What do you mean by flipped? Have we now gone back to talking about his combover?
Sorry, that was silly but I had to ask.
Seems like at least some profit taking here. Whatever happened to Bob's love of the II report? I don't remember hearing a recent analysis of it and how it is one of his indicators of tops. Then again, I haven't listened or read Bob much lately.
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From RM on the anniversary of the bull market of whatever type it is:
"Howard Simons
Birthdays And Anniversaries
10/08/03 02:22 PM ET
Paul/Aaron: First, great piece of analysis, Paul. Second, this is also a near-anniversary of the LTCM/Russian collapse in 1998; the market bottomed that year on October 8.
I think one reason for the skepticism, both pro and retail, is this market never really got cheap on the way down. We never hit those lows on P/E, P/S, P/B, dividend yield, mutual fund cash inflows or hemlines that have tended to characterize long-term bottoms.
A second reason may be the very aggressive policy mix employed post-bubble. On both a fiscal and a monetary basis, we've really thrown the kitchen sink - and thrown it with the seeming intent of supporting the market in hopes that it would in turn support the economy.
A third reason may lie in the extreme valuations seen at the height of the bubble. Yes, many stocks came down 90%+, but those declines might have been a more reasonable 40-50% in another bear market. The sheer number of stocks so disemboweled made more of them eligible for a subsequent survivor's rally from very low levels.
A final reason, touched on by Arne Alsin earlier, is the perception that so many potential investments appear overpriced. Over time, it is the absolute attractiveness of an investment, not its relative attractiveness today, that is important. How many of today's strong rebounders from a year ago are that attractive on an absolute basis? "
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Paul Kedrosky's analysis of the year old bull: (note that Rillinois here pegged it! Now if he can just tell us when this is over, he can replace Bob)
"A year ago this week, the bull market began. It sure didn't feel like it at the time.
It was Oct. 9, 2002. The Dow Jones Industrial Average fell 2.9% that day, and the Nasdaq and the S&P 500 were down 1.4% and 2.8%, respectively. It was a worse week, with major indices falling more than 1% on seven of the prior nine days. Skeptics were everywhere -- even perma-bull Abby Joseph Cohen cut her gravity-defying S&P estimate and mused about a double-dip. It may have been the bottom, but very few picked it.
Some things have changed since then, but much has stayed the same. While retail investors generally believe in the bull, fewer pros seemingly do. You read some of them on this site, but many are happy to show up on CNBC or to be quoted in The New York Times or elsewhere. They don't believe that this market can continue to run, and they haven't believed it pretty much since it started running.
It feels a little like a law of market metaphysics. The total amount of stock market skepticism hasn't decreased, despite the market's message that the economy has improved; the skepticism is just distributed differently now than it was 12 months ago.
A year ago, we were worried that the economy wouldn't turn around, or perhaps that there would be a double-dip recession. The new worries are myriad: The economy isn't producing enough jobs, the current rebound isn't self-sustaining, junk stocks are rising and quality stocks are languishing, etc. Trashy stocks in a trashy market, critics say; it's a return to the late 1990s, when junk stocks ruled the earth.
Is the accusation true? To find out, I went back and looked at which stocks have done well and which have done poorly in the past year. I started by screening stocks on the basis of price (greater than 50 cents), market capitalization (greater than $100 million) and average trading volume (greater than 150,000). The result was a list of 1,684 publicly traded stocks on U.S. exchanges.
How did those stocks fare over the past five years? The following figure breaks it down. The left axis is the number of stocks and how far they declined. The bottom axis is a series of brackets, capturing the number of stocks that fell in the past five years by that percent. Along the right axis is the percentage of stocks in each of these brackets that doubled or more. For example, about 160 stocks fell between 40% and 49%. At the same time, as is shown on the right axis, none of the stocks in the prior group doubled.
Decliners and Doublers
Source: MSN data, Paul Kedrosky
As you move along the bottom axis, however, things change dramatically. The further you go out -- in other words, the larger the percentage declines -- the greater the likelihood that the stocks in that group doubled, or more, in the last year. The effect is dramatic at the extremes, where 70% of the 573 stocks that fell by 80% to 89% in the past five years doubled. Further out, it almost becomes absurd, with 23 of the 24 stocks that fell by more than 90% in the period doubling in the last 12 months.
Tech stocks dominate the list of decliners, which is at least a little bit logical. Those stocks had climbed the most and were the furthest from fair value, whatever that might have been, so they had the biggest distance to fall. That largely explains the following fact: In every bracket, the groups of stocks that had the greatest likelihood of doing a double (or triple) were technology stocks, and it helped if they lost money. Those were the ones that had fallen furthest.
So, in a sense, the skeptics were right: Junk stocks did rule the earth for the past year. The stocks that fell furthest had the biggest runs. If you had blindly bought a basket of stocks last October -- purely on the basis of how far they had fallen from their five-year highs -- upwards of 70% of the stocks in your portfolio would've doubled (or more).
Yes, that is irritating. But judging by market history, there's a good chance it's not over yet.
Consider the following chart. It details the major market downturns of the past century with the S&P 500's decline from peak to trough. It then shows what the index did in the year after the trough. As you can see, the market fell an average of 36% in these downturns. There was, however, a fairly close correspondence between how far the market fell, and how well it did in the next 12 months.
But there's a noteworthy exception: this past year. The following graph shows the average next-year percentage increase for various market-decline percentages over the past 80 years. Admittedly, we're dealing with relatively small numbers of cases here, but the results are interesting.
The past 12 months are an outlier -- because of how poorly the S&P 500 did. Assuming Oct. 9, 2002, marks a near-term trough in the market, we would've expected the market to rebound much further than it did. Instead of a 29% climb, you would have expected closer to double that, if not more, judging by historical norms.
The market doesn't repeat itself perfectly, so we shouldn't read too much into this. But at the same time, the rebound in beaten-down tech stocks this year has shown two things. First, markets are like perfect springs: They can be compressed and compressed, but they want desperately to rebound back, even if it's only to be followed by another collapse. It's partly an emotional thing, partly the growth in the economy and partly the inexorable flow of cash into the markets. But the effect is the same.
Second, rebounds don't have to be rational. Just because stocks started higher than usual, and bounced anyway, doesn't mean that they can't go even higher yet. If there is a big bounce, of course, it may mean that future gains are limited; it may also cause higher-than-normal volatility for a while. But a blind or naive allegiance to price-to-earnings multiples, for example, is no way to make money for your clients in most markets.
Does all this mean that the markets have further to go? My hunch is yes. Stimulus, as the strategists are fond of saying, is still flowing into the markets. And returns elsewhere are as lousy as ever, with real interest rates scraping their bellies on the ground at zero. Sure, it is possible that something derails things -- a fast-weakening dollar, a lousy fourth quarter, a widening war, increased inflation, etc. -- and undoubtedly after a further whoosh upward we're in for lower future returns and higher volatility over the next decade. But if I had to wager, I'd bet that the current rally isn't over yet. " |
