Over the long term equities are driven by two things. One, fundamental and the other sentimental.
The Fundamental
The fundamental driver of equities values is earnings. Earnings are a function of revenues (demand), margins (efficiency) and tax regimes. Earnings may vary over time, but trend positive.
The Sentimental
The sentimental driver of equities values (which is to some extent and at different times more important than earnings) is the multiple. What the market is prepared to pay for earnings at any particular point in time. It is a function of confidence and risk. The multiple the market is prepared to pay for present (and implied future earnings) varies from a high of 35x to a low of 8x.
Since bottoming in 2009 the market has been propelled by substantial earnings recovery and earnings growth ($30 EPS to $115 EPS), and by multiple expansion (11x to 16x). With earnings plateauing, future market performance is likely a function of multiple performance. If the multiple goes from the present 16x to 20x then the market can rise to 2300 (30% above the present level). Projecting earnings is relatively easy (or if not easy, more stable). Projecting multiples is a lot more difficult.
Showing posts with label trend. Show all posts
Showing posts with label trend. Show all posts
Wednesday, October 30, 2013
Thursday, May 16, 2013
Market Due A Pullback
The market is due a pullback. The odds are in my favor. I know that. x number of up days in a row. x number of days without a 5% pullback. But just because I know the odds are in my favor, doesn't make it any easier to sit on losing positions and watch them drain away.
The market is up 16% YTD. 21% in the last six months. The move has been relentless. 7% in just the last month. There has been little to no respite. A couple of minor pullbacks here and there. Other than that, it has been a tidal surge.
The move is flushing the bears and the laggards out. I feel it. I can feel the sentiment changing. I feel better about the future. I see things differently from what I saw them before. I can see the justifications for valuation levels, expanding multiples and all sundry of related thoughts that go hand in hand with this kind of move. Don't fight the Fed (or is it ABE and don't fight the trends/momentum). I have some short positions on that are getting pretty painful. I shorted for the wrong reason (valuation) and they are names leading the charge. I have gone against this thing for the last couple of months - selling into it, putting on shorts and directionally speccing on market puts. I know that you need to manage your risks. I know there are times to cut and run, take the loss, live to fight another day.
But I have been here before. I felt those same feelings, and I have not held to my conviction or had the patience to hang tough. I have spat the dummy and watched as I missed out on the rewards that were there waiting for me. Not this time. I am going to go with my conviction. I am going to have the fortitude to go against the flow. But I am also going to put in some stops that will minimize the damage should it continue to go against me.
The market is up 16% YTD. 21% in the last six months. The move has been relentless. 7% in just the last month. There has been little to no respite. A couple of minor pullbacks here and there. Other than that, it has been a tidal surge.
The move is flushing the bears and the laggards out. I feel it. I can feel the sentiment changing. I feel better about the future. I see things differently from what I saw them before. I can see the justifications for valuation levels, expanding multiples and all sundry of related thoughts that go hand in hand with this kind of move. Don't fight the Fed (or is it ABE and don't fight the trends/momentum). I have some short positions on that are getting pretty painful. I shorted for the wrong reason (valuation) and they are names leading the charge. I have gone against this thing for the last couple of months - selling into it, putting on shorts and directionally speccing on market puts. I know that you need to manage your risks. I know there are times to cut and run, take the loss, live to fight another day.
But I have been here before. I felt those same feelings, and I have not held to my conviction or had the patience to hang tough. I have spat the dummy and watched as I missed out on the rewards that were there waiting for me. Not this time. I am going to go with my conviction. I am going to have the fortitude to go against the flow. But I am also going to put in some stops that will minimize the damage should it continue to go against me.
Friday, April 26, 2013
Systematic Mistakes aka Bad Wiring
I am prone to the same mistake on different sides of the cycle.
When markets are trending up, I am reluctant to chase and look for a pullback to make an entry (but it either never is enough or I move the goalposts when it comes my direction).
When markets are trending down, I am reluctant to cut and run and look for a bounce to sell into (but it is either not enough or I move the goalposts...does that sound familiar).
If I could get those two elements out of my software, it would improve my decision making and results enormously.
The problem is that I am wired as a natural contrarian, and both mistakes imply a lack of conviction.
When markets are trending up, I am reluctant to chase and look for a pullback to make an entry (but it either never is enough or I move the goalposts when it comes my direction).
When markets are trending down, I am reluctant to cut and run and look for a bounce to sell into (but it is either not enough or I move the goalposts...does that sound familiar).
If I could get those two elements out of my software, it would improve my decision making and results enormously.
The problem is that I am wired as a natural contrarian, and both mistakes imply a lack of conviction.
Friday, December 18, 2009
The Key to 2010
Q. Will we go up by more than 10%, or down by more than 10% from current levels in 2010? Ans. Yes.
The key to having a really good 2010 will be picking which comes first. I'm pretty sure both will happen, but if you get the call right it can make for a much more enjoyable year. Despite my skeptical bias on the longer term outlook, it seems to me that the odds are stacked toward an upward move of 10% first.
Reasons supporting that contention: growing confidence in the economic recovery; increasing signs of an economic recovery; current market trends and momentum are supportive; investors coming out of their bunkers; cash at 0%; big money is positive; still large amount of skepticism and risk aversion (sentiment is supportive); continuation of the carry trade; the optimism of entering a new year and a new decade; ongoing relief that catastrophe has been averted; the scramble to get back in; the confirmation bias; recent market consolidation sets us up for the next move higher.
Factors mitigating that contention: market needs a break after a 65% bounce; the psyche is fragile; signs of reversal in the trend; investors pulling in their wings and putting money in the bank after a good 2009; focus moving to fiscal/monetary exits and outstanding systemic risk factors; growing risk aversion; a crowded reflation/carry trade; increasing doubt in the sustainability of the recovery.
The key to having a really good 2010 will be picking which comes first. I'm pretty sure both will happen, but if you get the call right it can make for a much more enjoyable year. Despite my skeptical bias on the longer term outlook, it seems to me that the odds are stacked toward an upward move of 10% first.
Reasons supporting that contention: growing confidence in the economic recovery; increasing signs of an economic recovery; current market trends and momentum are supportive; investors coming out of their bunkers; cash at 0%; big money is positive; still large amount of skepticism and risk aversion (sentiment is supportive); continuation of the carry trade; the optimism of entering a new year and a new decade; ongoing relief that catastrophe has been averted; the scramble to get back in; the confirmation bias; recent market consolidation sets us up for the next move higher.
Factors mitigating that contention: market needs a break after a 65% bounce; the psyche is fragile; signs of reversal in the trend; investors pulling in their wings and putting money in the bank after a good 2009; focus moving to fiscal/monetary exits and outstanding systemic risk factors; growing risk aversion; a crowded reflation/carry trade; increasing doubt in the sustainability of the recovery.
Thursday, December 3, 2009
The Cash Dilemma
What do you do as an investor if you have cash sitting in the bank gathering dust, the markets are running, and you see inflation in the outlook?
What do you do if you are a corporate with cash burning a hole in the balance sheet, shareholders demanding a return on investment, and you see inflation in the outlook?
You deploy your cash.
ZIRP forces cash from the sidelines into the market, almost irrespective of the fundamental outlook.
Investors are scarred and highly skeptical of the markets, and are not surprisingly reluctant to leave those sidelines. But many have no option. That cash is slowly but surely getting squeezed back into the markets.
What happens if/when that cash is redeployed and the market fesses up to reality? A potential disaster waiting to happen.
What do you do if you are a corporate with cash burning a hole in the balance sheet, shareholders demanding a return on investment, and you see inflation in the outlook?
You deploy your cash.
ZIRP forces cash from the sidelines into the market, almost irrespective of the fundamental outlook.
Investors are scarred and highly skeptical of the markets, and are not surprisingly reluctant to leave those sidelines. But many have no option. That cash is slowly but surely getting squeezed back into the markets.
What happens if/when that cash is redeployed and the market fesses up to reality? A potential disaster waiting to happen.
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