[Motley Fool] Be Careful With Forward P/E And PEG Ratios

http://beta.fool.com/thebargainbin/2013/03/05/be-careful-forward-pe-and-peg-ratios/26033/

[Zero Hedge] "Everyone Was Talking About A Stock Bubble... Just Before The Last Bubble Burst"

http://www.zerohedge.com/news/2013-11-27/everyone-was-talking-about-stock-bubble-just-last-bubble-burst

Consumer Confidence

A super interesting article on Zero Hedge breaking down the latest disappointment:

http://www.zerohedge.com/news/2013-11-26/consumer-confidence-misses-again-tumbles-lowest-7-months

View The Conference Board's release here:

http://www.conference-board.org/data/consumerconfidence.cfm

Bubble Discussion (cont.): Volume

Continuing from my last post, I had another thought on the definition and subsequent analysis of an equity bubble. One calling card of a bubble I forgot to mention yesterday is increased volume. Many site higher than average trading volume in conjunction with unjustifiably high prices in diagnosing a bubble. So, with that in mind, I took a look at market volume (YTD, since I'm not made of time here) to see what trading volume has to say about this supposed bubble.

In short, trade volumes do not seem to be supporting the bubble theory. In fact, volume has actually been a little light in the past few weeks, comparatively speaking. Since October, only 1/3 of trading days had S&P 500 volumes above the 2013 annual average, and both the 200 day and 50 day moving averages have edged below the annual average as well. These results could be less than telling due to a number of factors, including seasonality, holidays, fund rotation, and my overly simplistic analysis. This is further evidenced by NASDAQ volumes showing nearly the exact opposite: days since October with volumes above the YTD average are a whopping 70%, with the 50 day simple moving average crossing above the 200 day and the YTD marks. Could this be due to sector rotation? Rebalancing? Hard to say.

While far from conclusive, I do feel fairly comfortable stating that the volume data do not support defining the current domestic equity market as a bubble. Needless to say, we will keep an eye out for any changes, however I do not expect volumes to pick up dramatically through the end of the year due to the holidays.

The Dreaded "B" Word

Hello readers! It has been a while (2+ years) since my last post; life somehow has a way of getting in the way of our daily rituals. In any event, my goal is to resume writing regularly again, so here it goes:

 So, the "B" word. Bubble. There seems to be an increased volume of the B-word lately, particularly with regards to equities. While some talking heads have a vested interest in stirring the pot, increasing volatility, and drumming up more short interest, it is difficult to ascertain how Main Street Joe feels about current stock prices and (more importantly) valuations. In any event, to properly judge weather or not we are "actually" in "bubble" territory, we must first define (or at least set some parameters) bubble. Even here at this most basic phase of our analysis we see some inconsistencies. I heard one pundit on CNBC attempt to define an equity bubble as a market environment where the financial news is playing at her dry cleaner's, or when her doorman asks her how much she is up today. While these decidedly unacademic measures are (at best) difficult to quantify, this person's analysis was that we were not anywhere near an equity bubble. Others begin to feel gaseous when equity indices are trading at historic highs, or at least above their averages. According to this S&P 500 P/E Ratio, we are currently kissing 20x earnings, with the 100+ year mean and median at 15.5 and 14.5x, respectively. While this is nowhere near the record high, we are also not anywhere near value territory. Being that we are not in value land, let us venture to world of growth analysis. Looking at one of my favorite statistics, the PEG ratio, we are currently looking at anywhere from 4.4x to 5.5x earnings on the S&P (depending on who's numbers you use for P/E and EPS growth). The author of this Seeking Alpha article seems to think that is too high compared to the widely accepted multiple of 2.5x. I was taught (as a value guy, admittedly) to look for a number closer to 1. This is to say, the P/E ratios we are seeing don't seem to be justified by current, or even projected growth rates.

 But bubble? That's a fighting word, to be sure. Truth be told, most economists seem to think bubbles can only truly be diagnosed in hindsight, and I (unfortunately) tend to agree. Trying to define the current market as a bubble or anything else is all but impossible. We are up more than 20% YTD. Make no mistake, that is a huge and largely unprecedented gain. But we can't really say for sure if this is a bubble until it is too late... 

Currently I am long equities with put options as a hedge.

Third Times the Charm? A Commentary on the Most Recent European Debt Crisis 'Fix'

Early yesterday morning, word trickled out that a new "comprehensive" deal to "fix" the euro-debt crisis had been cemented. Investors in Europe and abroad were thrilled; markets rallied an average of 3%. Analysts were less enthusiastic, somehow universally agreeing to use the term "cautious-optimism" to qualify the deal. While the media and analysts are still digesting the hard data (many in the negotiations were quoted saying they had trouble understanding many of the components of the deal), a few things are certain. Greek debt holders will take a 50% haircut on the face value of their paper (much more than previously agreed upon this summer), banks will have to raise their tier-1 capital to 9% of the banks' holdings, and the EFSF will be leveraged to a total of 1.4 trillion euros to meet all previous obligations without being totally zapped.

While this is indeed great news (primarily because we now know the EU has come to their senses and will not expect Greece to fully pay all of its unrealistic debt), many details remain to be determined. One particularly interesting detail yet to be negotiated is the fate of credit-default swaps (CDSs) on the Greek bonds. The EU deal has chosen to classify the 50% haircut as a "voluntary" write-down. While these losses are, in reality, far from voluntary, the deal is trying desperately to avoid a "credit event" that would trigger pay-outs of the CDSs. However, if this massive write-down isn't a "credit event", despite the fact that it is clearly a default (albeit an "orderly" default), what the heck is? With the EU saying the nearly 4 billion euros worth of CDSs purchased on Greek bonds wont be triggered (think your fire insurance refusing to pay because only half of your house burnt down), this will, in my opinion, trigger a credit-event of a different kind. The liquidity of the CDSs market will all but disappear, at least on sovereign paper. What would make sense, at least to me (and we all know I am more of the outsider-looking-in than any kind of real expert), would be for the CDSs to pay out what is written down. That was the original intention of the CDSs in the first place, to insure against losses of any kind. In theory, the sellers of swaps should not be all that surprised that Greece is defaulting, and should have more than enough cash to cover half of the losses. The risk of default, when calculated accurately, should be reflected in the price of the CDSs. I have a hard time believing that banks (or whoever originated the CDSs, or later bought the puts) would sell a Greek bond swap at the same rate as a US swap. And they didn't. The International Swaps and Derivatives Association would be far better suited to NOT bend to the will of the EU, and declare the haircut a credit event, therefore triggering payouts. After all, the negative implications on future derivatives markets should be of much bigger concern to the association in charge of it than a puny €2 billion, since the default was only on 50% face value). For the sake of the future of swaps and derivatives (at least on sovereign debt), I hope the ISDA holds firm.

(sources: The Economist)

Moody's and Fitch Downgrade Europe, Dexia bailed out...where does it end?

This week will surly go down as one of the worst, in global economic terms, since October 2008. Fitch downgraded the credit worthiness of several European countries, including Italy, Spain, Portugal, as well as placing some countries once presumed totally solvent up for review, such as Belgium. Between this, the Moody's downgrade of 12 UK banks, Greece's struggle to meet austerity requirements for their next bail-out tranche, and the forced recapitalization of Franco-Belgian bank Dexia, it looks like the catastrophe in Europe is coming to a head. And all of this coming on the heels of a bad end to a bad quarter...what comes next?

Well, as the markets this week reflect, I think the solution is coming sooner rather than later. With ECB President Jean-Claude Trichet scheduled for retirement next month, we can only hope that the new regime will take into consideration the aforementioned crisis and deal with the real issue at hand: deflation. While Trichet has been spending much political and actual capitol on battling inflation with more than one rate hikes since January, the money flow has all but ground to a halt. If I were a betting man, I would gamble that we are going to see a real-life TARP-like bail-out of banks in Europe, as well as a few shotgun mergers just to be safe. What is to be done about Greece is a different battle, and personally I think Europe would be better without Greece in the Euro.