Whoever Is Behind World Markets Really, It's not Hedge Funds

[Woodrow97]

I am looking for forward yields to equalize at 4-5%. Which means we are undervalued by 20-50% easy.

If interest rate will be 3% forever then we should be at 5000 with today’s earnings.

Anyone’s guess. But will be huge.

Here is chart I made of SPX earnings yield versus risk free rate (U.S. 10 YR). I know this has been shilled a lot in academia (Damodaran anyone?), but the correlation between them for a further market rally is poor. Look at the 90s! Rf rate stayed consistently above S and P EY for an entire decade. Would you have been short that market, betting on a 50% retracement?

 

[Woodrow97]

Dude the ALWAYS part is questionable. They’ve been buying back for so many years already. Haven’t seen the top yet.

Buy backs in recent years are also replacing dividends due to the tax advantage.

I showed the forexIG data. Retail gave up chips during the oct-mar shakedown and currently is at 3:1 short long.

The rally train has been cleansed and ready for the next push. The price action is too clear. We may screw around here for a few days then a big rally is likely into the earnings.

Look I get what you are saying, we have a -10% to -20% correction where the weak hands are shaken off the train, then the rally continues, yadda yadda yadda. But there is an important caveat:

Not every -10% to -20% drawdown is the same.

Take a look at the implied recession probability (calculated by FED treasury spreads) versus SPX:
In 2011 we had a -19.4% drawdown, IRP was <5%, weak hands missed the rally and were BTFOed.
In 2016 we had a -16.0% drawdown, IRP was <2%, weak hands missed the recovery and were BTFOed.
In Q1 2018 we had a -10.0% drawdown, IRP was <10%, weak hands missed the rally and were BTFOed.
In Q4 2018 we had a -20.0% drawdown, but IRP went from 10% to 27% during the Q12019 recovery?

I bought the dip in 2016, Q12018, and Q42018. However, this is not a normal correction. It's all a matter of basic conditional probability, same expected forward return as before, but the risks have increased 4 to 5 fold!

 

[srinir]

Here is chart I made of SPX earnings yield versus risk free rate (U.S. 10 YR). I know this has been shilled a lot in academia (Damodaran anyone?), but the correlation between them for a further market rally is poor. Look at the 90s! Rf rate stayed consistently above S and P EY for an entire decade. Would you have been short that market, betting on a 50% retracement?

View attachment 200310

Shilled in academia? You are clueless. It is a FED model, coined by Yardeni and it is pretty useless. For starters one is nominal and other is real yield.

 

[Woodrow97]

Shilled in academia? You are clueless. It is a FED model, coined by Yardeni and it is pretty useless. For starters one is nominal and other is real yield.

I have no regrets about being clueless on an useless metric.

 

[dozu888]

Here is chart I made of SPX earnings yield versus risk free rate (U.S. 10 YR). I know this has been shilled a lot in academia (Damodaran anyone?), but the correlation between them for a further market rally is poor. Look at the 90s! Rf rate stayed consistently above S and P EY for an entire decade. Would you have been short that market, betting on a 50% retracement?

View attachment 200310

I hear you. No model is perfect. But we all have to predict based on something. At the moment I just don’t see any other assets worth buying. Including cash.

 

[dozu888]

Look I get what you are saying, we have a -10% to -20% correction where the weak hands are shaken off the train, then the rally continues, yadda yadda yadda. But there is an important caveat:

Not every -10% to -20% drawdown is the same.

Take a look at the implied recession probability (calculated by FED treasury spreads) versus SPX:
In 2011 we had a -19.4% drawdown, IRP was <5%, weak hands missed the rally and were BTFOed.
In 2016 we had a -16.0% drawdown, IRP was <2%, weak hands missed the recovery and were BTFOed.
In Q1 2018 we had a -10.0% drawdown, IRP was <10%, weak hands missed the rally and were BTFOed.
In Q4 2018 we had a -20.0% drawdown, but IRP went from 10% to 27% during the Q12019 recovery?

I bought the dip in 2016, Q12018, and Q42018. However, this is not a normal correction. It's all a matter of basic conditional probability, same expected forward return as before, but the risks have increased 4 to 5 fold!

View attachment 200311

This stuff can get complicated quick. I don’t buy this IRP stuff. Couple years ago went to a lecture by Loreta Mester the Cleveland Fed President. She downplayed the significance of the spreads, citing market supply demand other than recession related reasons. Eg foreign funds flight to safety. I tend to agree on that. Too many factors affecting the yields.

 

[ironchef]

Maybe 20 years ago hedge funds had some smart people? I don’t know. But nowadays seems they are just the bottom of the barrel

By the way. Another evidence that the next equity push will be huge.

I think they hired too many PhD physicists, mathematicians, statisticians and economists. Too smart for their own good, they didn't get back in because of paralysis by analysis?

 

[ironchef]

I have no regrets about being clueless on an useless metric.

We the clueless ETers welcome you to our club.

 

[dozu888]

I think they hired too many PhD physicists, mathematicians, statisticians and economists. Too smart for their own good, they didn't get back in because of paralysis by analysis?

I call them bottom of the barrel because they think like amateurs. The forexIG data shows how retail got shaken out from oct to March.

 

[dozu888]

Thanks for the analysis. Buybacks are definitely a large part of the story, and I should elaborate more, companies ALWAYS buys back the most of their stock at the highest valuation levels. The amount of bids at recession lows (when shares are cheapest), are far less than what they are at the top, for the aforementioned reasons.

This maybe a chicken and egg thing. Money is easier to get when times are good.

This also goes with my question of ‘are we gonna run out of shares’. Corp bonds are at what. 3.5%. If you can borrow at 3.5 and buy back stuff yielding 6. Why not. This is partly why the yields will naturally equalize.

The question is where. And the Fed seems to have gestured 3%. On top of the 2% inflation target. So. S&p 5000. Here we come.