Macro Man wants your view

At the risk of embarrassing himself by displaying the dearth of readership of this (admittedly young) project, Macro Man would like to solicit your opinion on the US equity market. The results will then feed into a poll-of-polls, the results of which will be revealed on Friday.

http://vgk.pollhost.com/

Please respond, and encourage your (astute) friends and colleagues to do so as well. Disclosure: Macro Man voted for the 'bubble talk is irrelevant' option.

Macro Man humbly thanks you.
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OkieLawyer
admin
November 20, 2006 at 3:47 PM ×

I don't like the choices. I think there is a stock market bubble, but I don't think it is of "historical proportions." Because I think there is one now, I don't think it will be next year before it happens.

And obviously 3 and 4 don't reflect my opinion because I believe there is one.

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Macro Man
admin
November 20, 2006 at 4:08 PM ×

Sadly, they are not my choices...just using the choices generated by the creater of the uber-poll that this one will feed into. I'd encourage you to respond with choice 1, even if it doesn't perfectly reflect your view, if for no other reason than to ensure I am not the only respondent to my own poll!

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barreb
admin
November 21, 2006 at 10:18 AM ×

There is no bubble in the broader market as measured by earnings yield relative to bond yield. I believe that stocks climbed a wall of worry since the Jun 13th low. Initially there was short covering, then there was disbelief, followed by resignation that equities were heading higher. Investors need to step back from the tree and look at the wood. Take a look at the S&P since 1950 on a weekly log scale on Bloomberg with a regression line on it. There were two main deviations....underperformance in late 70's / early 80's that set up the 82-95 bull market....and out performance 1995-2000 that was the bubble. Currently we're just above the line.

The market is underpinned not just by technological advances or emerging economies actually "emerging", but also by the reduction in the share float as a result of share buybacks, m&a activity, and private equity firms actions. In time these actions will subside. Indeed private equity will need to return many companies to market to realise their gains some of which may be crippled with high debt/equity ratios.

There are, however, many mini bubbles in sectors/themes as witnessed by moves in ethanol and alternative energy source stocks as a result of Bush's speech in Jan, Canadian small cap mining stocks seizing on Chinese demand for the raw product and then the mines, silver and platinum prices preceding new ETF launches, uranium prices as the energy market accepts the inevitable etc etc.

Despite the best efforts of the worlds central banks the financial system is still awash with capital. Individual investors chase short term momentum moves continually based on theme of the month. We live in the internet era. Never has so much information been so freely available to so many investors. The velocity of this information flow coupled with abundant liquidity results in an almost continuous series mini thematic bubbles that inflate and deflate.

So investors should not be afraid of the broader market but certainly should be wary of being amongst the last people on board the latest thematic bubble.

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Macro Man
admin
November 21, 2006 at 11:55 AM ×

I think you raise some excellent points there. Today's platinum move is just silly, especially when one considers that the launch of the oil ETF (USO) a) more or less coincided with the top in crude, and b) has delivered execrable results to investors because of the steep contango. As I noted in yesterday's 'honest man' post, the bear case for equities hinges on an abrupt halt to earnings growth, while a fervent bull case must hinge in on 2006-07 being 1995 all over again.

Given that 10yr yields are currently 4.60% and not 8% on the way to 5.6%, I am not particularly hopeful that the straight line rally can continue, especially now that shorts have been covered and weak longs established.

In my mind, the greatest bubble is in fixed income, not equities. Sovereign and corporate bonds are substantially more expensive than historical precedent would suggest. I think we can put this down to a transfer of investment capital away from the Western private sector (heavy asset allocation into stocks) and towards the Eastern public sector (virtually exclusive asset allocation in fixed income.) As such, we might need to get used to the notion that equities look cheap relative to bonds, simply because bonds enjoy the 'Zhou put' these days.

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