The Frogs of Wall Street

It seems like positive news is bad for business.

Tell someone about the stock market’s good tidings and your gaze may be met with something between stupefaction and haughty derision.

Apparently, I just don't understand what drives real economic activity.

Must be newspaper headlines then, eh?

Uninvested

The higher prices rise alongside in the absence of corrective action along the way, the louder the naysayers get. 

That’s not because of some secret knowledge.

It’s because they’re not invested.

Those on the outside of this market, whether what you’re talking about is tech, tulips, banks, real estate or cryptocurrencies, will always say those on the inside are being foolish.

And it sounds clever when they do.

Pessimism gives as much pop to an argument as it does damage to investments.

The Frog

You’ve heard the story about the frog sitting in a pot as the water slowly comes to a boil. The frog can’t tell how hot the water gets until it’s too late.

That metaphor applies as much to pessimism as it does to asset classes like bond funds.

Pessimism about stock market performance and an impending crash is like an obsession with the eruption Yellowstone Park; sure, it’s going to happen, but you can’t spend your entire life worrying about it.

And in both instances we will recover to conditions better than they were before.  

My concern for bonds also remains the same: There is simply NO good reason to own bonds. 

There are many different alternatives providing multiple benefits in the future that give much more flexibility than a guaranteed flat rate for 10 years.

The only reason people still line up to buy bonds at less than 2.55% is because they can no longer feel the water boiling around them.

And that inability to see outside the pot is down to fear. Pure and simple:

The 10-year is still less than half of the S&P earnings yield.

And Speaking of Earnings…

My hoped for choppy, corrective, worried earnings season with lots of noisy reporting numbers (yes, I did hope for that) may not get a chance to get started. 

The latest weekly update from Thomson on earnings is a barn-burner.

It’s the best increases seen since 2007, before Armageddon 2.0. 

For newcomers, Armageddon 1.0 was the Great Depression and Armageddon 1.5 was the Tech Crash in 2000-2003.

Here’s the Numbers:

• Fwd 4-qtr estimate: $150.32 vs. last week's $147.94
• P.E ratio: 18.5x
• PEG ratio: 1.40x
• S&P 500 earnings yield: 5.40% vs. last week's 5.39% (despite the 3% S&P rally for 2018, the S&P 500 earnings yield has actually increased the last two weeks)
• Year-over-year growth of fwd estimate: +13.24% vs. last week's 11.46%

(Source: Thomson Reuters I/B/E/S, "This Week in Earnings" dated 1/12/17)

Now I know that most readers are not numbers junkies like me. 

So, the point is that it’s HIGHLY unusual to have two consecutive big bumps up to start a year when rolling over for forward earnings. 

It simply does not happen. 

The Absence of Bull

The last big point in this major update set of bullish numbers is the substantial jump in the "y/y growth of forward estimate" to 13.24%.

It’s pretty darn solid to see an almost 200 basis-point sequential increase in the S&P 500's forward growth estimate, and in just the second week of a new year (which usually carries the big boost in week one). 

The forward estimate two weeks ago was $143.  We’ve since seen a $7 increase in the forward estimate in two weekly updates, and the season has just begun. 

I suspect $150s are in the cards by Q2, if not sooner. 

Finally, in a world of 2.50% - 3.50% interest rates (US), markets with expected growth of 13% and trading at 18x earnings is a historically very reasonably-valued stock market.

So, it will be interesting to see if we get any of the bulls to come back to the game.

The screens are (so far) green for the start, but there is a ton of headline chatter about "exuberance" and all the "experts" are telling the sheep how foolish they are to own stock.

The Wall Street Repeat

It reminds me of back in 1982 when 30-year bonds were paying 15%.

Back then Wall Street was telling the investor crowd that they were idiots to own them because of inflation.

"We will take those dirty old things off your hands for you - so inflation does not eat you alive...." 

Aye, right....

And guess who is selling investors all those 2.50% bonds today, "because they are safe and prudent as a part of every portfolio?"

Wall Street.

I rest my case.

One more time folks: Pray for a choppy, sometimes ugly earnings season. 

If we get one of those I'm taking bets on bullishness to fall back down into the 20s again.