This column originally appeared on Real Money Pro at 10:12 a.m. EDT on Aug. 13.NEW YORK ( Real Money) --
"One of the most helpful things that anybody can learn is to give up trying to catch the last eighth -- or the first. These two are the most expensive eighths in the world. They have cost stock traders, in the aggregate, enough millions of dollars to build a concrete highway across the continent."To be sure, the last six weeks (and, for that matter, most of 2013) have not been fun for the ursine crowd, a fraternity that unfortunately includes me as a member. Once again, as has been the case throughout the market advance since the generational low in March 2009, the bullish crowd has outsmarted the bearish remnants. I have learned over the years that there is only one side of the market -- it's not the bull side or bear side; it's the right side. But Mr. Market is never obvious. He is designed to fool most of the people, most of the time -- and even as I write today's column, we meet this morning at close to the market's all-time high. There is certainly no arrogance in my bearish/top view expressed today, as some of my previous market forecasts have been wrong-footed in a bull market that has been a buy on every dip. Similar to Johnny Depp, who has experienced several high-profile and recent movie flops, I have been chastened (and I am poorer) based on my mistaken market views throughout this year.
-- Jesse Livermore
"Do not dwell in the past; do not dream of the future; concentrate the mind on the bagel and lox on the plate." -- Grandma KoufaxBy the same token, Grandma Koufax used to tell me that it is unproductive for me to dwell in the past. (She also told me to never put jelly on matzo.) Back in late May, I covered most of my shorts (with the S&P 500 at a 1560-1575 level), but I have been slowly expanding my net exposure throughout July and early August.
"The only thing to do when a person is wrong is to be right, by ceasing to be wrong. Cut your losses quickly, without hesitation. Don't waste time. When a stock moves below a mental-stop, sell it immediately." -- Jesse LivermoreDuring the last six weeks' market rally I have tried to manage risk, as I continue to remain negative on the market outlook. Still, my concerns are that:
- the Fed is about to taper; and
- the domestic economy will not be able to hold up in the face of a higher cost of capital (and rising interest rates).
Multiple Expansion Has Fueled the Rally in Equities
The S&P 500 index has increased by over 34% since the beginning of 2011, of which 28% has come from multiple expansion. During the same period, growth in corporate earnings has slowed. The trailing 12-month earnings for S&P 500 companies rose 2.4% in 2012 and another 2.5% for the first seven months of this year, registering the slowest earnings growth in non-recession years since 1998. Without renewed earnings growth, a continued rally in stocks driven by multiple expansion may be not sustainable. -- Scott Minerd, Guggenheim PartnersIn formulating my bearish opinion, it is important to recognize that most investors and strategists have made little change in their economic and S&P forecasts for earnings in 2013-2014, yet (as described above by Guggenheim Partners) they have comfortably accepted the rise in valuation from under 14x to over 16x this year and have almost universally stepped up their S&P price targets. This P/E expansion has occurred despite China growth issues/questions, a (market-unfriendly) trajectory of higher interest rates, evidence of a growing ineffectiveness of quantitative easing, the heavy weight of upcoming decisions in Washington, D.C., and disappointing bottom- and top-line second-quarter 2013 results (and guidance).
In terms of market calls, few academics or economists can match Yale University economics professor Robert Shiller. In his 2000 book, Irrational Exuberance , he argued that 10-year averages of corporate earnings smoothed out the ups and downs of the business cycle. Then, using this "cyclically adjusted" level of earnings and comparing it to current stock prices, he claimed to generate a better version of the P/E ratio. Shiller's timing couldn't have been better. The "Shiller P/E ratio" was at an all-time high in 1999-2000, a clear signal of overvaluation and a reason to sell.Today, Shiller's valuation work says that stocks are back to being in overvalued territory. At the end of July, Shiller's ratio was 23.8, the highest since 2008.