Tag: news

Submitted by F.F.Wiley of Cyniconomics blog,

[S]tock prices have risen pretty robustly. But I think that if you look at traditional valuation measures, the kind of things that we monitor, akin to price-equity ratios, you would not see stock prices in territory that suggests bubble-like conditions.

 

– Janet Yellen, responding to a question in November’s nomination hearing

We offered our take on stock valuation several times last year, while arguing that traditional price-to-earnings multiples (P/Es) are almost useless during periods of heavy policy stimulus. We’ll take a different direction here, by suggesting a “fix” for an entirely different problem with traditional P/Es. Our analysis reveals three messages about current stock prices.

We’ll start with 100+ years of traditional P/Es based on trailing 12 month earnings:

From this simple chart, analysts draw conclusions about whether valuation is high, low or neutral versus historic norms. One problem with that – and the motivation behind this post – is in the depiction of historic norms. Analysts typically weight periods of expanding earnings equally with periods of depressed earnings. But when earnings are depressed, P/Es tend to spike upwards as the earnings input to the denominator shrinks.

Unusual jumps in P/Es often occur in bear markets, as we saw during the Internet bust and again in the housing bust. In each of these instances, P/Es reached all-time highs despite the fact that stock prices were far below prior peaks. For example, when the S&P 500 plummeted below 700 in March 2009, P/Es climbed to a new record of 79, on their way to five consecutive months of over 100! (These results are cut off the chart for scaling purposes.)

Such distortions may make you wonder: Do P/Es during earnings recessions tell us anything at all about stock valuation?

Our answer is no.

As any Excel user who’s been foiled by a “#DIV/0” message knows, ratios demand careful attention when the denominator is volatile. In this case, a better approach is to divide equity prices by the highest earnings result from any prior 12 month period. (Dividing by trend earnings or 10 year average earnings is better still, but we’ll leave these methods for other posts.) This measure of “price-to-peak earnings” (P/PE) isn’t skewed by recessions because the denominator never falls.

Here’s the chart:

The last three data points (for October, November and December) are 18.2, 18.7 and 18.8. As of November, we reached a new high for the current bull market. What’s more, there are only nine comparable, historic episodes of P/PE climbing above 18.5 (as numbered on the chart). Combining these episodes with other statistics, we’ve identified three possible messages:

Message #1: Beware the bear (he’ll be here within a few months)

After five of the nine P/PE breaches of 18.5, a bear market began within the next three months (with four of the market peaks remarkably occurring in the very next month):

Message #2: Time to buy (earnings will bust through their prior peak)

In three other episodes, earnings were accelerating and still hadn’t reached the peak of the previous earnings cycle. Each time, the P/PE breach of 18.5 was followed by three consecutive years of double-digit earnings growth, with stock prices rising strongly but still lagging earnings:

Message #3: Bull to bubble (prices will leave earnings behind)

In the remaining episode (1996), earnings had already breached their prior cycle peak and would soon level off. The bigger story after this P/PE breach of 18.5 was the dizzying rise in stock prices that would outpace earnings by a large margin. Here are the details, along with a comparison to circumstances as of last month:

One way to interpret these results is to focus on the number of episodes linked to each of the three messages. That won’t be our approach.

We prefer to condition the results on two factors, one based on the earnings cycle and the other on the Fed. For the first factor, we look at whether earnings were accelerating upwards from below the prior cycle peak. For the second factor, we separate the Fed’s first eight decades (described according to the old-time philosophy of “taking away the punch bowl when the party gets going”) from the last two decades of Greenspan/Bernanke puts (based on the new philosophy of “refilling the punch bowl”).

As you might guess from the grid, we’re not convinced that current P/PEs signal a bear market in 2014, despite the facts that:

1. Five of nine instances (56%) of P/PE breaching 18.5 were closely followed by market peaks.
2. When earnings are at all-time highs, five of six instances (83%) of P/PE breaching 18.5 were closely followed by market peaks.

Not only do we have to be careful about using price multiples for forecasting (as mentioned in earlier posts), but we currently sit in the grid’s lower right-hand quadrant with the Fed setting new standards for short-term market support. The only other P/PE breach of 18.5 belonging to this quadrant was in the early stages of the Internet bubble.

What’s more, recent earnings and stock performance match up more closely with the Internet bubble episode – as shown in the “Message 3” table – than with the episodes in the “Message 2” table.

So, are we predicting four years of soaring stock prices and nonsensical valuations, as in 1996 to 2000?

Not exactly.

The past can offer clues to the future but it doesn’t give us a blueprint. The bigger message is that today’s valuations don’t bode well for long-term returns, where long-term means beyond the next market peak. Prices could surely bubble upwards from here, but bubbles are invariably followed by severe bear markets. (We’ll expand on this outlook in a future post, where we’ll add total return estimates.)

More importantly, we shouldn’t be fooled by traditional valuation measures. P/Es, in particular, have several flaws. We’ve shown in past articles that we get completely different results when we adjust earnings to account for mean reversion. We made a separate adjustment here to correct for the distorting effects of earnings recessions. Either way, our conclusions are a far cry from the “nothing to see here” that we keep hearing from the Fed.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/42RhYniPiBU/story01.htm Tyler Durden

Submitted by F.F.Wiley of Cyniconomics blog,

[S]tock prices have risen pretty robustly. But I think that if you look at traditional valuation measures, the kind of things that we monitor, akin to price-equity ratios, you would not see stock prices in territory that suggests bubble-like conditions.

 

– Janet Yellen, responding to a question in November’s nomination hearing

We offered our take on stock valuation several times last year, while arguing that traditional price-to-earnings multiples (P/Es) are almost useless during periods of heavy policy stimulus. We’ll take a different direction here, by suggesting a “fix” for an entirely different problem with traditional P/Es. Our analysis reveals three messages about current stock prices.

We’ll start with 100+ years of traditional P/Es based on trailing 12 month earnings:

From this simple chart, analysts draw conclusions about whether valuation is high, low or neutral versus historic norms. One problem with that – and the motivation behind this post – is in the depiction of historic norms. Analysts typically weight periods of expanding earnings equally with periods of depressed earnings. But when earnings are depressed, P/Es tend to spike upwards as the earnings input to the denominator shrinks.

Unusual jumps in P/Es often occur in bear markets, as we saw during the Internet bust and again in the housing bust. In each of these instances, P/Es reached all-time highs despite the fact that stock prices were far below prior peaks. For example, when the S&P 500 plummeted below 700 in March 2009, P/Es climbed to a new record of 79, on their way to five consecutive months of over 100! (These results are cut off the chart for scaling purposes.)

Such distortions may make you wonder: Do P/Es during earnings recessions tell us anything at all about stock valuation?

Our answer is no.

As any Excel user who’s been foiled by a “#DIV/0” message knows, ratios demand careful attention when the denominator is volatile. In this case, a better approach is to divide equity prices by the highest earnings result from any prior 12 month period. (Dividing by trend earnings or 10 year average earnings is better still, but we’ll leave these methods for other posts.) This measure of “price-to-peak earnings” (P/PE) isn’t skewed by recessions because the denominator never falls.

Here’s the chart:

The last three data points (for October, November and December) are 18.2, 18.7 and 18.8. As of November, we reached a new high for the current bull market. What’s more, there are only nine comparable, historic episodes of P/PE climbing above 18.5 (as numbered on the chart). Combining these episodes with other statistics, we’ve identified three possible messages:

Message #1: Beware the bear (he’ll be here within a few months)

After five of the nine P/PE breaches of 18.5, a bear market began within the next three months (with four of the market peaks remarkably occurring in the very next month):

Message #2: Time to buy (earnings will bust through their prior peak)

In three other episodes, earnings were accelerating and still hadn’t reached the peak of the previous earnings cycle. Each time, the P/PE breach of 18.5 was followed by three consecutive years of double-digit earnings growth, with stock prices rising strongly but still lagging earnings:

Message #3: Bull to bubble (prices will leave earnings behind)

In the remaining episode (1996), earnings had already breached their prior cycle peak and would soon level off. The bigger story after this P/PE breach of 18.5 was the dizzying rise in stock prices that would outpace earnings by a large margin. Here are the details, along with a comparison to circumstances as of last month:

One way to interpret these results is to focus on the number of episodes linked to each of the three messages. That won’t be our approach.

We prefer to condition the results on two factors, one based on the earnings cycle and the other on the Fed. For the first factor, we look at whether earnings were accelerating upwards from below the prior cycle peak. For the second factor, we separate the Fed’s first eight decades (described according to the old-time philosophy of “taking away the punch bowl when the party gets going”) from the last two decades of Greenspan/Bernanke puts (based on the new philosophy of “refilling the punch bowl”).

As you might guess from the grid, we’re not convinced that current P/PEs signal a bear market in 2014, despite the facts that:

1. Five of nine instances (56%) of P/PE breaching 18.5 were closely followed by market peaks.
2. When earnings are at all-time highs, five of six instances (83%) of P/PE breaching 18.5 were closely followed by market peaks.

Not only do we have to be careful about using price multiples for forecasting (as mentioned in earlier posts), but we currently sit in the grid’s lower right-hand quadrant with the Fed setting new standards for short-term market support. The only other P/PE breach of 18.5 belonging to this quadrant was in the early stages of the Internet bubble.

What’s more, recent earnings and stock performance match up more closely with the Internet bubble episode – as shown in the “Message 3” table – than with the episodes in the “Message 2” table.

So, are we predi
cting four years of soaring stock prices and nonsensical valuations, as in 1996 to 2000?

Not exactly.

The past can offer clues to the future but it doesn’t give us a blueprint. The bigger message is that today’s valuations don’t bode well for long-term returns, where long-term means beyond the next market peak. Prices could surely bubble upwards from here, but bubbles are invariably followed by severe bear markets. (We’ll expand on this outlook in a future post, where we’ll add total return estimates.)

More importantly, we shouldn’t be fooled by traditional valuation measures. P/Es, in particular, have several flaws. We’ve shown in past articles that we get completely different results when we adjust earnings to account for mean reversion. We made a separate adjustment here to correct for the distorting effects of earnings recessions. Either way, our conclusions are a far cry from the “nothing to see here” that we keep hearing from the Fed.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/42RhYniPiBU/story01.htm Tyler Durden

Well, it took three years, but finally the Goldman Sachs-based head of the New York Fed, Bill Dudley, admitted what we all knew. From a speech just given by NY Fed’s Bill Dudley at the 2014 AEA meeting in Philadelphia:

“We don’t understand fully how large-scale asset purchase programs work to ease financial market conditions“

Or, in other words, “we still don’t know how QE works.” It just does (thank you Kevin Henry). And this coming from the people who want their word to become equivalent to gospel in a time when QE is being phased out and replaced with forward guidance. Luckily, at least the Fed knows all about how “forward guidance” works.

The good news: it only took $4+ trillion in Fed “assets” for the central bank to understand it had no idea what it was doing.

In retrospect, things could always have been worse.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/osVlyhkTcRY/story01.htm Tyler Durden

Well, it took three years, but finally the Goldman Sachs-based head of the New York Fed, Bill Dudley, admitted what we all knew. From a speech just given by NY Fed’s Bill Dudley at the 2014 AEA meeting in Philadelphia:

“We don’t understand fully how large-scale asset purchase programs work to ease financial market conditions“

Or, in other words, “we still don’t know how QE works.” It just does (thank you Kevin Henry). And this coming from the people who want their word to become equivalent to gospel in a time when QE is being phased out and replaced with forward guidance. Luckily, at least the Fed knows all about how “forward guidance” works.

The good news: it only took $4+ trillion in Fed “assets” for the central bank to understand it had no idea what it was doing.

In retrospect, things could always have been worse.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/osVlyhkTcRY/story01.htm Tyler Durden

Of the 21 nations covered by PMI "soft data" surveys, only 4 have sub-50 (deceleration) prints – Russia remains at multi-year lows along with France (core Europe?), Australia (but but China?), and Greece. Of course, as Goldman (some of the optimism on the basis of recent manufacturing PMIs… may not square with evidence of a structural break in the link between the PMIs and growth) and BofAML (it's important to understand how crude these surveys are) note, faith in these 'surveys' is often misplaced (and current levels suggest the rolling over is coming soon).

 

 

Bear in mind, Goldman's own work on "soft data" surveys like PMI in Europe – We conclude that some of the optimism on the basis of recent manufacturing PMIs… may not square with evidence of a structural break in the link between the PMIs and growth. While a reading of 50 may in pre-crisis days have indicated positive growth… it today may only indicate flat growth, as the external financing constraint prevents better sentiment from translating into activity.

 

And BofAML's destruction ofthe "myth" of exuberant PMIs,

It is important to understand how crude these surveys are. Each month, a few hundred purchasing managers are asked if a variety of activity variables are up, down, or the same relative to the prior month. Their responses are then converted into diffusion indexes: the sum of the number managers reporting activity is “increasing” and half of those reporting “the same.” Note that there is some guesswork involved: the survey is taken before the month is over and some of the questions cover areas of the firm that are difficult for a purchasing manager to get a timely read on.

…

Fans of the two indexes point out that they are relatively stable, easy to interpret and never revised. However, in our view, the simplicity of the data is a drawback, not an advantage. It means no attempt is made to correct misreporting or to include late respondents. Moreover, the sample they use is not representative of the overall economy. They represent a broad cross-section of industries, but they oversample big firms and they make no attempt to adjust for the birth and death of firms.

 

Chart: JPMorgan

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/zVEOFpsnDvE/story01.htm Tyler Durden

Of the 21 nations covered by PMI "soft data" surveys, only 4 have sub-50 (deceleration) prints – Russia remains at multi-year lows along with France (core Europe?), Australia (but but China?), and Greece. Of course, as Goldman (some of the optimism on the basis of recent manufacturing PMIs… may not square with evidence of a structural break in the link between the PMIs and growth) and BofAML (it's important to understand how crude these surveys are) note, faith in these 'surveys' is often misplaced (and current levels suggest the rolling over is coming soon).

 

 

Bear in mind, Goldman's own work on "soft data" surveys like PMI in Europe – We conclude that some of the optimism on the basis of recent manufacturing PMIs… may not square with evidence of a structural break in the link between the PMIs and growth. While a reading of 50 may in pre-crisis days have indicated positive growth… it today may only indicate flat growth, as the external financing constraint prevents better sentiment from translating into activity.

 

And BofAML's destruction ofthe "myth" of exuberant PMIs,

It is important to understand how crude these surveys are. Each month, a few hundred purchasing managers are asked if a variety of activity variables are up, down, or the same relative to the prior month. Their responses are then converted into diffusion indexes: the sum of the number managers reporting activity is “increasing” and half of those reporting “the same.” Note that there is some guesswork involved: the survey is taken before the month is over and some of the questions cover areas of the firm that are difficult for a purchasing manager to get a timely read on.

…

Fans of the two indexes point out that they are relatively stable, easy to interpret and never revised. However, in our view, the simplicity of the data is a drawback, not an advantage. It means no attempt is made to correct misreporting or to include late respondents. Moreover, the sample they use is not representative of the overall economy. They represent a broad cross-section of industries, but they oversample big firms and they make no attempt to adjust for the birth and death of firms.

 

Chart: JPMorgan

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/zVEOFpsnDvE/story01.htm Tyler Durden

Some may have forgotten, or not be aware, that the Federal Reserve system has its own police force. Well, it does: “The U.S. Federal Reserve Police is the law enforcement arm of the Federal Reserve System, the central banking system of the United States…. Officers are certified to carry a variety of weapons systems (depending on assignment) including semi-automatic pistols, assault rifles, submachine guns, shotguns, less-lethal weapons, pepper spray, batons and other standard police equipment. Officers also wear bullet resistant vests/body armor. On October 12, 2010 President Barack Obama signed into law S.B. 1132 the “Law Enforcement Officers’ Safety Act Improvements Act”, which states that law enforcement officers of the Federal Reserve are “qualified law enforcement officers” and thus are authorized to carry a firearm off-duty.”

At last check, there were over 1000 sworn members of the Fed police force. And judging by the recent spike in appearances of such “help wanted” ads as those shown below, that number is too low. We expect many more job postings such as these to appear in the coming weeks and months: in fact, we are willing to predict that the closer we get to a “renormalization” of the Fed’s balance sheet, the faster the hiring of Fed cops…

 

Position Summary:
 

Law Enforcement Officer
 

The Law Enforcement Officer is responsible for the protection of Bank property, valuables, and staff. Maintains security perimeter at building entrances, and performs routine building patrols to prevent unauthorized entry to premises, provide fire protection, and deter criminal and other irregular activities. Performs public relations functions by answering inquiries and providing direction to employees and visitors. Enforces federal laws and Federal Reserve policies and regulations to protect life, property and assets. Responds to incidents on Bank property and provides emergency  services. This position is an essential function of the Bank and may require extended work hours and/or work during emergency or crisis situations.

* * *

Police Technician

It’s about respect and recognition from your peers. It’s you. At the Federal Reserve Bank, we operate a part of the nation’s bank, helping to shape policies that enable people to purchase homes, send their children to school, and to live greater lives. It’s a good feeling, knowing that your work holds such meaning. It’s an even better feeling, knowing that you’re doing so with a team that recognizes the talents that make you unique. Join us today.

Are you looking for a challenging and rewarding position? Look no further!

Key Responsibilities:

• Develops and maintains proficiency in areas such as weapons (lethal and non-lethal), first aid, CPR, fire fighting techniques, civil disorders, and public relations, by attending training classes. Must exhibit spontaneous good judgment over life and safety issues (shoot and don’t shoot scenarios, discrete handling of detected weapons and/or explosive devices, when to employ use of life saving and rescue equipment, etc.).
• Controls pedestrian and vehicle access to the facility, patrols building and reports unusual situations or unauthorized individuals. Responds to general alarm, provides emergency service, and follows local response protocol until the alarm or situation has been resolved. Monitors Bank departments for safety or security violation and reports findings to department management. May prepare and/or review appropriate shift reports and distributes as required. Works all posts. Prepares logs and input information pertaining to incident and daily activity reports in prescribed format.
• Monitors metal detectors or utilizes metal detection wands to scan visitors, personal items, and packages for unauthorized items. Monitors and authorizes visitors accessing Bank facilities and records visitor data on appropriate logs. Monitors surveillance equipment, intercoms, telephones, radios, and other specialized equipment. Inspects vehicles entering security sensitive areas for unauthorized personnel or contents.
• Operates as a law enforcement officer pursuant to the authority given the Board of Governors by Section 11 (q) of the Federal Reserve Act. Authorized personnel act as law enforcement officers pursuant to regulations of the Board of Governors and approved by the U.S. Attorney General (Uniform Regulations for Federal Reserve Law Enforcement Officers).
• On an as needed basis may conduct initial investigations into accidents and incidents, make proper notifications to the senior law enforcement officer on duty, and perform follow up duties as directed by supervisor. Could be needed to testify in court in response to a subpoena regarding accidents or incidents.
• Develops proficiency in use of personal computer (PC) and related software, computerized access and control systems, video surveillance equipment, x-ray and metal screening equipment, various alarms systems and Automated External Defibrillators.
• On an as needed basis may participate in special assignments to protect dignitaries of a Reserve Bank or the Board of Governors, this could include escorting visitors, contractors and/or vendors working in high security areas.

Qualifications:

• Education: High School Diploma or GED
• Experience: Less than two years

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/PR4nXMIOo9k/story01.htm Tyler Durden