Markets were under intense pressure earlier today, with the Dow Jones Industrial Average down almost 400 points. Most indexes were down 2 percent or so around the globe before recovering some of the losses.
As is often the case during big market swings, numerous narratives attempt to explain the causes of the market turmoil. Consider the following headlines:
• “U.S. Index Futures Tumble as Microsoft, Caterpillar Disappoint”
• “U.S. Stocks Tumble After Downbeat Data, Earnings”
• “Ukraine crisis: EU leaders warn of more sanctions against Russia”
• “Microsoft Gave All Kinds Of Gloomy Warnings During Today’s Earnings Call”
• “Greece and Europe Dig In on Bailout Terms After Syriza Victory“
The only genuine surprise on that list was an unexpected drop in durable goods orders of 3.4 percent in December.
Let’s take a look at the “news” that supposedly drove today’s stock market.
Caterpillar missed fourth-quarter earnings expectations and lowered forecasts for the coming year on (surprise!) plunging energy prices and slower European and Chinese sales . Procter & Gamble blamed lower earnings on the stronger U.S. dollar (shocker!), while Microsoft said that software-license sales for PCs declined (who ever could have seen THAT coming?).
Can Apple save the market? Tune in after hours for the answer. What drama.
Apple iPhone sales blew away the analysts expectation by more than 10%. So everything is ok now. The next time something needs to be built, they can use their trusty iPhone app instead of the old-school Caterpillar equipment.
“Understanding the mathematics of mean reversion and valuation helps as well, as does weighting your holdings toward less expensive assets”
That latter bit is very difficult to do:
Median NYSE Price/Earnings Multiple at Post-War Record
http://www.wellscap.com/docs/emp/20150108.pdf
“The median New York Stock Exchange (NYSE) stock is currently at a post-
war record high P/E multiple, a record high relative to
cash flow, and near a record high relative to book value!”
If you care about price paid there really is nowhere to hide. This piece doesn’t discuss it, but I’d also point out that a startling number of so-called “blue chips” have very little tangible book value; some indeed have negative tangible book value. And of course, with the tag-team Fed and ECB QE’ing it up for the indefinite future, things will only get worse. It’s arguably the worst time ever to be an investor (as opposed to a speculator, who have their returns guaranteed indefinitely).
please, gdp has been miscounted since the early 2000’s at least. Maybe even since 1996-7. Higher gdp makes prices more understandable. It also means the financial crisis was pure bs and artificially created.
Basis for assumption of miscalculation of GDP?
The durable goods thing was the best. It really only fell .8 when you take out transportation, which will be added back in January.
Lower earnings is par for the course as the expansion matures. Poor sampling kills………..
One of the things you have been doing is “outing” forecasters. Perhaps using the current weather situation people might perhaps learn.
“Why were the forecasts so bad?
It’s simple: Many forecasters failed to adequately communicate the uncertainty in what was an extremely complicated forecast. Instead of presenting the forecast as a range of possibilities, many outlets simply presented the worst-case scenario.”
http://www.washingtonpost.com/blogs/capital-weather-gang/wp/2015/01/27/why-the-snow-forecast-for-new-york-city-was-so-bad-and-what-should-be-done/?hpid=z3
well its been shown that we need ‘simple’ explanations for every thing, see politicians
One of the things you have been successfully doing is outing forecasters. Perhaps using the current dust up over the weather situation might help.
“It is incumbent on us to communicate forecast uncertainty,” Uccellini said. “We need to make the uncertainties clear.”
“http://www.washingtonpost.com/blogs/capital-weather-gang/wp/2015/01/27/why-the-snow-forecast-for-new-york-city-was-so-bad-and-what-should-be-done/?hpid=z3”
Yup they blew it big time. No blizzard or bad weather at all. I am sure that the people a few miles north of NYC that have a couple of feet of snow and coastal flooding will be pleased to hear that.
http://us.cnn.com/2015/01/27/us/weather-storm/index.html
but every thing just has to be simple!!
We’re just churning, imo. I continue to believe that the auto sector is going to shine in 2015 and 2016. I especially believe that Ford will benefit from the EU decision on QE.