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How much more bull can world markets bear?
Date
May 20, 2013
Matthew Kidman
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Illustration: Karl Hilzinger.
It is getting virtually impossible to find an expert who believes global equity markets are a risky place to invest. As markets on all continents grind higher and higher, the bears are in danger of becoming extinct and the Winston Churchill ''voice in the wilderness'' warning us of the troubles ahead seems to have departed the scene. When everyone is in agreement, we should start to get a little worried.

Let's roll the tape.

Permabear Nouriel Roubini capitulated two weeks ago by shelving his concerns of a pending financial disaster and declaring the equities bull market could last another two years.

Last week billionaire hedge fund manager David Tepper stepped up to the plate and declared in a rare interview, ''guys that are short better have a shovel to get themselves out of the grave''. Tepper's is the same message that Warren Buffett gave recently when he said equities were still the best place to invest.

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Meanwhile, two New York Federal Reserve economists, Fernando Duarte and Carlo Rosa, recently delivered a paper that concluded stock prices in the US, based on the risk-free rate of return, were as cheap today as any time in history. Quite remarkable given the US market has risen 140 per cent since March 2009 following the global financial crisis.

All this is being driven by a historically low risk-free rate struck from US Treasuries. Under this measurement the Dow Jones could climb another 25 per cent to 20,000 points and trade on a price-earnings (PE) multiple of 18 times before it started to look stretched.

The Duarte-Rosa paper also shows that if interest rates were allowed to rise to normal levels, rather than be suppressed by central bank purchases, the story would be completely different and equities would be expensive.

We are living in a false economy. If everyone believes the false economy is the new normal and the only game in town is equities, then we are setting ourselves up for a nasty correction sometime soon.

The overwhelming view among investors is that central banks around the globe will continue to print money and keep interest rates low for the foreseeable future. This will underpin global equity markets because investors are forced out of cash into higher-yielding equities. This consensus view has taken more than four years to solidify and was sealed when Japan's moribund sharemarket sprang to life after its central bank started printing money again. Typically, consensus is viewed as a critical ingredient to success; when it comes to sharemarkets it is usually a prelude to disaster.

Until very recently markets around the globe have been climbing a wall of worry. These concerns seem to have almost dissipated. The VIX Index in the US, which is also known as the ''fear index'', has sunk to its lowest since early 2007.

These are dangerous signs. Bull markets have a tremendous ability to suck everyone in before they conclude. One by one the doubters who are either ''short stocks'' or are cowering in cash feel too much pain as the market rises by the day. The tech boom in the 1990s and the epic rally in resources in Australia over the past 10 years both eventually bewitched everyone before they both collapsed.

In the short term I am still a bull. I am on the record as saying the S&P 500 Index in the US can rally another 3 per cent to 1700 points and the All Ordinaries can climb a further 9 per cent to 5600 in 2013. Driving this last leg of the current bull market should be economically cyclical stocks, while the financials and defensives take a breather. Beyond this point I have no confidence with valuations stretched to unhealthy levels.

Virtually everyone has conceded it is impossible to ''Fight the Fed'' and win. But the reality is if you cross the road looking only one way, the odds are a car coming from the other direction will mow you down.

Sharemarkets around the globe have been on a tear over the past 12 months. Look at the following upward moves: Britain 23 per cent, the US 24 per cent, Australia 24 per cent, Germany 31 per cent, New Zealand 32 per cent, Turkey 58 per cent, Japan 69 per cent and Greece 104 per cent. Money is being pumped around the world by central banks and it is funnelling into equity markets because cash and fixed interest offer next to no yield.

It is almost impossible to say what will serve to derail the 50-month-old bull market in the US. It could be a simple surge in economic growth that causes a selloff in bonds and a spike in yields. In the long term that would be good for sharemarkets, but it would ensure a big correction in share prices in 2014. Alternatively, it could be that economic growth fails to emerge and we all become highly sceptical that the trillions of dollars of financial stimulus of the past five years have amounted to anything.

matthewjkidman@gmail.com

It's only the beginning, and doom and gloom reports are out so soon? Interest rates haven't even begun rising yet!

I still remember in 2011 investors were shouting europe crisis, few dared to buy big
now the same people are shouting bull

I even attended Nouriel Roubini's mega bear presentation at raffles city, shouting china's hard landing...
now he roti prata and shout 2 year bull... LOL

My parents are perma bears......LOL.......

To me, its like passing the bomb around during musical chairs. Buying shares now, while the immenient corrections approaches and explodes on you.

but now those that are 100% cash also pain
inflation 5%, with bank interest only 1%
bleeding 4% per year also sianz

(20-05-2013, 06:56 PM)felixleong Wrote: [ -> ]but now those that are 100% cash also pain
inflation 5%, with bank interest only 1%
bleeding 4% per year also sianz

TINA...

05-04-2013, 11:56 PM Post: #1
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Must Read: It's a bull market, but not as you know it , says Aitken
I got this article from an Aussie mate and thought it was relevant from the global perspective:

"Record-low yields for better quality government and corporate debt, along with pithy term deposits rates, have forced those looking for income towards riskier assets. "The only reason our team probably got anything right in the last year was working out that people are going to have no alternative. In here we call it TINA: there is no alternative. Central banks are forcing people who rely on income to live to take risks and to get the income they need from dividends,'' Aitken explains."

TINA: http://en.wikipedia.org/wiki/There_Is_No_Alternative

It's a bull market, but not as you know it , says Aitken
Philip Baker and Peter Wells
1301 words
15 Apr 2013
The Australian Financial Review
AFNR
English
Copyright 2013. Fairfax Media Management Pty Limited.
Sharemarket Everyone's watching one man and his tie to find out when the run is over.
If you see Charlie Aitken wearing a tie during the week, get hold of your broker and start selling shares. It's a signal he thinks the current bull market is over.
In August 2012 the well-known, optimistic stockbroker told clients the five-year bear market was over and it was time to buy equities again.
The Australian sharemarket has risen almost 20 per cent since.
"I got so nervous writing the report, despite everyone on the team agreeing with the call, that I took my tie off and have kept it off ever since. It won't be back on while I'm in the office until I think this bull run is over,'' the superstitious managing director of Bell Potter Wholesale says.
Wary of jinxing things, Aitken – who gets up at 6am each morning to produce a daily newsletter read by thousands – is also holding to other routines from that August morning. He has been driving the same route to work each day and, when he arrives, orders a macchiato with Vegemite toast from Aurora Cafe in Sydney.
Aitken may have been timely last year with his call on the end of the bear market, but what has followed doesn't seem like a "normal" bull market.
"It's the strangest bull market I've ever seen. In the past you'd say with a bull market everything goes up. This is not case, it's not the same. We've seen mining shares fall, mining services fall, while small caps and mid caps have also been left behind. It's not your classic bull market," he says.
"Don't get me wrong, things are better – no doubt. But you're working very, very hard. Trust me, this isn't your typical 2003 to 2007 bull market, where you hung your shingle out, business came in and you went to the Ivy Pool Bar. It's not that."
In fact, as he points out, the bear ¬market might be over but it's only the start of the bull market for about eight stocks – large caps with relatively high dividend yields.
"I thought mining stocks would be involved because of inflation with money being printed by global central banks. That hasn't worked out and that really surprised me. So you get some part of it right and some part of it wrong,'' he adds.
In keeping with the new style of bull market, Aitken has eschewed a typical lavish 40th birthday recently in favour of staying home with his six months' ¬pregnant wife and their three-year-old child.
There might be cause for some celebration later this year depending on how hard the rally continues, but for Aitken, family life is very important these days. Though, as a keen golfer, he laments he's lost a stroke on his handicap for every year he's been married.
"I hope my wife doesn't read that,'' he jokes.
What makes this bull market different is the influence of central banks and the effect on investor behaviour.
This time around the bull market is all about yield and dividends.
Record-low yields for better quality government and corporate debt, along with pithy term deposits rates, have forced those looking for income towards riskier assets. "The only reason our team probably got anything right in the last year was working out that people are going to have no alternative. In here we call it TINA: there is no alternative. Central banks are forcing people who rely on income to live to take risks and to get the income they need from dividends,'' Aitken explains.
It's a trend that has a closing date but the typically bullish broker reckons that could be in 2020.
As such, Aitken thinks the big switch back into shares from cash and bonds is still in its infancy. This is why, although it's a dangerous thing to say, he has to lose a bit of traditional discipline when it comes to evaluating stocks.
In these "unprecedented times", traditional stock measures like price earnings multiples and earnings growth may take a back seat for some time as the ultra-loose monetary policies of central banks force investors to chase yield.
"That means [stocks] could get very, very, very overpriced. But they could remain that way for a long time until the central banks pull out.''
Australia, Aitken says, is arguably the "yield capital of the world" from both a bond and equity perspective.
"If this is all about yields for the next eight years, a huge amount of global money could come here."
Telstra, which the Bell team made a right call on when it was fetching $2.60, closed at $4.61 on Friday, but Aitken can see it going to $5.60. The major banks would keep rallying, too
Aitken expects the day central banks start pulling back support won't come any time soon. Moreover, he thinks the recent move by the Bank of Japan has raised the bar and doesn't rule out a response from other central banks, such as the US Federal Reserve, that could announce more quantitative easing programs.
"Everyone is playing their own home game now, aren't they? Everyone except Australia, that is. And at some stage they might fall back into some form of QE – you never know. It would be unusual that we'd be the only country in the world that with high interest rates, no QE and a currency that's just on a rampage every day while everyone else is doing the opposite."
But there is a hitch.
"The biggest risk though is [central banks] prematurely believe their own bullshit – that they've created asset price inflation and it's all going better – and they start to pull out too quickly, and everyone goes, 'Hang on, it was just you guys. The reason we're here in the stockmarket is you. Don't start believing we've created macroeconomic growth'. That's a big issue for investors, absolutely! It's sort of a mirage because interest rates are zero."
Aitken thinks corporates don't believe central bank action is turning into robust economic activity and are wary of being sucked into high-asset price takeovers.
"They might be right. This long-awaited merger and acquisition spree hasn't happened. What is more likely to happen, is that an IPO cycle starts. I think more private companies will go, 'You guys just buy things on yield and equities, do you? Well here's my private company on 15 times earnings and a 5 per cent yield. You can have it!'"
Easy money from central banks have led to the most recent bubbles in tech and US housing. But investors haven't reached the bubble in yield equities yet.
"I don't think everyone's been sucked into it yet. I don't think everyone's adjusted to the fact that really we could be dealing with very low interest rates for a very long time. The thing is usually it forces most people in. But then I look at it at the moment and mums and dads aren't looking at PEs or valuations Rightly or wrongly, they're looking at what is the grossed-up value of this thing inside my super fund. It's a highly unusual bull market. It's like nothing we've ever seen. It's a bull market but not as you know it. A very selective, narrow bull market. But does it spread is the key."

Fairfax Media Management Pty Limited

If compared to the current property bubble, this bull market still got a long way to go.