Thursday, January 02, 2020

The Two Charts You Need to Ignore or Rationalize Away in 2020 (Unless You're a Bear)

If you believe you've front-run the herd, you're now in mid-air along with the rest of the herd that has thundered off the cliff.
We're awash in financial charts, but only a few crystallize an entire year. Here are the two charts that sum up everything you need to know about the stock market in 2020.
Put another way--these are the two charts you need to ignore or rationalize away--unless you're a Bear, of course, in which case you'll want to tape a printed copy next to your wall of curled Post-It notes for future reference.
These charts show that all the potential gains from a thee-year advance (2019-2021) in P-E multiples and stock valuations have already been front-run in a mere three months. This is a key dynamic in the diminishing returns on Federal Reserve stimulus. This is an important point that few seem to observe.
Once market participants observed how the Fed's QE (and "Not-QE") have pushed stock multiples and valuations higher again and again, they now front-run the "guaranteed" gains. Market dynamics being what they are, this manic buying in anticipation of years of future gains compresses all future buying into the three months of manic front-running.
In effect, all the potential gains of three years of Fed stimulus (QE and "Not-QE") have already been skimmed in the three months since the Fed launched "Not-QE". 2019's nearly 30% gains in stock valuations wasn't the result of soaring operating income or profits; it was all multiple expansion based on front-running the Fed's stimulus.
While the Fed generated 3 years of gains from each of its previous QE stimulus programs, now all the gains have been taken in only three months: that's the acme of diminishing returns: now that the Fed brought three years of buying forward into one quarter, what's going to push a blow-off top in stocks even higher for the next two years?
If you answer "$60 billion a month in Fed stimulus," you'll get your head handed to you on a platter, as all the gains from "not-QE's" $60 billion a month have already been front-run.
Another point few seem to notice is that as the stock market has ballooned in value, the Fed's QE is diminished as a percentage of market valuation. In other words, the Fed's stimulus is increasingly nothing more than signal noise, as depicted in this chart showing the Fed's $60 billion per month "not-QE" in relation to the $33 trillion stock market.
As recently as February 2016, total market cap of U.S. stocks was less than $19 trillion. The value of U.S. stocks have risen by almost 75% in a mere four years, yet the Fed's QE is supposed to have the exact same effect in an $33 trillion market as it did in an $18.9 trillion market?
And this assumption is based on what, other than magical thinking?
Speaking of magical thinking, take a look at Apple's operating income, which has actually declined while its price per share doubled from $145 in January 2019 to $293 in January 2020. Other than mass delusion or Martian Mind Control, the only possible explanation for the doubling of the value of a company whose operating income is at best stagnant is the same dynamic: punters have front-run all the potential gains of the future to double Apple's share valuation in one year.
All those analysts predicting a billion Apple Watch sales to recession-impoverished consumers and Apple eating Disney's lunch because Apple has squandered millions on entertainment "talent"--you're joking, right? Every attempt to replace declining iPhone revenues with "services" or "wearables" in an exercise in magical thinking.
Look at the chart, people: Apple's operating income is at best flat. How the human mind spins stagnation into another $500 billion in valuation can only be understood as Pavlovian front-running, which can also be understood as the herd thundering off the cliff.
If you believe you've front-run the herd, you're now in mid-air along with the rest of the herd that has thundered off the cliff, awaiting gravity to accelerate the herd into a fatal collision with the sharp rocks at the bottom of the cliff.
As for rationalizing away these charts--be my guest. But please don't think magical thinking is a substitute for detached observation and realistic assessment.


My recent books:
Money and Work Unchained $6.95 (Kindle), $15 (print) Read the first section for free (PDF).


If you found value in this content, please join me in seeking solutions by becoming a $1/month patron of my work via patreon.com.

NOTE: Contributions/subscriptions are acknowledged in the order received. Your name and email remain confidential and will not be given to any other individual, company or agency.
 
Thank you, Jeffrey C. ($50), for your marvelously generous contribution to this site-- I am greatly honored by your steadfast support and readership.
 

Terms of Service

All content on this blog is provided by Trewe LLC for informational purposes only. The owner of this blog makes no representations as to the accuracy or completeness of any information on this site or found by following any link on this site. The owner will not be liable for any errors or omissions in this information nor for the availability of this information. The owner will not be liable for any losses, injuries, or damages from the display or use of this information. These terms and conditions of use are subject to change at anytime and without notice.


Our Privacy Policy:


Correspondents' email is strictly confidential. This site does not collect digital data from visitors or distribute cookies. Advertisements served by a third-party advertising network (Investing Channel) may use cookies or collect information from visitors for the purpose of Interest-Based Advertising; if you wish to opt out of Interest-Based Advertising, please go to Opt out of interest-based advertising (The Network Advertising Initiative). If you have other privacy concerns relating to advertisements, please contact advertisers directly. Websites and blog links on the site's blog roll are posted at my discretion.


PRIVACY NOTICE FOR EEA INDIVIDUALS


This section covers disclosures on the General Data Protection Regulation (GDPR) for users residing within EEA only. GDPR replaces the existing Directive 95/46/ec, and aims at harmonizing data protection laws in the EU that are fit for purpose in the digital age. The primary objective of the GDPR is to give citizens back control of their personal data. Please follow the link below to access InvestingChannel’s General Data Protection Notice. https://stg.media.investingchannel.com/gdpr-notice/


Notice of Compliance with The California Consumer Protection Act
This site does not collect digital data from visitors or distribute cookies. Advertisements served by a third-party advertising network (Investing Channel) may use cookies or collect information from visitors for the purpose of Interest-Based Advertising. If you do not want any personal information that may be collected by third-party advertising to be sold, please follow the instructions on this page: Limit the Use of My Sensitive Personal Information.


Regarding Cookies:


This site does not collect digital data from visitors or distribute cookies. Advertisements served by third-party advertising networks such as Investing Channel may use cookies or collect information from visitors for the purpose of Interest-Based Advertising; if you wish to opt out of Interest-Based Advertising, please go to Opt out of interest-based advertising (The Network Advertising Initiative) If you have other privacy concerns relating to advertisements, please contact advertisers directly.


Our Commission Policy:

As an Amazon Associate I earn from qualifying purchases. I also earn a commission on purchases of precious metals via BullionVault. I receive no fees or compensation for any other non-advertising links or content posted on my site.

  © Blogger templates Newspaper III by Ourblogtemplates.com 2008

Back to TOP