For Auld Lang Syne
I remember when markets were somewhat rational
There’s Covid in my house at present. It’s doing the rounds again in my community. A shitty state of affairs.
Remember how quickly the powers that be responded to the advent of Covid-19 and how quickly Rapid Antigen Testing was developed? Seems like when there’s a will to do so, we can get things done. Why is it then, that we can’t develop solutions to age old problems like a rational approach to investing, markets and valuations? Not only is there no will, but few realize there is even a problem.
As someone who in their 35th year of this financial market gig (Fuck, I’m old!), I’ve been on the inside of the institutional portfolio management game and know what goes on. I got frustrated with the unwillingness to accept there was a problem let alone try to improve their service offering. These businesses concentrate on growing their income by getting new clients onboard instead of making more money by growing their client’s wealth (i.e. more consistently and then retaining that wealth by experiencing fewer drawdowns during down markets - too hard) and charging a fee on that. In the end, I said, “Fuck,’em”, and decided to step away from insto life. I didn’t know what the solution was, but I knew the Wall St. type instos don’t have it.
Since then, I’ve developed many unique ways of evaluating the economy and markets, and have come up with a number of world-leading insights, some of which quantify how stupid some Nobel Prize winning economists are - classroom brilliant, but real-world stupid.
So, what are we going to look at today?
Well, I’ve been watching the employment situation. As usual, it’s a slow game. Challenger Job Cuts are still somewhat elevated, but a little lower than the first few months of the year.
The Challenger Job Cuts data lines up with the regional PMI data, which has been negative for some 18 months now. Markets were surprised by a new bout of weakness in PMI data over the last couple of weeks, but then they saw headline payrolls numbers (a number which can, and does, and recently has been, revised lower) and forgot about the PMI data.
That’s the irrationality of markets for you. They grab each data point, forgetting the last, and then make no attempt to gather all the data points to build it into a cohesive picture - or basis for valuation.
We’re in thin air momentum territory at present. I mean, when a CEO is gaining celebrity status to the point of autographing a woman’s chest, you know things are getting out of hand … or anyone who has been in markets for any length of time might.
I dug up one of my models for auld lang syne, just to see how it was tracking. It’s a simple model, but that’s the point and why I constructed it the way I did.
I recently read a comment on LinkedIn by someone who thought they were being profound but was really revealing their ignorance. “The market and the economy are not the same thing”, they said this in support of continuing strength in the stock market. That statement may be true over the very short-term, but primarily, the market acts in service of the economy because it is simply the place whereby ownership of the economy is exchanged, and a rational investor should pay a fair price for any business they are buying. But these are not rational times.
So, my model, it is simply a single revenue input for the first quarter of 1962. After that, it is nothing more than that single number scaled by the rate of GDP growth multiplied by the Shiller CAPE number of years, and the product is then discounted by the U.S. Baa Corporate yield.
Guess what? It’s been pretty good in saying when the stock market is undervalued or overvalued relative to the economy. At present, the stock market is a long way ahead of the economy, which never ends well.
Another new model
I saw another comment online about the number of stocks hitting 52 week highs and also others hitting 52 week lows, so went digging for some data to investigate and see if I could find something worthwhile. I came up with this …