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Wednesday, 20 August 2014

Stock market bubble warnings grow louder

Some of the brightest minds in finance are sounding the alarm about a stock market bubble.

They aren't warning of an imminent crash, but their comments should remind investors that the current bull market -- over five years long -- can't last forever.

1. Nobel Prize-winning economist Robert Shiller: Valuations at "worrisome" levels.
"The United States stock market looks very expensive right now," Robert Shiller wrote in a recent column for The New York Times.
Shiller, a Yale University professor who is often cited as one of the most influential people in economics and finance in the world, created a metric that compares stock prices with corporate profits. The metric recently climbed above 25. That level has only been surpassed three times since 1881: 1929, 1999 and 2007.

Steep market tumbles followed each instance, including the bursting of the dotcom bubble in the early 2000s. The Nasdaq still hasn't fully recovered from that meltdown.

The Yale professor sounds bewildered by the lofty valuations for the stock market, which has nearly tripled since the March 2009 bear market lows.

But none of this means it's time to sell everything. Shiller notes that his gauge is a "very imprecise timing indicator" and said the market could "remain at these valuations for years."

2. Hedge fund king Carl Icahn believes there's a bubble.
"We can no longer simply depend on the Federal Reserve to keep filling the bunch bowl," the hedge fund billionaire wrote on Tumblr last week, referring to the numerous measures the Fed has taken to stimulate the U.S. economy.

Icahn described a "dangerous financial situation" that includes challenges tied to monetary policy, unemployment and income inequality.

He also said recent comments from Fed chief Janet Yellen at the International Monetary Fund "suggest, and I agree, that we are in an asset bubble."

Still, Icahn isn't calling for an imminent crash by any means. He acknowledged a bubble might not burst for "the next one, five, ten or 20 years."

It's also important to recall that Icahn currently owns billions of dollars worth of stocks. During the second quarter he even raised his stake in eBay (EBAY, Tech30) and added a new investment in Gannett (GCI). He still thinks there's value out there.

3. Ex-Treasury secretary Robert Rubin: Low rates could spark another financial crisis.
"The risk of excesses and the consequent instability have increased substantially," Rubin and Harvard professor Martin Feldstein wrote in an Op-Ed in The Wall Street Journal last week.

These financial luminaries (Feldstein served as chief economic adviser to President Ronald Reagan) didn't explicitly say whether a bubble already exists or if the Fed needs to hike rates now to prevent one.

However, they did advise the central bank to consider the possibility that the "excesses" caused by extremely low interest rates could "create financial crises."

Rubin and Feldstein pointed to record high stock prices, "dramatically" lower spreads on low-quality junk bonds and surging volumes of high-risk leveraged loans as alarming signs.

If hedge funds are holding assets that suddenly pop in a bubble, there's a risk of "contagion and snowballing effect" when they all hit the exits at the same time, the duo wrote.

Rubin should know about this threat. He was in charge of Treasury in 1998 when collapsing hedge fund Long-Term Capital Management imperiled the whole system. Ultimately Wall Street was forced to come to the rescue with a $3.6 billion industry-funded bailout.

Friday, 15 August 2014

Smart investors ignore the news

Chuck Jaffe

You can read the headlines, just don’t trade on them

If the market is making your head swim, you may be able to solve the problem by turning off, tuning out and dropping out of the 24-hour news cycle. 

That’s an odd suggestion coming from someone who works in the media, but what makes it doubly strange is that it’s prompted in part by the website I trust like no other, Beyond simply being my employer, I trust the site because I know personally the quality people and journalists my fellow staffers are. 

But, last month, MarketWatch set a site record for the number of unique visitors to its news pages, which set me to wondering what kind of messages we were sending to both new and increasingly active visitors at a time when they were presumably drawn in looking for some measure of market guidance to calm their nerves or keep them on top of the financial news. 

In the old days of newspapers, I would have gone through a stack of front pages and looked at headlines. In the Internet world with its 24/7 action, that doesn’t work, because a busy news site will change its front page multiple times over the course of a day, and there’s not necessarily a record of what the site looked like with each of those changes. 

So I looked at “snapshots” of MarketWatch’s front page, one each day — just the top screen, always the first one available after 5 p.m. ET — just to see what titles would have captured the attention of an average investor seeking some guidance, perspective and outlook after the market had closed for the day. 

Here were some of the highlights, in chronological order, from July (I have removed the names of experts quoted; it’s unimportant if you actually recognize the name, but highly important that a news site wouldn’t use the name of a non-expert): 

•‘This is not an average, typical or normal bull market’ [expert] says
•Today’s bubbles aren’t like the famous bubbles of the past
•If ever the stock market flashed a ‘sell’ signal, it’s now
•‘Rotten rotation’ could signal bull market is living on borrowed time
•[Expert]: U.S. stocks will be ‘very disappointing’ for 10 years
•A stock correction is coming, then more years of gains; [expert]
•[Expert] There’s a big hole in the bull case for stocks
•We’re in the third biggest stock bubble in U.S. history
•Not much fallout from Gaza, Ukraine? Wait a year, says [expert]
•[Expert]: Great Crash of 2016, third $10 trillion loss this century
•Greenspan says bubbles can’t be stopped without ‘crunch’
•Buy-and-hold investing is impossible
•Stock bubble is ‘beyond 1929 and 2007’: economist
•Stock trader who called 3 crashes now sees a 20% collapse
•[Expert]: Wait to be uber-bearish until autumn 

That’s just 15 examples — one of them from my own column — less than half of the investing-oriented headlines that caught my eye. I would have included something from an expert suggesting a big gain ahead, but there weren’t any of those atop the pages I looked at (they could have been there at other times of day). 

It’s no wonder after a barrage of headlines like that that the first monthly measure of investor sentiment released for August — the Investors’ Business Daily Economic Optimism Index — was down sharply. 

But at a time when the round-the-clock news cycle and the ubiquity of social media makes it possible to not only read the stories but to feel like you can influence the news — or at least the thinking of others who have seen the same stories — it’s hard to believe there will ever be enough agreement between the bulls and bears to believe an overall sense of optimism. 

They’re no more likely to get together and see the situation in a remotely similar way than impassioned Republicans and Democrats would be to suddenly see key issues the same way, allowing for fast, easy progress. 

Meanwhile, if this stuff confuses the general public, it enriches the sharpies on Wall Street.
Malcolm Polley, president of Stewart Capital Advisors and co-manager of Stewart Capital Mid-Cap SCMFX +0.29% , could not have been more blunt about how the headlines are helpful to the industry, even if all they do is confuse the public. 

“To the extent that the news and information turns into crap — and that crap turns into volatility — that’s good for me,” he said. “For us, it’s information that creates a dramatic downward move in a price, where the information might be valid, or it might be misunderstood. … The knee-jerk reaction is ‘This looks bad, let’s get out,’ but that creates opportunities if you understand the situation, rather than just reacting to what you read or hear. 

“We like the information — and that there’s so much of it available — but most of it’s just noise.”
Moreover, the constant prognostications have made it so that everyone seems to think they can be a market weatherman, capable of spotting the next squall, shower or sunny day. Relying on that purported “expertise,” rather than trying to be prepared for all weather conditions is how someone finds themselves sitting inside on the sunny days or getting rained on without an umbrella during the showers. 

“The headlines and forecasts are interesting and funny, but they should teach investors to just give up on the short-term trends, because even if you are right there you’re not right for long,” said Ned Riley, president of Riley Asset Management in Boston. “I sometimes make short-term forecasts too, but I’d rather be right in the long-term.” 

In short, reading the analysis and looking at the headlines is fine; it makes you a more informed investor. 

Acting on it is where investors get themselves into trouble. 

If you’ve been changing your actions based on the news, the headlines or the websites you favor and it hasn’t been improving your investment results, it may be time to disconnect your portfolio from what you are reading and listening to. 

Said Riley: “If you get the long-term forecast wrong – if you miss out on the trend for the next few decades because you’re concerned about what could happen in the next few weeks or the few weeks after that – that’s how you wind up in real trouble. … It’s not about how many corrections or downturns you called right if all those moves don’t add up to making real money over a lifetime.”


The Recession's Over: Clean Your Financial House and Win

If you were an operations leader during the 2008 Financial Crisis and deep ensuing recession, you probably spent a lot of time on the phone like I did, literally begging vendors and business partners not to cancel credit lines or change payment terms vital to keeping a business afloat.

If that's the case, none of us were alone as total credit market debt held by American businesses peaked in 2008; contracting by $247.7 billion in 2009, the worst year of the downturn; not reaching 2008's levels again until 2011 or 2012.

So what happens when nearly a quarter of a trillion dollars in business credit is siphoned out of the economy in one year, customers pay you slowly for past business, banks stop lending, and customers stop buying new products?

Welcome to the world American COO's, CFO's, and CEO's faced just a few years ago: a period of intense struggle and fight or flight mode for many of us.

Thankfully, business lending regained traction, increasing from $11.66 trillion in 2008 to $13.60 trillion in 2013 and there's no longer scores of doom-and-gloom reports about small business owners who had their business credit cards cancelled with little notice from lenders.

Now that the "worst" seems to be over in this area, hopefully, business leaders are able to breathe again and get back to growing their companies after several tough years.

Here's some things to consider moving forward:

Clean Up Your Balance Sheet: If you still have unpaid balances with business partners, tally them up, formulate a realistic plan to retire your debt, and contact the vendors as soon as possible. Americans are a very forgiving lot, even in business, and professionals that you work with at one company can easily become new business partners in another organization someday.

Additionally, it's much easier to reinstate cancelled or dormant credit lines with vendors once you're paid up with them; providing you more resources that you can leverage as you go out to win more business and grow your company.

Shore Up Your Banking Relationships: Before the downturn, we worked with a fantastic business banker. He looked like a winner, was smart as a whip, and always had half a dozen ideas for helping us improve our business and maximize our relationship with his bank. Unfortunately for us, our banker received a promotion and we never "took" to his replacement; generally feeling that this individual had little sense of our business needs or our business in general.

However, in 2010, our business hit a rough patch and my weak relationship with our new banker became glaring; leading to us to briefly "audition" replacement banks, before being reassigned to work with a more proactive banker at our home bank.

Don't make the mistake I made several years ago. A growing business needs strong financial relationships and I didn't ask our new banker to lunch or bring them into our office to see if they had any genuine ability to help us. Instead, during a tough time, I worked with a stranger and that's exactly how our new banker treated us.

Now that the downturn's over and hopefully your overall business and balance sheet is in better shape; this is a great time to be scheduling lunch or a meeting with your business banker when you don't need them, so you can draw from a well filled with water instead of the dry well I dipped in four years ago.

Reward Your "Foxhole" Partners: Who stood by you through thick-and-thin when things got rough in 2009 and 2010? The business partners who didn't shut off your copiers or seize your computer equipment when you couldn't make regular payments and struggling to bring receivables in.

If you haven't done so, those business partners should be thanked and lionized by your organization. They stood by you during the worst of times; imagine what kind of partners they'll be now that things are improving.

Punish The Cowards: Who cut-and-ran when things got rough in 2009 and 2010? The business card issuer who cut your credit line by 70% or the vendor who put your account on cash-on-delivery (COD) status when you were trying to complete an important client assignment.

If you haven't done so, those business partners should be put under review by your organization. They didn't stand by you during the worst of times; why reward their cowardice and lack of faith in your business now that times are getting better.

Aren't you glad it's not 2009 or 2010 anymore?

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