measures of trading volume. The blue line is the daily share volume traded on the NYSE (smoothed). The red line is total volume less the volume traded in our group of Phoenix stocks. As the graph shows, during the last couple of years, the two lines have hardly parted. That's because the Phoenix trading volume was a small fraction of total volume. The recent divergence between the two highlights that volume outside of a handful of these financial stocks continues to contract.

On a Phoenix-volume adjusted basis, NYSE share trading is at the lowest level in years. Healthy bull markets, even if not during the earliest days of a rally, will typically recruit growing amounts of investor interest and expanding levels of volume as prices rise

Expanding volume continues to be an important characteristic missing from this rally.

Update:

I think balance sheets and sustainability - govt, central bank AND private sector, MATTER Bob, ‘The Bear’, Janjuah via FT Alphaville

If they no longer matter, I will be WRONG, and I will have to accept that the policy of ‘Print/Borrow/Spend on Rubbish we don’t Need’ is a limitless phenomena, without consequences, which means there should never be a bear market ever again….

I hope this sounds as ridiculous to you reading as it did to me when writing…..

This quote was just too good to be burried in the comment section...... ;-)

Dieses Zitat war einfach zu gut um es lediglich in den Comments zu posten.. ;-)

Consumer Spending Break-Down / Hester

Nice quote via William Hester from his piece Consumer Spending Break-Down .

Nettes Zitat via William Hester aus Consumer Spending Break-Down

Following a Bull's game in the 90's where Michael Jordan scored 69 points and the newly acquired Stacey King contributed one point, the rookie quipped, “I'll always remember this as the night Michael Jordan and I combined to score 70 points.” Whether you're handicapping basketball games or the economy, it's always best to figure out how the major producer will perform.

It´s still amazing that some are still in denial.....

Schon erschreceknd das bei den meisten "Experten" der Groschen noch immer nicht gefallen ist.....

A quick look at economist's expectations for the economy this year shows that much is riding on the forecast of a mild slowdown. The level of GDP should be essentially unchanged the first two quarters of this year, and then expand at almost 2 percent in the second half, according to a Bloomberg poll. Underlying those estimates is the forecast for spending to grow at an average rate of one half percent in each of the first two quarters, and at about 2 percent in the second half

But they are probably betting on the never ending story of creative accounting from the government level ( Pre-Revision CPI: 9%, Disappearing Economic Indicators, Unemployment Soars, Jobs Collapse etc ) to mask the real damage. At least the officials haven´t gotten so far as the pentagon ( Behind Analysts, the Pentagon’s Hidden Hand )..... :-)

Wahrscheinlich werden hier schon die "kreativen" Berechnungsmethoden von Staatsseite eingepreist ( Pre-Revision CPI: 9%,Disappearing Economic Indicators, Unemployment Soars, Jobs Collapse usw ) die nur ein Ziel haben die Wirklichkeit in einem besseren Licht erscheinen zu lassen. Das mag kurzfristig sogar funktionieren, mittel bis längerfristig wird hier aber enormer Schaden angerichtet. Immerhin sind Sie noch nicht soweit wie das Pentagon gegangen (Bush kaufte TV-Militärexperten ).... Obwohl ich ir da auch nicht immer ganz sicher bin .... :-)

Global Yield Curves, Earnings Growth, and Sector Returns / Hussman

This piece from William Hester from Hussman Funds takes a closer look at the yield curve. The trac record isn´t bad o far. It remains to be seen if China & Co will change the outcome this time.

William Hester wirft hier wie ich finde einen gelungenen Blick auf deb Zusammenhang von Zinskurven und Unternehmensgewinnen. Es sieht so aaus als wenn dieser Indikator in der Vergangenheit recht zuverlässig gearbeitet hat. Bleibt abzuwarten ob China & Co etwas wesentliches verändern werden.

Global Yield Curves, Earnings Growth, and Sector Returns
A reliable measure suggests slower global earnings growth ahead .....

Aside from the risk of slowing economic growth in the U.S. and the G7 countries, there is a strong risk that global earnings may slow enough to spook equity investors, especially those who are overweighting highly cyclical industries. Historically, global yield curves have provided guidance about this risk.

To see this, we can look at a composite of global yield curves and its relation to MSCI's World EPS data series. To measure the world's yield curve, we'll use the countries of the G7, excluding Japan, which has been out of step with other large economies for more than a decade. The graph below shows the global yield curve and the subsequent growth in World EPS. Both lines are smoothed to isolate the underlying trends. The global yield curve is a 12-month moving average of the yield curves of the 6 countries, each weighted by their GDP. The World EPS Growth rate is the subsequent two-year change in the two-year average of World EPS. So the last data point on that line represents the average earnings figure over the last two years versus the same calculation two years ago. That line ends in September 2005. The global yield curve is represented by the blue line, and is plotted on the left axis. The change in World EPS is in red, and is plotted on the right axis.

Changes in World EPS have tracked the shape of the global yield curve closely, usually with about a two-year lag. The global yield curve was inverted from 1979 until 1982. The smoothed World EPS eventually declined by 10 percent. The global yield curve inverted again in 1990, and World EPS declined by a similar amount. In 2001 when the smoothed yield curve flattened, but didn't invert, World EPS again declined by more than 10 percent. The 12-month moving average of the yield curve spread hit zero in July. It has since ticked up a fraction, as short rates have fallen in response to the world-wide credit crisis.

Much like the pattern in U.S. data, year-over-year changes in World EPS have very little correlation with the short-term returns of the MSCI World price index. But the current flatness of the global yield curve may turn out to be important. That's because more extended declines in World earnings have correlated with important declines in MSCI's World price index.

As the chart above shows there have been three meaningful declines in smoothed World earnings, bottoming in 1982, 1991, and 2001. Using monthly data, the smoothed Global Yield Curve bottomed in November 1981, May 1990, and April 2001. The corresponding declines in the MSCI World price index from those points were -17.3 percent, -19.4 percent, -35.0 percent, respectively (the peak-to-trough market losses were even worse).

Private Equity and Market Valuation / Hester

excellent work from William Hester. the term "buyout bingo" describes best what is going on in the markets right now and especially the last 12 month. it will be fun when all the deals will come back to the market..... but who wants to buy this then highly leveraged companies that were taken from the market at sky high prices......lots of supply down the road.....


toller report von William Hester. ich finde der begriff "buyout bingo" beschreibt wunderbar was am markt gerade und auch in den letzten 12 monaten gespielt wird. es wird spannend zu sehen sein was passieren wird wenn all diese buyouts ihren weg zurück auf den markt finden werden/wollen....aber wer wird die dann bis an die halskrause verschuldeten unternehmen kaufen.....da schwappt eine menge an angebot die nächsten auf den markt....

thanks to Jim Borgman http://frontier.cincinnati.com/blogs/borgman/

The average valuation of takeover candidates suggests thinning reward-to-risk

“Buyout Bingo.” “Merger Monday.” At the point a trend in the market is identified with constant alliterations, it's probably about to stop working. That term “Buyout Bingo” came across the newswires recently – an apt description of the popular strategy of building a portfolio of stocks with “takeover characteristics” and then sitting back in hopes of seeing them purchased at a premium by private equity investors. For the broader market, the pace of private equity deals has fueled the argument that stocks represent reasonable values. The recent rise in stock prices has been helped in some part by the message that investors are taking from the number of private equity deals. Increased private equity activity must be signaling that stocks are fairly valued, the argument goes, and not until the pace of takeovers drops will stocks be overvalued.


Both of these arguments may be unreliable. Waiting for a collapse in the rate of private equity deals as an indicator to reduce stock market exposure could prove too late to avoid a downturn. The number of deals may slow, especially if borrowing rates continue higher. But the pace of deals could roll over, rather than collapse, and the deals may increasingly reflect non-economic factors that have little to do with valuation.

That's Warren Buffett's take on the subject. Speaking at last month's Berkshire Hathaway shareholder meeting he pointed out that there is a tremendous incentive for private equity managers to force money into new deals, value or no value. “If you have a $20 billion fund and charge a 2% fee on it, you earn $400 million a year. You can't start another fund with a straight face until you get that money invested.” So the pace of activity may depend equally on those that allocate the investments and on the providers of capital. Buffett added, “It may be some time before disillusion sets in for the people supplying the money for these deals.” .....

If the universe of stocks that private equity investors pick through lacks value, it will be difficult to argue that the broader market offers better opportunities. One way of doing this is by looking at the investment value of the typical takeover candidate.

Takeover Candidates
Over the last few years, the strategy of buying a portfolio of likely takeover candidates has worked well. Holding a portfolio of stocks with buy-out characteristics – including low debt, high cash flow per share, and a price tag that is manageable for private investors - has returned 9 percent a year over the last 6 years versus the S&P's 5 percent return. Most of the outperformance of the strategy has occurred during the last few years, as investors have increasingly chased takeover candidates in hopes of capturing buyout premiums.

The chart below shows the result of this enthusiasm. It is the ratio of the average enterprise value to earnings before interest, taxes, depreciation, and amortization (EBITDA) for potential takeover candidates. Enterprise value includes both equity and debt, so it represents a likely purchase price to a private buyer. Earnings before interest, taxes, depreciation, and amortization is a proxy for cash flow. The benchmark was kept simple, and includes stocks with market values between $2 and $30 billion, low debt, and then ranked by cash flow per share.

As the chart shows, the price of the average buyout candidate relative to its cash flow has been rising over the last three years. Last month the average multiple jumped to 9.5, up from 8.3 a year earlier. That makes the average buyout candidate almost 15% more expensive relative to its cash flows versus a year ago. Takeover candidates are 40 percent more expensive relative to cash flows than they were four years ago. The average cash flow yield has fallen to 10 percent from 15 percent during that time period.

This upward trend in multiples may help explain why the average deal premium has been trending lower. The average deal premium was 28 percent in 2006, according to Bloomberg data. It's fallen to 23 percent this year. In May, the average deal premium was 19.5 percent, the lowest average premium since February of 2006. Private equity investors are paying smaller buyout premiums for companies as the overall price tag on takeover candidates relative to cash flows has soared.

The pick-up in the number of private equity deals beginning a few years ago was rooted in better conditions. The universe of attractive takeover stocks had average cash flow yields of 15 percent and borrowing rates were rock bottom. But the argument that the current pace of private equity deals provides evidence that stocks are fairly valued needs to be reconsidered. Current deal flow alone can't be an indicator of investment opportunity because it is too clouded by factors outside of valuation. And it's becoming increasingly difficult to argue that, on average, the universe of potential candidates to take private represents attractive value.