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I'm adding to shorts...
- Thread starter trade-ya1
- Start date
You are right, I do not trade stocks intraday. Your post is well taken and I'm typically the first to say that the trend is the most powerful force in the universe. You have never seen a post by me on this board indicating any sort of short position or condoning a short position prior to 2 days ago. I'm keenly aware of fighting trends and trading with the trend. Nonetheless, I would not use the market's feel or actions in the 1999-2000 period as the market 'norm'. That is probably a period that will be written about in history books for centuries to come. In my opinion, given that I believe that they very long term trend (multiple-year) has changed to bearish, this is about as bullish for me as the market needs to be. What is my evidence for 'bullishness' in the market? It's been too hard to maintain any sort of short position (on a multiple day basis) to allow for any sort of 'real' short in the market. That's enough for me and I think that the counter-trend rally of the last 12 months is near an end. Am I flexible if proven wrong? Absolutely.
Cool. I know what you mean about the persistent bidding, they've been doing that for years with the bonds. They clearly have a totally different motivation for buying than any conventional investment assessment of value. So just saying it's overvalued is not enough, you need to figure out what is going to make the authorities change their policy, or at least shake the Japanese faith in their authorities.
I think one important factor is that the BoJ/MoF have basically ordered the financial community to pile into the bond market, I guess partly to help the government finance the huge deficit spending of the last decade. With price deflation and collapsing stocks, the financial community was happy to go along for the ride. The government basically gave them a free put, like Greenspan in the early 90s but even more so, and then manipulated the market higher to ever more insane yields, handing them massive capital gains on the bond portfolio. I'm sure it isn't coincidence that this offset their massive equity losses. It's almost like they gave them an absurd bond mark-to-market for years just to stop them breaching the BIS capital adequacy requirements as stock prices collapsed.
The obvious thing to reverse that is if deflation stops and gets replaced by actually increasing prices; but a second possibility is if the stock market recovers sufficiently to strengthen their balance sheets. Ideally both would happen in tandem. Once that recovery goes far enough, the rationale for the government to prop up the bond market disappears, and is in fact replaced by a convincing rationale to raise rates, at least into the 1-2% range. And if and when the government back away from their guarantee, then the entire Japanese financial sector is caught long at ludicrously low yields. Foreigners won't touch the market and the domestic players will simply have no one to sell to. IMO there will be an incredible stampede out, you could have a crash in money and the only place all that money can go is inflation-hedged assets e.g. the stockmarket. We could have a crash and a buying frenzy happening simultaneously.
A good comparison IMO is the USA after the WWII era, up to the end of the 50s. They had very low rates for a long time, a hangover from the deflation of the 30s, but eventually inflation started popping up. However, it took the US financial sector much longer than you'd expect to start demanding higher yields. It was almost as if they had all gotten used to the old regime, and could not even conceive of a different state of affairs. Eventually there was a major crash in the treasury market, I can't remember the exact details, and then the long bond had a two decade bear market. Stocks on the other hand, went on a massive secular run. I think Japan could be entering the early stages of a similar very long-term trend.
I don't know if that will happen by mid 2005. But look at last summer - no sign of raising rates, just a bit of a panic in the bond market and the Euroyen puked massively, even only 12-18 months out. I suppose the safest bet is to go short across several months, and keep rolling those shorts forward.
Out of interest, is there any reason you are short the back months as opposed to shorting the bonds? I guess you don't have to worry about delivery or paying for the rollover.
I think one important factor is that the BoJ/MoF have basically ordered the financial community to pile into the bond market, I guess partly to help the government finance the huge deficit spending of the last decade. With price deflation and collapsing stocks, the financial community was happy to go along for the ride. The government basically gave them a free put, like Greenspan in the early 90s but even more so, and then manipulated the market higher to ever more insane yields, handing them massive capital gains on the bond portfolio. I'm sure it isn't coincidence that this offset their massive equity losses. It's almost like they gave them an absurd bond mark-to-market for years just to stop them breaching the BIS capital adequacy requirements as stock prices collapsed.
The obvious thing to reverse that is if deflation stops and gets replaced by actually increasing prices; but a second possibility is if the stock market recovers sufficiently to strengthen their balance sheets. Ideally both would happen in tandem. Once that recovery goes far enough, the rationale for the government to prop up the bond market disappears, and is in fact replaced by a convincing rationale to raise rates, at least into the 1-2% range. And if and when the government back away from their guarantee, then the entire Japanese financial sector is caught long at ludicrously low yields. Foreigners won't touch the market and the domestic players will simply have no one to sell to. IMO there will be an incredible stampede out, you could have a crash in money and the only place all that money can go is inflation-hedged assets e.g. the stockmarket. We could have a crash and a buying frenzy happening simultaneously.
A good comparison IMO is the USA after the WWII era, up to the end of the 50s. They had very low rates for a long time, a hangover from the deflation of the 30s, but eventually inflation started popping up. However, it took the US financial sector much longer than you'd expect to start demanding higher yields. It was almost as if they had all gotten used to the old regime, and could not even conceive of a different state of affairs. Eventually there was a major crash in the treasury market, I can't remember the exact details, and then the long bond had a two decade bear market. Stocks on the other hand, went on a massive secular run. I think Japan could be entering the early stages of a similar very long-term trend.
I don't know if that will happen by mid 2005. But look at last summer - no sign of raising rates, just a bit of a panic in the bond market and the Euroyen puked massively, even only 12-18 months out. I suppose the safest bet is to go short across several months, and keep rolling those shorts forward.
Out of interest, is there any reason you are short the back months as opposed to shorting the bonds? I guess you don't have to worry about delivery or paying for the rollover.
Good analysis Cutten. I agree. Hence my current 'texas style' positioning of Long Nikkei, Short Euroyen, Long Yen. I am short the Euroyen because I believe that they can fall further in a short period of time (and I have more control over the market) than the JGBs. For a good comparison look at deffered Eurodollar futures vs. the 10 year note for example. I suppose that I want to be long the TED spread. I agree that we can and should have a number of significant dips in the market even if the BOJ does nothing over the course of the next 1 1/2 years.
Quote from trade-ya1:
You are right, I do not trade stocks intraday. Your post is well taken and I'm typically the first to say that the trend is the most powerful force in the universe. You have never seen a post by me on this board indicating any sort of short position or condoning a short position prior to 2 days ago. I'm keenly aware of fighting trends and trading with the trend. Nonetheless, I would not use the market's feel or actions in the 1999-2000 period as the market 'norm'. That is probably a period that will be written about in history books for centuries to come. In my opinion, given that I believe that they very long term trend (multiple-year) has changed to bearish, this is about as bullish for me as the market needs to be. What is my evidence for 'bullishness' in the market? It's been too hard to maintain any sort of short position (on a multiple day basis) to allow for any sort of 'real' short in the market. That's enough for me and I think that the counter-trend rally of the last 12 months is near an end. Am I flexible if proven wrong? Absolutely.
Whats your current average entry price and where do you plan to cover?
Value Line's forecast for the Dow in 2004
Wednesday January 28, 12:01 am ET
By Mark Hulbert
ANNANDALE, Va. (CBS.MW) -- Believe it or not, the following projections are made by an advisory service whose 2004 target for the Dow Jones Industrials Average is 9,400 -- some 1,200 points below where it closed on Tuesday.
Corporate earnings will be 11 percent higher this year than in 2003, and dividends will rise by 4 percent. Interest rates will be only slightly higher, by just 30 basis points, and inflation will "remain muted."
Sounds pretty good, doesn't it? Makes you want to go out and buy more stocks.
Especially since these projections aren't being made by just anyone. They come from Value Line, Inc. (NasdaqNM:VALU - News), publishers of the Value Line Investment Survey. That service is one of the top ranked advisory newsletters for performance over the past two decades, as measured by the Hulbert Financial Digest.
Why, then, is Value Line so cautious?
The simple answer: "lofty P/E ratios." Value Line believes that "most of the earnings gains that we estimate for 2004 may already be priced into the market."
Value Line's argument will come as a surprise to those of you whose market commentary comes mainly from Wall Street's sell-side analysts. As they never tire of telling us, the market's P/E ratio is high only when we focus on trailing earnings.
But, they point out, the market's P/E drops significantly when we focus on what firms are projected to earn during 2004. For example, the Dow's (^DJI - News) current P/E, using Value Line's projections of 2004 earnings for the 30 Industrials, is "just" 18.2. That, so the argument goes, is only slightly higher than the long-term historical average.
So why worry?
To show why this argument is specious, I turn to the quarterly letter recently sent to clients of AQR Capital Management. According to Clifford Asness, one of that firm's managing principals, this argument relies on the sleight of hand of comparing a forward-looking P/E with an historical average based on trailing P/Es.
But that's comparing apples to oranges.
Or, as Asness puts it, the argument is "crapola."
After all, forward-looking P/E ratios are almost always lower than trailing P/E ratios. Rarely do analysts project that corporate earnings will fall.
So if Wall Street's Pollyannas were sincere in wanting to make a sound historical argument based on forward-looking P/Es, they would compare the market's current forward-looking P/E with an average based on forward-looking P/Es that have been recorded in prior years.
But they don't do that, and Asness suspects he knows why: If they did, they would have to concede that the market is just as overvalued as it appears to be when focusing on trailing P/Es:
According to Asness' calculations, the historical median P/E based on projections of year-ahead earnings is 12.1, far lower than the 16.0 median that has existed historically when P/Es are calculated using trailing 12-month earnings.
Consider what Asness found when he sorted all forward-looking P/Es that have been recorded since 1976 -- which is the earliest date for which analyst projection data is recorded.
The market's current forward-looking P/E comes in at the 81st percentile, which means that only 19 percent of the quarters since 1976 have seen higher valuations than where we are right now.
Contrast that with what Asness found when he sorted the market's historical P/Es based on trailing earnings. The market's current trailing P/E comes in at the 84th percentile, almost the same level as emerged from focusing on forward-looking P/Es.
Asness concludes: "In an honest comparison, not playing fast and loose with the numbers, P/Es of any stripe are very high versus history."
Follow-up to yesterday's column
I want to answer a question that many of you asked after reading my column from yesterday. I had reported that, on average since 1901, the stock market had performed significantly better (in nominal terms) when a Democrat was president than when a Republican sat in the oval office, and slightly better in real terms.
A great many of you were sure that this result was due to including the presidencies of Herbert Hoover and Franklin Roosevelt in the historical comparison. Take them out, and the Democrats' apparent advantage would disappear.
To find out whether this is true, I contacted Ned Davis Research, the authors of the original study that I had quoted. They kindly reran the numbers just from April 1945, the month in which Roosevelt died.
Guess what. The same overall pattern still existed.
Here are the numbers: Since April 1945, the Dow Jones Industrials Average has appreciated at an average annual rate of 8.1 percent during Democratic presidencies, and 6.9 percent during Republican Presidencies.
In real terms, it is 3.8 percent vs. 3.1 percent, again in favor of Democratic presidencies.
So I don't think we will so easily be able to wriggle out from under the force of this historical pattern.
Wednesday January 28, 12:01 am ET
By Mark Hulbert
ANNANDALE, Va. (CBS.MW) -- Believe it or not, the following projections are made by an advisory service whose 2004 target for the Dow Jones Industrials Average is 9,400 -- some 1,200 points below where it closed on Tuesday.
Corporate earnings will be 11 percent higher this year than in 2003, and dividends will rise by 4 percent. Interest rates will be only slightly higher, by just 30 basis points, and inflation will "remain muted."
Sounds pretty good, doesn't it? Makes you want to go out and buy more stocks.
Especially since these projections aren't being made by just anyone. They come from Value Line, Inc. (NasdaqNM:VALU - News), publishers of the Value Line Investment Survey. That service is one of the top ranked advisory newsletters for performance over the past two decades, as measured by the Hulbert Financial Digest.
Why, then, is Value Line so cautious?
The simple answer: "lofty P/E ratios." Value Line believes that "most of the earnings gains that we estimate for 2004 may already be priced into the market."
Value Line's argument will come as a surprise to those of you whose market commentary comes mainly from Wall Street's sell-side analysts. As they never tire of telling us, the market's P/E ratio is high only when we focus on trailing earnings.
But, they point out, the market's P/E drops significantly when we focus on what firms are projected to earn during 2004. For example, the Dow's (^DJI - News) current P/E, using Value Line's projections of 2004 earnings for the 30 Industrials, is "just" 18.2. That, so the argument goes, is only slightly higher than the long-term historical average.
So why worry?
To show why this argument is specious, I turn to the quarterly letter recently sent to clients of AQR Capital Management. According to Clifford Asness, one of that firm's managing principals, this argument relies on the sleight of hand of comparing a forward-looking P/E with an historical average based on trailing P/Es.
But that's comparing apples to oranges.
Or, as Asness puts it, the argument is "crapola."
After all, forward-looking P/E ratios are almost always lower than trailing P/E ratios. Rarely do analysts project that corporate earnings will fall.
So if Wall Street's Pollyannas were sincere in wanting to make a sound historical argument based on forward-looking P/Es, they would compare the market's current forward-looking P/E with an average based on forward-looking P/Es that have been recorded in prior years.
But they don't do that, and Asness suspects he knows why: If they did, they would have to concede that the market is just as overvalued as it appears to be when focusing on trailing P/Es:
According to Asness' calculations, the historical median P/E based on projections of year-ahead earnings is 12.1, far lower than the 16.0 median that has existed historically when P/Es are calculated using trailing 12-month earnings.
Consider what Asness found when he sorted all forward-looking P/Es that have been recorded since 1976 -- which is the earliest date for which analyst projection data is recorded.
The market's current forward-looking P/E comes in at the 81st percentile, which means that only 19 percent of the quarters since 1976 have seen higher valuations than where we are right now.
Contrast that with what Asness found when he sorted the market's historical P/Es based on trailing earnings. The market's current trailing P/E comes in at the 84th percentile, almost the same level as emerged from focusing on forward-looking P/Es.
Asness concludes: "In an honest comparison, not playing fast and loose with the numbers, P/Es of any stripe are very high versus history."
Follow-up to yesterday's column
I want to answer a question that many of you asked after reading my column from yesterday. I had reported that, on average since 1901, the stock market had performed significantly better (in nominal terms) when a Democrat was president than when a Republican sat in the oval office, and slightly better in real terms.
A great many of you were sure that this result was due to including the presidencies of Herbert Hoover and Franklin Roosevelt in the historical comparison. Take them out, and the Democrats' apparent advantage would disappear.
To find out whether this is true, I contacted Ned Davis Research, the authors of the original study that I had quoted. They kindly reran the numbers just from April 1945, the month in which Roosevelt died.
Guess what. The same overall pattern still existed.
Here are the numbers: Since April 1945, the Dow Jones Industrials Average has appreciated at an average annual rate of 8.1 percent during Democratic presidencies, and 6.9 percent during Republican Presidencies.
In real terms, it is 3.8 percent vs. 3.1 percent, again in favor of Democratic presidencies.
So I don't think we will so easily be able to wriggle out from under the force of this historical pattern.
Mecro, my first words on this thread were "I got lucky". Thanks for your opinion, the market will definately try the downside at some point tomorrow (probably after an initial short-covering pop) and I will watch that activity. Depending upon the action, I will make my decisions on a day-to-day basis. Best of luck to you in your trading.