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Warren Buffet’s Favorite Stock Market Metric Is Signaling Huge Downside Ahead
Warren Buffet’s Favorite Stock Market Metric Is Signaling Huge Downside Ahead
Today – Apple became the first public company worth over $1 trillion dollars. . .
Thanks to very low interest rates – the company’s piling on debt and buying their own shares back – shrinking the float.
And because of a worldwide rush into mutual funds and exchange traded funds (ETF’s) – there’s crazy demand for Apple shares.
The king of ‘buy and hold’ investing and a Champion of equities – Warren Buffet – must a have grin on his face from ear to ear. Because Apple’s surge just netted him a huge profit for his company – Berkshire Hathaway – of over $2.6 billion.
Many, now, may be thinking that they should buy Apple and other such stocks – right?
Well, not exactly.
Because according to this favorite Buffet metric – the market looks extremely overvalued and the future looks scary.
The Market Cap-to-GDP metric is a long-term value indicator. And it’s become popular recently thanks to Warren Buffet.
During an interview in 2001 with Fortune – he claimed that this indicator is “probably the best single measure of where valuations stand at any given moment.”
And what his favorite indicator’s showing us today is that stocks are more over-valued than they’ve ever been. . .
So – what is the Market Cap to GDP – aka the ‘Buffet Indicator’?
It’s easy. Just calculate the total market value of all stocks outstanding and divide it by the nations GDP.
When the ratio is greater than 100% – it means that stocks are considered overvalued and have historically less upside going forward.
And when the ratio is less than 100% – it means the opposite. That stocks are considered undervalued and historically have more upside.
I look at it this way: when the ‘Buffet Indicator” is more than 100%, the stock market is negatively asymmetric (high risk, low reward). And when it’s less than 100%, the stock market is positively asymmetric (low risk, high reward).
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“Risky Business”: Companies Are Now Funding Share Buybacks By Selling Bonds To Other Companies
“Risky Business”: Companies Are Now Funding Share Buybacks By Selling Bonds To Other Companies
One of this year’s key narratives has been the degree to which US stocks have benefited from a perpetual, price insensitive bid. By that we of course mean corporate buybacks, which one might fairly characterize as having replaced the monthly flow lost to the Fed taper.
The buyback bonanza shown above is of course sponsored by ZIRP. Put simply, when borrowing costs are close to zero and when the market has become completely myopic as it relates to assessing performance, it makes sense to issue debt and plow the proceeds into EPS-inflating share repurchases. Throw in the fact that the FED-induced hunt for yield has forced risk averse investors out of govies and into corporate credit and you have a kind of goldilocks scenario for corporate issuance and buybacks.
This all comes at cost. That is, you can’t simply keep leveraging the balance sheet to artificially inflate earnings. Eventually, some of the proceeds from debt sales need to go towards capex or wage growth or something that’s conducive to boosting productivity, long-term growth, and competitiveness. However, that simply won’t happen in a world governed by what Hillary Clinton correctly (yes, she has managed to get at least something right believe it or not) calls the “tyranny of the next earnings report.”
Once you understand all of the above, you can begin to see why a lack of market depth in the secondary market for corporate credit is so dangerous.
You have an environment that encourages record issuance and the proliferation of bond funds along with the now ubiquitous hunt for yield means any and all supply is promptly snapped up. But if those bonds ever have to be sold in a pinch, there’s no one home at dealer desks thanks to Volcker.
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Pop Goes The Alpha ( Natural Resources)
Pop Goes The Alpha ( Natural Resources)
If you want a cogent metaphor for the central bank enabled crack-up boom now underway on a global basis, look no further than today’s scheduled chapter 11 filling of met coal supplier Alpha Natural Resources (ANRZ). After becoming a public company in 2005, its market cap soared from practically nothing to $11 billion exactly four years ago. Now it’s back at the zero bound.
ANRZ Market Cap data by YCharts
Yes, bankruptcies happen, and this is most surely a case of horrendous mismanagement. But the mismanagement at issue is that of the world’s central bank cartel.
The latter have insured that there will be thousands of such filings in the years ahead because since the mid-1990s the central banks has engulfed the global economy in an unsustainable credit based spending boom, while utterly disabling and falsifying the financial system that is supposed to price assets honestly, allocate capital efficiently and keep risk and greed in check.
Accordingly, the ANRZ stock bubble depicted above does not merely show that the boys, girls and robo-traders in the casino got way too rambunctious chasing the “BRICs will grow to the sky” tommyrot fed to them by Goldman Sachs. What was actually happening is that the central banks were feeding the world economy with so much phony liquidity and dirt cheap capital that for a time the physical economy seemed to be doing a veritable jack-and-the-beanstalk number.
In fact, the central banks generated a double-pumped boom——first in the form of a credit-fueled consumption spree in the DM economies that energized the great export machine of China and its satellite suppliers; and then after the DM consumption boom crashed in 2008-2009 and threatened to bring the export-mercantilism of China’s red capitalism crashing down on Beijing’s rulers, the PBOC unleashed an even more fantastic investment and infrastructure boom in China and the rest of the EM.
…click on the above link to read the rest of the article…
