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Energetic
Forum Captain

Total Posts: 1491
Joined: Jun 2004
 
Posted: 2017-12-21 21:23
Would anyone agree or disagree with my (US-centric) view that there will be no more good news for the market for quite some time so it's time to sell?

For every complex problem there is an answer that is clear, simple and wrong. - H. L. Mencken

EspressoLover


Total Posts: 348
Joined: Jan 2015
 
Posted: 2017-12-22 08:30
I'm definitely not a bull, but to play devils advocate: earnings. If analysts are anywhere close to the mark, 2018 should be a gangbuster year for corporate earnings. GDP growth is consistently clocking above 3%, consumer confidence is high, homebuilders are on a tear, and labor costs are still cheap. There's a really well-timed synchronized business cycle expansion across all the major global economies. US corporates now make something like 40% of their profits overseas, so they're benefiting from high EM growth rates. Domestically, companies keep acquiring more monopolistic pricing power and market consolidation, because apparently antitrust law has become a hypothetical concept.

I mean even given all of that, equities still scare the hell out of me. At current valuations everything has to keep firing on all cylinders. Growth slows down even in just one major economy, then companies will start missing their quarterly targets. Inflation picks up: rates rise and P/Es must contract from their sky high levels. Oil prices collapse and there's real risk of contagion from the energy sector. Chinese hard-landing: duration loses its bid, rates rise and P/Es contract. Real estate contraction: consumer confidence collapses because rising home values are the only thing making up for stagnant wages.

That's not even getting into all the macro headline risk below the surface. We're only four weeks away from a government shutdown. The North Korea situation hasn't been solved at all. Saudi Arabia and Iran are a hair away from turning the Persian Gulf into scud missile volleyball court. ISIS terrorists are apparently morons, but if they keep making attacks every couple weeks, given enough tries they'll eventually pull off a 9/11-esque massacre. The US and Russia have basically restarted the Cold War. Anti-EU populists are still improving their polling in nearly every Eurozone country. And there's a very real possibility of a constitutional crisis in the US within the next 12 month.

Plus how much of the inflow to US equities is hot-money performance chasers. Seems like if equities correct even a little, we'll see a big unwind. But still if things don't go bad, 2018 could possibly be as good as 2017 for US equities. So, I say the market's basically short gamma. No news seems like the best news for bulls.

Good questions outrank easy answers. -Paul Samuelson

day1pnl


Total Posts: 47
Joined: Jun 2017
 
Posted: 2018-01-03 23:00
"No more bad news either!" - Cdxhy1087

In regs to current valuations, don't think they are just a little bit inflated - we have a whole generation of traders who has never seen a "real" price let alone a bear market. Will be interesting when/if everyone has to get out the door simultaneously in that neg gamma sense described below. That said, we are probably still going to grind tighter in 2018..

Cheng


Total Posts: 2856
Joined: Feb 2005
 
Posted: 2018-01-04 09:52
Disclaimer: I have been modestly bearish for quite a while so you might want to take my thought with a pinch of salt.

@Captain: Are we talking about a short term punt (a few days up to a few weeks) or a longer term investment (several years, 10 or so)? I am no short term guy and have thus no opinion. As for long term, if you buy an S&P 500 ETF today and hold it for 10 years or so you probably end up at the same index level as today but with a nasty drawdown in between.

@EL: Playing devils advocate for the devils advocate: when was the last time analysts got the earnings trend right? Imo never. They always start way to high and adjust downwards over the course of the year. Also those guys are usually tracking "operating" earnings (read: earnings without the bad stuff). GAAP earnings were way less impressive. Of course you can use operating earnings but please, please don't mix them with GAAP multiples. Operating earnings have lower multiples atached to them.
As for GDP growth, in my world this is driven by the number of people working (i.e. demography) and how much they produce per unit of time (i.e. productivity). The number of people working got lower and lower over the last few decades and unless the US open the borders and everyone with a pulse and some kind of qualification is allowed to seek a job this won't change imo. Productivity growth has also been on the low side. Given the amount of CAPEX spent over the last years (hint: not that much...) I don't forsee any miracles there, either. Bottom line: I would rather settle for something around 1%, maybe 1.5% real GDP growth. 3% is a pipe dream imo.

Some more depressing news...
Corporate profits as a share of GDP are down from their all-time highs (down from around 11.5% to something around 10% iirc) but still way above their long-term average (around 6.5%). The relatively higher shares of profits is driven by a lower share if labour. If you think this will continue indefinitly be my guest, I still believe in mean reversion (there are already some stories about tight labour markets and corresponding wage increases but I wouldn't call this a trend yet).
Normalized PEs (Shiller, say) are pretty f*cking high (27 last time I checked) compared to the long-term average (15 something). And this is even before adjusting for the abnormally high margins. Even if you believe that margins will remain high a run-of-the-mill PE normalization will cost you something like 45% (15/27-1). Don't start thinking about LTM PEs, unless you believe that LTM profits are a sufficient statistic until the sun goes out. I think you need some kind of normalization.

Bottom bottom line: I won't buy anything right now, rather accumulate cash. 0% interest is better than -40% loss...

"He's man, he's a kid / Wanna bang with you / Headbanging man" (Grave Digger, Headbanging Man)

Energetic
Forum Captain

Total Posts: 1491
Joined: Jun 2004
 
Posted: 2018-01-04 21:22
I am considering the tactics of switching from the existing 60% long position to cash. Dumping it all now vs. maybe 10% per month but starting when?

For every complex problem there is an answer that is clear, simple and wrong. - H. L. Mencken

Cheng


Total Posts: 2856
Joined: Feb 2005
 
Posted: 2018-01-05 08:36
Dunno whether I would dump it all. If you can stomach a 50% drawdown on your remaining equity exposure I would probably go down to 25% equities and 75% cash and cash equivalents (these T-bills look juicy lately) since you won't reenter the market at the precise turning point. Alternatively buy some OTM puts.

"He's man, he's a kid / Wanna bang with you / Headbanging man" (Grave Digger, Headbanging Man)

Cheng


Total Posts: 2856
Joined: Feb 2005
 
Posted: 2018-01-05 11:57
This could be interesting for you.

GMO Viewpoints: Bracing Yourself for a Possible Near-Term Melt-Up

"He's man, he's a kid / Wanna bang with you / Headbanging man" (Grave Digger, Headbanging Man)

ronin


Total Posts: 384
Joined: May 2006
 
Posted: 2018-01-05 16:54
It's very brave to call time on something like that.

Direction, yes. Timing, who knows.

If it helps, we had a small long bias for the first half of 2017. We got rid of it in June. Did better since we dropped it.


"There is a SIX am?" -- Arthur

Energetic
Forum Captain

Total Posts: 1491
Joined: Jun 2004
 
Posted: 2018-01-05 22:14
Cheng, thank you, a great paper. So far I'm inclined to gradually phase out.

For every complex problem there is an answer that is clear, simple and wrong. - H. L. Mencken

chiral3
Founding Member

Total Posts: 5068
Joined: Mar 2004
 
Posted: 2018-01-05 22:52
The thing with analyses is that they are essentially technical analysis from a historical perspective. If we are going to think top down, I think the real twist is in the last section, where he talks about FED and moral hazard. There really isn't a historical analogue for the amount and type of central banking intervention we've seen, all in the presence of a more global economy. It makes this all hard to extrapolate form the past and requires some bottom up thinking to get to a *less wrong* prediction.

Nonius is Satoshi Nakamoto. 物の哀れ

chiral3
Founding Member

Total Posts: 5068
Joined: Mar 2004
 
Posted: 2018-01-06 14:53
Incidentally, one of the better "predictors" we've seen lately have been simple sentiment scores for major indices. For instance, simply beautiful soup x SPX x reuters x general inquirer gives rather good T+10 signals that rise above the din of low correlation, unending passive investing, and single digit realized vols.

Nonius is Satoshi Nakamoto. 物の哀れ

EspressoLover


Total Posts: 348
Joined: Jan 2015
 
Posted: 2018-01-08 11:59
> For instance, simply beautiful soup x SPX x reuters x general inquirer gives rather good T+10 signals

Very interesting... Wonder if this would work with idio returns on single names. T+10's a really nice sweet spot for this, long enough where T-Costs aren't a major issue but short enough that Sharpes still look good with decent R-squared. Might be able to get really excellent risk-adjusted returns if you could do the same with 100+ orthogonal alphas.

Looked at something similar years ago, but didn't really find much. (Different horizon, library and source though.) Then again this current market's in a regime all of its own. So maybe this might have some juice.

Good questions outrank easy answers. -Paul Samuelson
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