The top 25 companies listed in the U.S. now trade with an average forward PE of just under 14. Typically, PE’s contract to 8-10 during recessions and expand to 17-18 during booms. Naturally, during a most confounding period of perpetual melt-ups, the FPE’s are now mid-range, essentially threatening doom to both long and shorts.
Should the economy improve, multiple expansion will be demanded. However, if we stagnate, expect contraction. It doesn’t matter what happens to NFLX or FFIV. Those are merely side dishes in the big scheme of things. The market is dictated by the whims of large cap stocks. Stocks like AAPL, XOM, MSFT, CHL, BHP and WMT demand your attention and force obedience upon those who attempt to fight the trend.
Just to rehash what has me “confused,” to put it mildly: The Fed is telling us things are not good, by their insistence to pursue reckless monetary policy. Everyone is assuming they will succeed. However, what exactly will they accomplish? $100 tomato, $400 gas?
Personally, it doesn’t make a difference if 30 yr mtg rates are 4.25% or 5.75%. The expense is negligible. Plus anyway, it’s not like the banks will, all of a sudden, open the spigots to the unwashed, allowing unbridled real estate speculation to re-emerge. What you view as nirvana, I see as a future disaster.
If the Fed is in the business of monetizing the debt, what will happen to their balance sheet when rates go up?
Answer: 100’s of billions in losses.
Which leads me to my next assumption: rates will never go up again, ever. If you are in the camp that puts the Fed on a pedestal, you have to accept the notion that the Fed will never allow rates to climb, due to their ridiculous exposure to the bond market, at historically high prices.
If that’s the case, well then, we are Japan. The Fed is preparing for 20 years of sideways to down economic activity. Or, this QE II idea is one big bluff, in an effort to push oil to $400, which will serve as an excellent and most efficient tax hike on the proletariat. So you know, I view commodity price increases as tax hikes.
If I am right about the sinister plans of the Fed, bonds will continue to outperform and commodities will serve as a safe haven of sorts for investors. Equities could trend high, most regrettably. However, should economic activity continue to bounce along the bottom, PE’s will contract, sending the markets lower.
The only reasonable argument for higher multiples is higher rates, due to robust economic activity. If that’s the case, then QE II will never happen.
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First
First again – its my lucky day.
Perhaps it is time to put aside your bias and start investing again?
The fed will keep rates low and keep printing money trying to reflate until nobody wants the hold its debt anymore. The bond bubble will burst, foreign creditors won’t roll over their short term instruments, and the fed will print more in an attempt to pick up the slack. The dollar will continue to fall, ultimately leading to a horrible, horrible situation. The only option is to deflate the bubble that started 25 years ago. High interest rates, increased savings, bank failure, rebuilding, transition back to an industrial economy, and reorganization of the work force. Don’t fight the fed’s own destruction. It has clearly chosen its path.
Chivo
That scenario is impossible, especially since the Fed will be buying bonds. Rates cannot go up, for if they do, The Fed will melt away like a candy bar in Arizona.
Well said, Fly.
I wish that people would stop acting as if the Fed is stupid or acts independently of its debt-holders.
How do you factor in the IMF/BIS/World Bank calls for a new reserve currency to replace the US dollar? I notice that you never factor this in. Big assumption, IMO, assuming this is something to ignore altogether. That assumes these folks have zero political power in our country, or any ability to affect our economy.
The BIS is a closed organization owned by the 55 central banks. The heads of these central banks travel to the Basel headquarters once every two months, and the General Meeting, the BIS’s supreme executive body, takes place once a year.
Thus, the Fed is directly tied to the BIS. A little hard to ignore, eh?
A related article…
THE IMF CATAPULTS FROM SHUNNED AGENCY TO GLOBAL CENTRAL BANK
http://www.webofdebt.com/articles/imf.php
And yet, we sit aorund talking about the “Fed” all day, as if no higher banking power exists to affect what is happening in the US?
But the FED is capable of paying infinately amounts of money. Why should it bother them to invent some money to pay their high interest?
Just suggesting that expecting the unexpected is one approach.
Well said Chivo
The high interest rate scenario you dream of is impossible.
>The high interest rate scenario you dream of is impossible.<<
Not necessarily… The bond market is a lot bigger than a $1-$2 trillion QE program. On the other hand, as I saw someone write elsewhere yesterday (Bruce Krasting, I believe), once gasoline climbs over $4/gallon ]the Fed will be reeled in by the complaining screams of the masses.
You are thinking too much…
Just buy everything and short the Dollar. Nuff said.
One problem my friend: The MBS the Fed owns is INSURED by the Treasury. In other words, if interest rates go up, and the mortgage market craters, the Fed doesn’t lose, the taxpayer does. LOL@Umerika!
Well, that is a moot point, since they are one and the same. The losses cannot and will not be accepted.
QE2 is already happening – it is just dressed up in a daily POMO costume.
Oh and by the way… I’M A WITCH!
I bet you have information regarding China too?
China is full of shit.
POMO is not everyday, only certain days…they are posted at the NY Fed site…tomorrow is another one…but Thursday, Friday isn’t…….here is my problem with all of this….Copper is hitting LME highs of 2008, Speculators have been buying it up, but because demand for products are down why would anyone think that production and demand will increase with a higher price? Contex Container Ship rates are moving down, etc……AAPL market Cap for is just stupid.
Apple is the greatest company in the world. I have five iPhones in my house and at least 3 iPods and plan on an iPad for a special x-mas gift to myself in December. Ya know how many people in this world do similar? The market cap for AAPL is worth the growth…
AAPL will not exist as a company in 20 years. Think ENRON.
Folks can be into copper because they are scared of gold (historic highs).
Copper hasn’t had quite the run yet. It’s another hard asset.
However, it’s not just a metal you look at or make watches out of.
Copper is needed to build “everything”. (industry)
(not that it will happen soon.. Or for all I know a long ass time).
However since it hasn’t had such a run yet the risk reward is greater than gold.
If every country Is going to debase their currency..then copper is a good place to possibly go.
If cash is “worthless” .. Hard assets will go higher. And if demand does come back for industry.. Copper will go higher.
Do not take physical delivery. Just trade it.
Dr.Copper is what everyone watches…China Govt has been buying it up as a hedge…but there is a delicate balance of China getting hit with major inflation problems over all of this. Yet, as in the past…China Govt knows how to slow that down and that is selling from the SR that they have built up.
China is investing heavily in infrastructure, which requires a lot of copper. In the west we are pushing the solar and wind energy generation. All those wind mills have windings. The windmills and solar cells have to be connected up to the grid. We are expanding and modernizing our power grid. Hybrid cars use 10X the copper of gas only cars. Electric cars are coming, which will use much copper. So copper demand is not just about wiring in houses and commercial buildings anymore.
i still contest that the Fed has more bark than bite. QE2 will disappoint and then expanded just like Q1.
Just a thought… Remember when Greenspan lowered rates to 1%? That didn’t truely have major impact on the real economy until things turned around in ’03. Think about how many “programs” have been implimented over two years… The amount is astounding. Now they do QE2 along with all the other QE activity and you could get something that could go full steam for the next 3 years.
It worked last time and that was childs play.
But times were WAY different, as the banks did not incur 1.8 trillion in losses several years prior. The low rates work only when banks lend money to small businesses.
MS raises gold price targets. GS raises copper price targets. More pain on the menu for tomorrow.
The $140 a barrel peak in oil happened right along the same time GS raised its price target to $200.
The credit crisis has already been solved, now we just need the economy to break the downtrend (which has already happened).
Banks are lending again. Not like they used to but alot more than 1 year ago. Cycle is just starting, credit expansion to borrowers is just trinkling in now. They will get greedy again.
You sir, are a madman.
The credit crisis is far from solved. What you see is a wounded soldier with a band-aid and some morphine standing at the rampart pretending to be a viable bank.
Banks lending again? Not even close.
This market rally has zero nexus with economic recovery or normalized credit.
Fly, Still holding TZA?
Ah, young Dr. Le Fly. Your money management skills and techniques are world renound.
But only now–with this post–do you have the articulated clarity you seek.
The endgame is your $400 oil that nobody can afford will come crashing back to $50. Then and only then will you have the endgame. That is when we truly become Japan as our equity market is drawn and litterally quartered. Just like Japan.
In the meantime, it is still a long way to $400 oil and flat yield curve, at zero percent…
Fly, I love that post…Question; If debt issuers are downgraded due to a larger risk of defaulting…that could send rates to the roof, no ?
free money – really:
http://www.boston.com/business/ticker/2010/10/no-interest_loa.html?p1=Well_MostPop_Emailed2_HP
Bullish
The credit crisis has not been resolved. Are you mad? Did you see commercial re vacancies hit new highs today, 17%+?
Just because stocks are going up, that does not mean all is well.
Scott
You might be right. But i dont like the idea of 400 oil
vacancies up, but prices back to 2002 levels no less…
The cure for high prices is
high prices.
People were modifying behavior at $4/gal gas.
Japan’s interest costs are 40% of something
A 100 basis point increase would turn that into 60%.
Japan cannot let rates go up; nor can we.
Poorly parroted from: http://www.kingworldnews.com/kingworldnews/Broadcast/Entries/2010/10/4_Ben_Davies__Part_II_files/MP3%20Icon.jpg
If that doesn’t work, use this: http://www.kingworldnews.com/kingworldnews/Broadcast/Entries/2010/10/4_Ben_Davies__Part_II.html
If we have another melt up tomorrow, the PPT hybrid will surely exceed 3 thus extending the current overbought rating (2.95). That will be followed by a drop and Fly will finally be right but will not be able to resume his profane ways. Some bad earnings numbers may be able to stop this freight train.
You’re overthinking it
What he said.
Agreud … we go higher
If you keep this theme in mind, you will be safe:
We’re allllll gold diggers now!
__________
I bought SLW puts today. A straight up channel with thirty consecutive updays, culminating in a blowoff top,
always leads to a big selloff. They said the same things you are saying in the 80’s at the Hunt Brother’s
top in silver; and when oil hit $146 a couple of years ago.
never say always
The Hunt Brothers top was at about $48 — in 1980 dollars.
We’re at $22 in 2010 dollars.
That said, SLW is overbot.
_______
Are you increasing your SLW hedge?
No, in fact I took some off yesterday, in case we get the runaway after the break of the old $HUI highs yesterday. Nothing but free air there now.
____________
Read your Bibles. It doesnt end well for the unwashed, if we are in fact on the precipice of TEOTWAWKI. If not, then the deception continues.
The Capones of the Exchanges are an interesting take here as volume returns and futures speculation rises: CME, CBOE.
What was up with the volume and price action in LQD on Oct 1? Anyone?
Looks like some bullshit
It was. Amazingly, Zeeco [sic] busted the trade for me. All they said was that it was “system wide.” Only thing I’ve seen on the net about it is:
http://seekingalpha.com/article/228051-the-dark-side-of-stop-loss-orders
From zerohedge:
http://www.zerohedge.com/article/hundreds-thousands-trades-canceled-lqd-flash-crash-confirms-sec-are-bunch-corrupt-bumbling-b
From Barron’s:
http://blogs.barrons.com/focusonfunds/2010/10/01/officials-no-flash-crash-with-lqd/?mod=yahoobarrons
I can grow my own tomatoes, and some potatoes. I will drive a car that gets 3000 mpg!!!
When is this site going to get up to the times and include a “like” button. I want to like things here in the fly kingdom.
karma is no more, also is gone the edit feature quite sadly of course not
+1 karma – See, it still works.
Dr. Le Fly, assuming that QEII is just a bluff, haven’t the treasury front runners pummeled term premiums enough for the Fed for them to take a short term hit to their balance sheet when capital flows into stocks and commodities?
Wouldnt it also mean that front runners have over shot on dollar weakness expecting too much printing?
As a historian, the bearded clam knows that it’ll still be years before the retail investor heads back to stocks, meaning these POMOs are the only thing holding up equities, and are being done for the sole purpose of liquidating stock markets in a more orderly fashion instead of all at once via HF redemptions. Sure, the balance sheet takes a hit when yields increase (not too big) and commodities rush up in the near term, but when the Pomo music stops (and it’ll be well before the retail investors is back in), equity indices take a swan dive, and capital comes rushing back to both the dollar and the treasuries, shoring up the balance sheet, reducing commodity prices relative to the dollar, and most importantly, letting the Government borrow at super cheap rates, so whatever fucktard is in office has a better chance of working off gov’t debt (or at least grow it slower). All this based on the assumption that Bernanke thinks were in a 13-16 year bear with real job destruction and his chief goal is to maintain dollar reserve status and be in a position to use conventional policy one day.
Like most of your readers, I am a glutton for pain and would appreciate you destroying my reasoning with gold-plated clawhammers.
Man, nothin on my thesis? worked hard on that.
Maybe we need to get the housing market going again, get it ramping up just a little. That would seem to solve a lot of problems. But not go crazy with every used car salesman becoming a mortgage broker.
Who in their right mind would lend the tapped-out, unemployed consumer money to by houses at higher prices?
No one.
Fly
Higher interest rates will be a natural force once people start selling bonds after the burst. The bond market is a bubble 25 years in the making. Who the fuck is going to give America money at 2.5% for 10 years as America has made it fully clear it’s going to print away any real earnings. WTF? Might as well take that money into the bathroom for your next meeting with Mr. Toilet. You said it’s impossible to have high interest rates because the Fed will buy bonds. I noted this. The fed will print to try to pick up the slack of others selling. It won’t work.
Scott
We are not Japan. We have to pay back our foreign creditors. (or tell them to fuck off) The inflation will hurt as we print off our debt. Look at bond market inflows–think about where the money will go when they turn to outflows.
Furthermore, keynesian economics is proving faulty and borrow to consume economies don’t work.
Fly two important points from my perch, one of which could be very stupid question from your perch
1) First, the stupid question – Lets assume for a second the rates rise in a year or so. Wouldn’t Fed have the ability to inject more M3 money supply to cushion its fall from lower bong prices? The increase in M3 shouldn’t exacerbate inflation because of the presumed increasing interest rates. I must be missing something really obvious here. What am I missing?
2) There is a very good possibility that not so distant future will see at least one if not two disruptive technologies in our generation that could stimulate consumer demand, spur lending, and contribute to overall growth. There are four streams of different technology that look promising – Nano, Wireless and Cloud, Alternative Energy, Genome based health care. Surely at least one of them has a potential to become as disruptive as Internet. When this happens, wouldn’t that mitigate some of the risks you are mentioning above? For instance, businesses will have an incentive outside of artificial government triggered stimulus, to ratchet up their borrowing and banks will also have a similar incentive to lend with comfort and at a higher rate than what the treasuries are yielding. Remember, the reasons why banks are not lending are not just because of uncertainty in regulatory environment but also and I would argue, more so because of uncertainty in growth. If the latter is no longer there, that could be a game changer.
Would love to know your thoughts on above.
Correction. “bong prices” = “bond prices”
SR – Lower bong prices sounds better.
+1 Karma
1) Would increased rates strengthen the dollar/hurt exports and significantly increase national debt payments?
2) So sorry, “not so distant future” in disruptive tech is 10-20 years. Getting something to work in the lab is nowhere near high qty production.
But Tepper says stocks will go higher under any scenario
QE3 – QE3 – QE3…after these ADP numbers, I’m starting the chant early.
5 Year T-Note just hit a record low @ 1.14%…So after inflation and taxes,enjoy whatevers left…Zero rates keeps the bankers happy, they no longer have to pay to hold deposits…it keeps China happy, no declines on their treasury holdings…it keeps Uncle Benny happy,we couldn’t afford the higher interest payments on the debt anyway….WE ARE INDEUD JAPAN
Some people see the glass as half full. Some see it as half empty.
The point is, the glass is twice as big as it needs to be. That’s a wasted resource. A whole ‘nother glass could’ve been made with that suplus material.
Use your brain, FUCKERS.
excellent….
Hang Seng got rejected at 52-week high…worth watching…could be double top?
Q3 and Q4 will be needed after today ADP number.
But, stocks will continue to go up as they are pricing in Q3, Q4, and possibly Q5.
Fly
We are far different than Japan. Our debt is owned by other countries. The Japanese debt is recycled from within.
We are at the mercy of the world when it comes to rates. If the Fed is forced to replace these buyers then we will see pure printing and a weaker dollar which triggers your 400 oil scenario.
This is not Japan over here…It’s far worse.
This is an exact replica of what I said before. Not dissing you theedge111, just saying that this reflects how I feel exactly.
There is nothing wrong with $400 oil. Gets us out of those fuckin’ SUV’s and gets
us walking and riding buses.
And while we are at it, there is nothing wrong with 10% inflation for 4 or 5 years.
Gets the minimum wage uop to $12, gets the retirees some much needed CD income,
bails out the pension funds, and screws the rich muni bond owners.
are you mad!
first off you obviously live in the city and assume the food at your grocery store just “magically” appears, like rain from the sky, it’s just “there” and little elves scurry about late at night when it closes and re stock the store so the next morning it is magically full again.
First off, as oil goes up, everything in your life goes up. What do you think runs the engines in the tractors across the world that plows and preps fields for crops? oil.
What do you think powers the trucks that deliver the food products to the store? oil.
What do you think is made from crude oil? just gasoline? you need to wake up, everything from the soles of your shoes to the tires on your car, to the tupperware in your refrigerator to the fucking seal on your refrigerator door is made from this crude oil.
if oil goes to 400.00 then your cost of living increases by the same. Do you think you will have a 400% increase in your income per year along side this?
wake up.
You ever hear of natural gas, in vast DOMESTIC supply and dirt cheap?
You ever hear of T Boone Pickens?
How close is the closest natural gas filling station that could be used to fill up your natural gas car that you don’t have?
Answer: You don’t know
And he’s ignoring the products made from petroleum — solid products — that cannot be made from gas.
_________
I just sharted.
yea…can’t wait until I am riding my bike through 4 ft snow drifts at -30 below zero when the busses are shut down here in Fargo, ND. You hipster city boys think everybody lives in a balmy metro.
You choose to live there, Dipstick.
Maybe it’s the 3.4% unemployment
Maybe it’s that we are a hop skip and a jump from 10,000 lakes
Maybe it’s the 100 degree summers
Maybe it’s that I can buy a 5 bedroom house for that you buy a studio apartment for
You choose to live there…Fuck Off with your bikes and bus stops bull shit. The wind blows from the west around here and it’s the only fresh air Minneapolis, et. all get when the seasons change.
$400 oil = $16/gal for gas
diesel is higher
What do you think that bus ride will cost w 20/gal diesel?
If everyone takes the bus, do you think there will be room for you?
No problem, they will just 4x the size of the bus fleet, hire some new drivers by next week & everything will be fine
Bus rides are free. Taxpayers provide.
Run the buses on nat gas. Doesn’t take any Einstein to figure THAT out.
And where I live the buses run with an average of 2 passengers on board.
And why are you clowns ignoring my corollary of 10% inflation for five years?
Uhmmm, because you’re a dumfook?
The IMF (our owners) have publicly called for a world currency to replace the US dollar.
The USD is bye bye. The IMF is a god even higher the The Fly.
The IMF is owned by the US Gov’t, just fyi.
__________
Wanted dead or alive “the fly”
Wait, wait a minute..
What happened to the phrase, “fuck you, your banned??”.
Just when the whole world was going in the right direction, that phrase got lost.
Fly, say it aint so..
He’l have to change that to, “excuse me fine sir, you are banned”…no swearing until Dow 10k.
Fly For President!
I’m going down to my bank today, unwashed, to see if I can a couple hundred grand to go all in long in stocks.
http://cache.gawkerassets.com/assets/images/11/2010/10/cigarguyeverywhere.jpg
Dusting off my #84 Vikings jersey – Moss is back – next, will I be using my Dow 10,000 hat again?
I am putting all of my money in Mulligatawny soup and if you want some please do the following:
Pick the soup you want.
Have your money ready.
Move to the extreme left after ordering.
And if you don’t then NO soup for you!!
Half empty.
The glass is half empty.
Great post. We think alike.
My intenet is to purchase DUG at $53. Oil should be $50 a barrel, over $80 is a ripoff.