What Goes Up Must Come Down ... Right?

Is anyone else as scared as I am?

Every morning over the past month when I wake up, I dread hearing "and the DOW is poised to hit another all-time high today."

It seems that everyone is focusing on what's pushing this up. There are many justifications and speculations, but honestly does it really matter? The question we should be asking is when it's all going to come down.

Last night, I read about the dot-com bubble and there seems to be some parallels. Obviously, this is not 1999. But some of today's inflated share prices - many seemingly on nothing but good faith - are disconcerting.

Attached is a Journal article (the link was blocked) from today about the record IPO numbers from 2013. Yet another artificial (right?) inflationary occurrence.

Then again, there's the argument that the DOW is just an arbitrary group of numbers and is not necessarily the greatest economic indicator. It most definitely is; but share prices are based on expectations. The indices set those expectations and therefore the psychological limits.

I've digressed a bit, but the point remains.

I'm more nervous about the markets than a ceiling fan store owner with a combover.

Comments (19)

May 13, 2013

Inflaaaaaaaaaaaaaaaaaaaaaashun.

May 13, 2013

I wouldn't say the current market valuation is based on "nothing but good faith". The S&P P/E ratio is at ~19x (near historical averages) while in 1999-2001 it ranged from 33x-44x. It's not a perfect barometer, but it suggests that the market's not terribly overvalued. Still, I'm somewhat nervous about a correction in prices, but I'm not about to sell anything yet.

May 13, 2013

To follow up on what stvr says, if current profitability stays steady, the market is not unreasonably priced. However, if one looks at a metric like the Shiller P/E, or some other metric that averages out earnings over a longer period, the market looks very over-valued. Corporations are delivering strikingly good returns on invested capital right now, and the big question is whether this is sustainable.

May 13, 2013

Not necessarily overvalued according to damodaran

http://aswathdamodaran.blogspot.com/2013/03/a-swee...

May 13, 2013

dont think about it too hard or you'll blow your brains out. just trade

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May 13, 2013

Fed prints money. This artificially lifts up everything. Sooner or later there is an inevitable bust and the market collapses. Rinse repeat, ad nauseam. Don't worry, look at Japan, we can still print a ton more money. ;)

May 13, 2013

Realize that the Dow is at all-time (or 5 or 10 year) high most days over the course of a major bull market. Peak earnings are what really scare me. Although we seem to have some room in the US for non-operating EPS improvement (i.e. repatriate foreign cash and buy back stock).

May 13, 2013

It depends on how you look at things. The market valuations are certainly getting a bit frothy, though still nothing near what we experienced at points in the 90s, etc. So if you think stocks are overvalued relative to historical averages, then that is a valid analysis.

But, if you compare stocks to other asset classes, it would be entirely accurate to state stocks are cheap relative to fixed income and others.

There is no right or wrong. I think a 5% correction would be healthy or even a lateral move for a few weeks.

May 13, 2013
peinvestor2012:

There is no right or wrong. I think a 5% correction would be healthy or even a lateral move for a few weeks.

Definitely.

May 13, 2013

Klarman has an EXTREMELY negative outlook for the market. Spoke with another value hedgie - his thinking is along the same lines as Klarman but definitely not as bearish.

Personally, I'm taking profits in the next little while and going to sit on 30-40% cash.

You need to understand that a good firm, a profitable firm, and an attractive stock investment can be 3 unrelated things. -Epicurean Dealmaker

May 14, 2013

Damn. The title of this thread is very misleading. .

May 14, 2013

if the market goes down again already then wtf is the point of buy and hold? and capm and all that shit should be tossed aside because the concept of market risk premium would also go down the drain if there isn't actually a risk premium.

May 14, 2013

Four things to remember:

1. I don't think one can make the case that equity markets are mean-reverting given their link to real earnings growth over the long term. Bond rates on the other hand...

2. As one of the posters above said: don't forget inflation. The index in real terms is still much lower than what it was prior to the GFC.

3. QEinfinity - central banks pumping so much liquidity into the system resulting in higher risk asset prices as investors hunt for yield further and further out the risk curve. Also, at some point in the future inflation will rear it's head again. Also good for equities.

4. When the US economy turns around (exact timing is anybody's guess, but it will happen at some point) and start accelerating again it will support earnings growth, and off current reasonable valuations (PE of 19x ~ long term average) that tells me that stocks are a good place to be, at the margin.

May 14, 2013

I think that on the margin, there is less downside risk in equities than fixed income. As others have said, the Fed's printing pre$$ has raised all valuations but with the 10 year Treasury note hovering around 1.65% (or $98.35), we know that there is not a ton of room for them as an asset class to go up. That means in my mind that there is probably a 0 or negative expected return in the medium to long-term on these assets.

Stocks do not have that natural ceiling and they can be priced at whatever the market will bear so they probably have a more attractive return profile overall. If you are looking for some kind of bond-link return (i.e. something with income), dividend stocks (either common or preferred) seem like the play for now with dividend yields sitting somewhere in the 3-5% range.

May 15, 2013

And how much money are you standing to lose if all goes to $#!T?

May 15, 2013

Why are you scared? Can't stand a little bust with your boom?

May 16, 2013

Only reason equity market is rising inspire of all the negative or corny data points is that big market player is believing low-interest environment will be around in duration of that in Japan along with high unemployment rate and support significant higher earning growth hence buying up market.

If not(my premise) or corporations fail to post higher elusive earnings, look out below.

What you need to do?

Mentally?

Stop speculating besides a decent assumption and acknowledge yourself that stock market return is a zero sum game even though it doesnt look.

Action?

reduce or start scaling down your equity holdings and be fucking profitable patient or still look to find companies undervalued within your circle of competence and go to work to make your 80k salary.

Finance no finance - pay attention to your income growth rather than speculative stock growth.

May 16, 2013
johnfly:

Only reason equity market is rising inspire of all the negative or corny data points is that big market player is believing low-interest environment will be around in duration of that in Japan along with high unemployment rate and support significant higher earning growth hence buying up market.

If not(my premise) or corporations fail to post higher elusive earnings, look out below.

What you need to do?

Mentally?

Stop speculating besides a decent assumption and acknowledge yourself that stock market return is a zero sum game even though it doesnt look.

Action?

reduce or start scaling down your equity holdings and be fucking profitable patient or still look to find companies undervalued within your circle of competence and go to work to make your 80k salary.

Finance no finance - pay attention to your income growth rather than speculative stock growth.

Or you could listen to David Tepper and go balls-to-the-wall in equities.

You need to understand that a good firm, a profitable firm, and an attractive stock investment can be 3 unrelated things. -Epicurean Dealmaker

May 17, 2013
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