The bulls will have to watch how the market behaves in response to news, such as the upcoming Earnings Season and the political posturing that is likely to occur over the Debt Ceiling, in order to discern the likely direction of the next major move. So what now? We all know that the economy remained sluggish in Q4, so earnings will not be great. There are some basics that you need to know before playing in the share market. It happened during the unique boutique market bubble of the late 90′s, but then occurred again just briefly during the 2006-2007 period when the valuation broke the 100% range in Q3 2006 and stayed above that range for about a year. If these regulatory reviews occurred anywhere but in China, investors would criticize Ma for speaking too freely and harming his business. Investors should therefore expect that the risk-on/risk-off environment should continue until the end of this decade. I wrote about this topic in 2011 (see A stock market bottom at the end of this decade) and cited two demographic studies by the San Francisco Fed and by Geanakoplos et al. You are looking for information about the stock market for beginners.
Can their children and grandchildren support stock prices at these price and valuation levels? Indeed, Warren Buffett uses a similar ratio of Market Cap to GNP as a valuation measure for stocks. For the first time since the recovery began, Warren Buffett’s favorite valuation metric has breached the 100% level. Investors follow large institutions and investors like Warren Buffett, who is known for quality trades. Investors expect dividends to grow at an annual rate of 9% into the future. Investors commonly base their expectations on reports published by analysts. I understand that analysts are too bullish in their multi-year forecasts — basically following trends with no allowance for bad news. If estimates are too bullish in the long run and too bearish at the time of the report, there must have been a “crossover date” when the forecasts were pretty good. These stocks can move at any time and I will usually buy them if I see that they are breaking through their high of the day.
First of all, the SPY to TLT ratio as a measure of the risk-on/risk-off trade is also testing a relative resistance level and showing a near overbought reading where stocks have retreated in the past. The next major resistance level to watch will be located at $100. Watch this Earnings Season! In addition, Earnings Season will be a source of volatility for stocks. Except perhaps one stock – ill let you do the research – which I see as highly undervalued and that is where perhaps stock pickers come into their own picking undervalued stocks. See the chart below for historical reference. The above chart of Market Cap to GDP only goes back to 1950, in which we have only had one episode of a secular bear, or sideways market. The chart below from the St. Louis Fed shows MZM updated to 19 Sep 2008. Despite the Bear, Fannie, Freddie and AIG bailouts of the recent past, the narrowly defined MZM money supply isn’t growing at all.
In the current low-yield environment, money has been piling into the income investment theme by driving down the yields on anything that has a yield. I have bought the following companies from the market this month – Bonvests, Chuan Hup, EnGro, Frasers Property, GL, Hong Leong Finance, Hongkong Land, Hotel Properties, Keppel T&T, Low Keng Huat, Shangri-La Asia, SIA Engineering, Sing Investment & Finance, Singapura Finance, UOB Kay Hian and Yeo Hiap Seng. In early April, Caixin magazine ran an article titled “Fool’s Gold Behind Beijing Loan Guarantees”, which documented the silent implosion of Zhongdan Investment Credit Guarantee Co. Ltd., based in China’s capital. What will it be? Barry Ritholz warned about an “earnings cliff” and Q4 earnings will be an important test of his thesis. For the upcoming earnings season I remain open-minded and I will be very attentive. Until then, we will have to live with the ups and downs of a sideways and range bound stock market.