Stock Market - A Fed created bubble

[Zebo]

http://www.fool.com/investing/general/2010/01/08/is-fed-buying-behind-the-stock-rally.aspx

I never understood rally as revenues to S&Ps keep crashing, massive insider selling, P/E's over 100 for S&P, horrendous asset values to pension libilites... My only question is Benny the new Bernie?

 

[Zebo]

I am guessing that a big part of the inflows to the stock market are from TARP bailouts, and 0% interest loans from the Fed to banks.

If you are managing a bank which was not about to go under, where would you put the 10s of billions the government required you to take?

If you can get 0% interest loans from the Fed, why not borrow a ton of money, and invest in stocks?

People have been wondering what the banks are doing with all the new money, which is not being lent out. I would say that buying stock is a likely answer to that question.

Also, the government has made it clear that 'to big to fail' banks will be protected from losses, but be able to keep all profits. In such a situation, it would be logical for to buy up large shares of other 'to big to fail' banks. That way if one goes under they all go under, and thus can be certain that if we have another crash, the government will absorb the losses.

One Fool had the perfect reply I agree 100% here. Last paragraph is freighting prospect though - fine say the IBs did invest in stock with fed money - where's it go from here considering data? And who pays again for when SHTF and they can't pay back fed? heh

 

[StageLeft]

When HK and J did this did they publicly announce it? I presume so. I presume that if the gov was doing this it would be known. Shouldn't it be fairly straight forward for the SEC or some organization to see on a grand scheme what money is going in/out and from where? I just guess I'm saying I'm not convinced. I'd need more than a guy on a blog somewhere.

 

[LegendKiller]

http://www.fool.com/investing/general/2010/01/08/is-fed-buying-behind-the-stock-rally.aspx

I never understood rally as revenues to S&Ps keep crashing, massive insider selling, P/E's over 100 for S&P, horrendous asset values to pension libilites... My only question is Benny the new Bernie?

Why can't you understand the rally?

Let's use some examples.

CAR = .34 at trough, 13 today
HTZ = ~2 at trough, 12 today
DTG = .60 at trough, 27 today
WYN = 2.20 at trough, 20 today


Those are just 4 securitization issuers that couldn't get ANY deals done, thus, the stock market hammered them, thinking they would go BK if they couldn't roll securitization debt. They all got non-TALF deals done because they weren't TALF eligible or they didn't want to pay the consequences for TALF issuance.

How about GOOG? Troughed at 245, now it's at 600. It dropped because of the high multiple and consequence of that on lower front-end earnings. However, they've proven resilient and have come back.

What people don't get is that this isn't a rally because times are good, this is a rally because times aren't that bad.

 

[heyheybooboo]

I pity the Fools who follow Alex Dumortier .... CFA


He throws out buzz words to get the maroons foaming at the mouth --- Fed created Bubble.

The facts are the DJIA was irrationally high in the Summer of 2007 immediately prior to the onset of the financial liquidity crisis in August of that year --- being in excess of 100% of GDP ---and continued to be so through the Fall.

Historically, the DJIA is around 77% of GDP.

Conversely, by March of 2009, the DJIA had dropped to 47% of GDP, being irrationally low.

Not surprisingly (at least to me) is that the DJIA is now hovering around 75% of GDP, or a 'return to the mean'.

DJIA --- Jan10 ---- 10,600'ish
GDP ---- Jan10 ---- 14,100'ish

And I'm wondering if Alex Dumortier .... CFA, really has any clue as to how the the Fed discount window and collateralization requirements and terms actually work.

edit: And here is a link to the BEA National Income and Product Accounts Table of our GDP.

It is not a pretty view in some areas but is not as bad as some folks would lead you to believe.

We just need to find ways to get folks back to work.



--

 

[Slew Foot]

What people don't get is that this isn't a rally because times are good, this is a rally because times aren't that bad.

Yup, as much as 14000 was irrationally high, 7000 was irrationally low. This is probably where it should have been all along.

 

[GarfieldtheCat]

Stock Market values are irrational and not based on logic.Wow.

What's next, water is wet?

 

[LegendKiller]

Stock Market values are irrational and not based on logic.Wow.

What's next, water is wet?

Over long periods the values are closer to rationality. However, the cyclical nature of human greed/fear, leads to short-term imbalances in valuation, usually driven by supply/demand, and not fundamentals of common stock value.

 

[StageLeft]

I think the stock market was more fairly valued at 8500 or so. But "fairly valued" is really by its nature impossible to agree upon, otherwise that's what it would be at. P/E now it's way overvalued but you need many years of earnings to get a proper P/E (can't use a recession value since it's probably temporary). The GDP one above seems good.

 

[LegendKiller]

I think the stock market was more fairly valued at 8500 or so. But "fairly valued" is really by its nature impossible to agree upon, otherwise that's what it would be at. P/E now it's way overvalued but you need many years of earnings to get a proper P/E (can't use a recession value since it's probably temporary). The GDP one above seems good.

By historical PE, sure. By forward PE, maybe. However, forward PE reflects the same biases as stock valuation, especially in a downturn. As seen, earnings have exceeded most analyst projections, sometimes by large margins, largely due to cost cutting. However, wealth begets spending which begets hiring.

 

[Ozoned]

If you are managing a bank which was not about to go under, where would you put the 10s of billions the government required you to take?


Buy T-bills and pocket the 3-4 % return you are going to get????

 

[ShawnD1]

Over long periods the values are closer to rationality. However, the cyclical nature of human greed/fear, leads to short-term imbalances in valuation, usually driven by supply/demand, and not fundamentals of common stock value.

Indeed. Long term values reflect the common sense side of the stock market - profitable companies grow. Short term values seem to heavily rely on the greater fool theory

from wiki article:

The greater fool theory (sometimes the bigger fool theory, also called survivor investing) is the belief held by one who makes a questionable investment, with the assumption that they will be able to sell it later to "a bigger fool"; in other words, buying something not because you believe that it is worth the price, but rather because you believe that you will be able to sell it to someone else for an even better price.[1]

You'll be largely resistant to stock market crashes if you avoid the greater fool theory. People who bought Intel stock have been earning steady dividends for the past 10+ years whereas many fools trading worthless junk stocks and junk bonds are losing their shirts.

 

[LegendKiller]

Indeed. Long term values reflect the common sense side of the stock market - profitable companies grow. Short term values seem to heavily rely on the greater fool theory

from wiki article:


You'll be largely resistant to stock market crashes if you avoid the greater fool theory. People who bought Intel stock have been earning steady dividends for the past 10+ years whereas many fools trading worthless junk stocks and junk bonds are losing their shirts.

I always laughed at people shit-talking Intel while going gaga over AMD a few years ago. They failed to realize that Intel was a far better managed company, despite their P4 silliness while AMD was a horribly run company that acquired ATI in a stupid move that has obviously destroyed shareholder value.

 

[Zebo]

I posted years ago in CPU forum as stock was climbing to 50s and every was like "this is the next intel" that their stock would crash back to pre Athlon 64 days immediately upon release of conroe. My 'bet', as it were, was more based on product though as I have no clue about timing markets, don't even try..

 

[Tequila]

http://www.fool.com/investing/general/2010/01/08/is-fed-buying-behind-the-stock-rally.aspx

I never understood rally as revenues to S&Ps keep crashing, massive insider selling, P/E's over 100 for S&P, horrendous asset values to pension libilites... My only question is Benny the new Bernie?

The rally made perfect sense to me. Stocks were on a fire sale in march. Everyday I read a new story how someone sold everything at the lows and bought bonds . It amazes me how people will wait for that perfect sale at store for merchandise but when a stock is on sale they don't buy it, they panic and sell.

Now I'll admit I didn't go buy up all those stocks that were on sale. Just a few here and there, one nice in Trina Solar at around $8 which is now almost $61. However, overall I'm pretty conservative and my three largest holdings are JNJ, KO and CVX which I've accumulated and reinvested dividends over the past 20 years. I sleep very well at night no matter what the market is doing. When I see those stocks on sale I just buy more

 

[lothar]

Why can't you understand the rally?

Let's use some examples.

CAR = .34 at trough, 13 today
HTZ = ~2 at trough, 12 today
DTG = .60 at trough, 27 today
WYN = 2.20 at trough, 20 today


Those are just 4 securitization issuers that couldn't get ANY deals done, thus, the stock market hammered them, thinking they would go BK if they couldn't roll securitization debt. They all got non-TALF deals done because they weren't TALF eligible or they didn't want to pay the consequences for TALF issuance.

How about GOOG? Troughed at 245, now it's at 600. It dropped because of the high multiple and consequence of that on lower front-end earnings. However, they've proven resilient and have come back.

What people don't get is that this isn't a rally because times are good, this is a rally because times aren't that bad.

Add ACF to that list!!!
52 Week Range: 3.07 - 21.00, current price = 20.97

I also didn't see the death that people were chanting on HTZ. I first discovered HTZ when Berkowitz added it to his security holdings in FAIRX(which is the only mutual fund I own).
I could have gone HTZ and done due diligence too, but I went full blood into ACF instead rather than split money into both since I've owned ACF for almost 2 years now.

Do you personally follow Bruce Berkowitz at all?

 

[LegendKiller]

Add ACF to that list!!!
52 Week Range: 3.07 - 21.00, current price = 20.97

I also didn't see the death that people were chanting on HTZ. I first discovered HTZ when Berkowitz added it to his security holdings in FAIRX(which is the only mutual fund I own).
I could have gone HTZ and done due diligence too, but I went full blood into ACF instead rather than split money into both since I've owned ACF for almost 2 years now.

Do you personally follow Bruce Berkowitz at all?

I don't follow him myself, I'll look into him though.

I knew the DTG/CAR/HTZ world from my ABS experience, I had looked into doing some fleet ABS deals a few years ago (including Budget truck rental), through all three companies, I know the business quite well. The real breaking point was when the gov't announced TALF eligibility for fleets, even though none of the three (IIRC) ever did a TALF eligible deal.

It is unsurprising all three got ABS deals done. While the market was in a gridlock, it was impossible for it to go away forever, there's just too much cash to put to work and too many investors that want the sure-fire maturities of fleet ABS.

The biggest challenge for all of the car companies was to find an advance rate and rating that would make sense, since the traditional car ABS structure required a wrap (bond insurance) at a BBB attachment point, making them AAA bonds. Since the wraps died, so did easy leverage structures.

They made it work, the people at CAR are pretty damn smart, same with most of the other car companies.

Want to know how I made so much money on Marketocracy? 1.4MM of my 2MM+ in profit came from CAR, HTZ, and DTG.

The game performance is far worse than my own fun-money portfolio.

 

[Zebo]

The rally made perfect sense to me. Stocks were on a fire sale in march. Everyday I read a new story how someone sold everything at the lows and bought bonds . It amazes me how people will wait for that perfect sale at store for merchandise but when a stock is on sale they don't buy it, they panic and sell.

Now I'll admit I didn't go buy up all those stocks that were on sale. Just a few here and there, one nice in Trina Solar at around $8 which is now almost $61. However, overall I'm pretty conservative and my three largest holdings are JNJ, KO and CVX which I've accumulated and reinvested dividends over the past 20 years. I sleep very well at night no matter what the market is doing. When I see those stocks on sale I just buy more

Like I said I'll stick to what I know. I'd never pay 30x+ annual cash flow for a business or a well (because of depletion), more like 3-5x. And many companies don't even pay dividend. So your essentially buying on faith they will someday or you will find someone to buy from you at higher than you paid. Something I don't get and probably never will. Seems like a pyramid scheme to me.

Let me give you an example - I have gas well that pays me $400 a month I paid 15,500 for a 5% working interest in her. With gas prices at near record lows I'm virtually guaranteed my money back in 40 months (minus cost of capital), After which it's all gravy not to mention if gas prices comes off record lows and I still own the property. If I buy 15,500 in stock no guarantee or even close could crash tomorrow.

I looked up the 'safe' JNJ it will take you 50 years to get you money back with 2.5% avg dividends. Ridiculous - doesn't even keep up with inflation.

 

[ShawnD1]

And many companies don't even pay dividend. So your essentially buying on faith they will someday or you will find someone to buy from you at higher than you paid. Something I don't get and probably never will. Seems like a pyramid scheme to me.

When a company is well established and doesn't need to grow, earnings are paid out as dividends. Example: Intel is already big and they've already set aside money for research and new product lines, so anything in excess of that can be paid out.
Other companies are still in the process of growing (or paying debts) as quickly as possible, so they hold onto profits and use that money to grow. This is called "retained earnings". Companies like Google have never paid out even 1 dividend in their entire history, but that doesn't mean they're bad. Google, for example, reported earnings of almost $6B in Q3 of 2009.

 

[Zebo]

I don't follow him myself, I'll look into him though.

I knew the DTG/CAR/HTZ world from my ABS experience, I had looked into doing some fleet ABS deals a few years ago (including Budget truck rental), through all three companies, I know the business quite well. The real breaking point was when the gov't announced TALF eligibility for fleets, even though none of the three (IIRC) ever did a TALF eligible deal.

It is unsurprising all three got ABS deals done. While the market was in a gridlock, it was impossible for it to go away forever, there's just too much cash to put to work and too many investors that want the sure-fire maturities of fleet ABS.

The biggest challenge for all of the car companies was to find an advance rate and rating that would make sense, since the traditional car ABS structure required a wrap (bond insurance) at a BBB attachment point, making them AAA bonds. Since the wraps died, so did easy leverage structures.

They made it work, the people at CAR are pretty damn smart, same with most of the other car companies.

Want to know how I made so much money on Marketocracy? 1.4MM of my 2MM+ in profit came from CAR, HTZ, and DTG.

The game performance is far worse than my own fun-money portfolio.

You made 2 mil in last year? You know how to play Wall Street Casino berry berry well.

 

[Zebo]

When a company is well established and doesn't need to grow, earnings are paid out as dividends. Example: Intel is already big and they've already set aside money for research and new product lines, so anything in excess of that can be paid out.
Other companies are still in the process of growing (or paying debts) as quickly as possible, so they hold onto profits and use that money to grow. This is called "retained earnings". Companies like Google have never paid out even 1 dividend in their entire history, but that doesn't mean they're bad. Google, for example, reported earnings of almost $6B in Q3 of 2009.

I understand they are not 'bad' but you're still gambling at a higher threshold than I care for, for every LK there is a guy who lost 2 mil. For every Intel there is a Tandy who goes under. You're also dependent on what company decides to pay absolutely no dividend guarantee.

 

[StageLeft]

Well there's a reason LK referred to his fun money; I think he's too smart to think he can best the market with the money that really matters, something that too few realize.

Given that we all know the majority of professional investors cannot even match, let alone beat the market, we're forced to conclude that the reason there are so many hedge funds and personal investors, etc. is simply hubris; they believe they are special. They believe they know more, can do better. And as already said, most of them are wrong.

 

[Tequila]

Like I said I'll stick to what I know. I'd never pay 30x+ annual cash flow for a business or a well (because of depletion), more like 3-5x. And many companies don't even pay dividend. So your essentially buying on faith they will someday or you will find someone to buy from you at higher than you paid. Something I don't get and probably never will. Seems like a pyramid scheme to me.

Let me give you an example - I have gas well that pays me $400 a month I paid 15,500 for a 5% working interest in her. With gas prices at near record lows I'm virtually guaranteed my money back in 40 months (minus cost of capital), After which it's all gravy not to mention if gas prices comes off record lows and I still own the property. If I buy 15,500 in stock no guarantee or even close could crash tomorrow.

I looked up the 'safe' JNJ it will take you 50 years to get you money back with 2.5% avg dividends. Ridiculous - doesn't even keep up with inflation.

Nothing wrong with sticking with what you know. I don't know the first thing about owning a gas well. Your knowledge of dividend paying stocks is incredibly naive especially your lack of understanding current yield vs effective yield. The true power comes from reinvested dividends especially in an IRA/401k rollover. If you bought JNJ today your current yield is 3.1%. If you bought 20 years ago, reinvesting the dividends during that time gives you an effective yield of 50%. That means I could turn off the drip and just collect the dividends and make a decent income but I don't plan on doing that for another 20 years. It's even better for my Chevron shares.

JNJ has never missed a dividend and consistently grows them at 10% a year. They are a cash machine and have an ROE of 27%. They are big pharma but well diversified in medical devices and consumer products. That's why I sleep well at night no matter what the market is doing. Big and boring is very exciting for those who have the patience.

 

[halik]

Risk appetite is back in full force, which is why you're seeing a rally in virtually risky assets out there.

Right now we're seeing a market sharpe ratio (price of risk) lower than the average of 2006.

 

[StageLeft]

Speaking of leading indicators is the VIX a good one? I mean with it apparently very low now like it was a couple of years ago I wonder what it says.

I realize that NOTHING is a good leading indicator by everybody's standards or else it no longer would be.