WSJ: Behind Wall Street's Melt-up

[jserraglio]

Wall Street Journal
https://www.wsj.com/articles/melt-up-ra ... yptr=yahoo
By Corrie Driebusch, Michael Wursthorn and Chris Dieterich
Jan. 17, 2018

The Dow Jones Industrial Average closed above 26000 for the first time on Wednesday, sprinting to a fresh 1000-point milestone just eight trading days after toppling the previous one, its fastest run ever.

The most recent gains have been powered in part by a sudden hunger for stocks among certain money managers and individual investors who have long been wary of the nearly nine-year bull market.

Some market observers have dubbed this phenomenon Fear of Missing Out, as stock market records fall on an almost weekly basis. Others refer to a “melt-up” market, where the prevailing mood is shifting to greed from fear and investors stampede in without worrying much about valuation or fundamentals.

Whatever it is called, many analysts say the recent change in ethos is transforming what has been considered one of the most unloved rallies into a newly beloved one. Some admit it is hard to justify staying out of the market when stocks rise on a regular basis.

“I heard the word ‘melt up’ twice on the radio today,” John Briggs, head of strategy in the Americas at NatWest Markets wrote in a Tuesday client note. “It wouldn’t surprise me to see the current risk-on mood continue, even as it does honestly worry me to some degree.”

The Nasdaq Composite Index closed at an inflation-adjusted record for the first time in nearly two decades, surpassing its peak closing level from March of 2000 at the height of the tech boom. Adjusting for inflation offers a sense of how the purchasing power of money invested in the Nasdaq changes.

A recent Bank of America Merrill Lynch survey concluded fund managers are increasingly bullish. Average cash balances among portfolio managers also fell to 4.4% this month, a five year low, the survey found. The majority of investors who participated in a January poll said they expect the stock market to peak in 2019 or beyond. A month ago, the majority expected a top in the second quarter of 2018.

Investors joining the party late at least have history on their side. On average, roughly 40% of a bull market’s gains accrue in the first 12 months and an additional 32% pile on during the final 12, according to Longview Economics.

And stocks appear to be gaining steam. One-third of S&P 500 ended Friday at their highest prices in at least a year, the strongest “breadth” reading since 2013, according to MKM Partners. At least nine out of 10 stocks within six S&P 500 sectors last week coasted above their 50-day moving averages, another rare show of strength, according to Bespoke Investment Group.

Even small investors are showing new faith. About 60% of individual investors said this month they think the stock market will go higher over the next six months, the highest percentage since 2010, according to a recent American Association of Individual Investors survey.

“I’m more aggressive than I have been,” said Maurice Martin, a 62-year-old software sales retiree who lives outside of Atlanta. He has been buying financial stocks because he thinks they will benefit from any rise in interest rates and eventually from lower taxes.

The main engine propelling stocks higher has been record-low interest rates, many investors believe, and an exorbitant amount of stimulus from the world’s major central banks. These forces encouraged risk, pushing big institutional investors into stocks when bond yields were too low to get needed returns.

Now, the new bulls say, stock prices are rising for more fundamentally sound reasons. U.S. economic growth was better than 3% in the third quarter, its fastest pace in more than two years. The World Bank this month said global economy would grow 3.1% in 2018, on track to be the first year since the financial crisis that it will be operating at or near full capacity.

The new U.S. tax law that cuts corporate rates to 21% from 35% is likely to give earnings another lift. Goldman Sachs analysts estimate the new law will boost per-share earnings growth in the S&P 500 by 5% in 2018.

“That’s good for stocks,” said Erin Browne, head of asset allocation at UBS Asset Management, who added to her stock position late last year when the new tax policy looked likely to pass. She also felt encouraged by low inflation and central bank policy remaining accommodative.

rest of article is behind a pay-wall

[Belle]

Our stock market generally, but not always, follows yours. These comments are generalizations and mostly wrong:

The most recent gains have been powered in part by a sudden hunger for stocks among certain money managers and individual investors who have long been wary of the nearly nine-year bull market.Some market observers have dubbed this phenomenon Fear of Missing Out, as stock market records fall on an almost weekly basis. Others refer to a “melt-up” market, where the prevailing mood is shifting to greed from fear and investors stampede in without worrying much about valuation or fundamentals.

The economy in the US is on the improve but still playing catch-up with Europe. Zero interest rates and low bond rates have severely impacted upon the incomes of retirees and those wanting to build for retirement and the hints of green shoots and optimism via lowered unemployment and better numbers has meant they have demonstrated a willingness to buy. So, being wary of the nearly 9 year bull market has to be cast aside because of other imperatives. Institutional investors (as we call them in Australia) are the biggest investors, then followed by Retail investors (retirees and superannuation funds).

And 'greed' is a loaded emotive word which doesn't really argue anything. Investors 'stampede' (more emotion) without worrying about valuation and fundamentals.... Simplistic. Analysts and their clientele (traders) take risks and are, at the moment, most likely taking profits rather than holding long term investments. The old days of "set and forget" are gone, and it's also very easy to see if stock is being 'shorted' - that's something I've learned to do here on the ASX. Much discussion on trading platforms concentrates on China and the US and I've not read or heard anything like this which has been written by the Washington Post. Let me assure you, the vast majority of people who have all their life savings in the stock market are very concerned about "fundamentals". It's just that there have been no sustainable investment alternatives since interest rates hit zero (in any country) and economies have been largely stagnant.

"Greed" can apply to Bitcoin and such, but it's not a useful word to describe investors generally. Day trading is highly risky and people do this because the market fluctuates and they may be able to judge when a stock will rise and fall, but this always involves huge amounts of money and risk. This isn't "greed"; it's just a recognition of the fact that something of value (just the same as property) can be bought and sold for a profit, and that it's easier to do that than buy and hold for dividends or rent (in the case of property - which also has other imposts the share market does not).

And a 'market observer' is not an analyst. I'd like to know who these "some market observers" are. It's the sort of thing you'd expect to read in "The Guardian" and not the WSJ.

[jserraglio]

My take . . .

-- The article reprinted here is incomplete (half of it was behind a pay-wall).

-- It refers largely not to investors's motives historically but to the motives behind the current run-up of 1,000 pts. on the DJIA in a week. What is that if not "irrational exuberance", or baldly stated -- greed?

-- Market observer vs analyst: in this context, a distinction without a difference? Besides technical economic analysis, the WSJ publishes a lot that appeals to the general reader, such as today's story on the warning issued by 'Catch Me If You Can' scam artist, Frank Abagnale Jr. about the insecurity of checking accounts:

If you are still paying by check, you might be putting your life savings at risk. That’s the warning from Frank Abagnale Jr.

Anyone who has seen the face of a check you write from your checking account or wealth-management account could draft on that account tomorrow, he says.

[Belle]

As I said, I disagree with the comments of the "observers" who are very different to market analysts whose job it is to advise investors based on thorough knowledge of the movement of individual stocks. And anonymous 'observers' is sloppy journalism. Here in Australia these people are usually (almost always) identified so that we know whether they've got it right or wrong in the past. Most are usually wrong!!

Checking accounts are largely a thing of the past. We don't use one anymore and haven't for a while.

[jserraglio]

As I said, I disagree with the comments of the "observers" who are very different to market analysts whose job it is to advise investors based on thorough knowledge of the movement of individual stocks. And anonymous 'observers' is sloppy journalism. Here in Australia these people are usually (almost always) identified so that we know whether they've got it right or wrong in the past. Most are usually wrong!!

The article, incomplete (it is mostly behind a paywall), still manages to cite three observers by name--they are hardly anonymous.

I am not interested in whether stock-market forecasts from the WSJ are right or wrong. I am not looking for professional advice on how to buy or sell stocks. I read the WSJ because it offers well-written and interesting journalism of the first rank; also b/c it exposes me to a more conservative political viewpoint than I would otherwise get.

Nevertheless, one could do a lot worse than read the WSJ if one is managing one's own portfolio.

[Belle]

As I said, I disagree with the comments of the "observers" who are very different to market analysts whose job it is to advise investors based on thorough knowledge of the movement of individual stocks. And anonymous 'observers' is sloppy journalism. Here in Australia these people are usually (almost always) identified so that we know whether they've got it right or wrong in the past. Most are usually wrong!!

The article, incomplete (it is mostly behind a paywall), still manages to cite three observers by name--they are hardly anonymous.

I am not interested in whether stock-market forecasts from the WSJ are right or wrong. I am not looking for professional advice on how to buy or sell stocks. I read the WSJ because it offers well-written and interesting journalism of the first rank; also b/c it exposes me to a more conservative political viewpoint than I would otherwise get.

Nevertheless, one could do a lot worse than read the WSJ if one is managing one's own portfolio.

OK, so those observers were named. That's what I would expect to see. I manage a fairly large share portfolio and never read the WSJ, some of which is printed at the back of "The Australian" newspaper - which we get 6 days a week. But I do read other financial journals etc. What's interesting is that our own ASX often follows your stock exchange but not always - because our economy is mostly tied to Asia these days, especially China.

I still think the WSJ is wrong about the current market behaviour and why people are investing in shares with a vengeance and stick by my original comments (supported by local economic commentators - whom you wouldn't know if I named them). One of our TV talk program hosts here last night has just returned from the US and talked about a "melt up", warning of a crash. These comments demonstrated that she poorly understood the cycles of share markets, let alone any of the reasons for investor behaviour. Every day I watch a program called "Trading Day" and these things are discussed by experts; most agree (and I'm using their jargon) "the metrics are right" both here in the USA for people to dip their toes into the market again. I prefer not to use unhelpful terms like "greed" because it doesn't tell us anything. Sooner or later the stock market will "correct" and people will cry "crash" and then the cycle will begin all over again. That's when I'll be buying!

[jserraglio]

I manage a fairly large share portfolio and never read the WSJ

My dad, a welder by trade, successfully managed a large share portfolio entirely on his own with zero training in finance and no professional advice. He read the WSJ every day and told me it gave him all the help he needed.

[Belle]

Obviously an excellent outcome for him!!! But I suspect there were other forces at play, such as the willingness to take risk. I couldn't get by myself without reading about companies and taking heed of what share market analysts have to say. Some years ago I did a course where I learned to read financial reports, but even that has its limits. Good horse sense is always needed too, apart from what 'experts' have to say.

I'll give you an example; last year we went to a day-long seminar conducted by the ASX. One of the brokers in a firm there recommended a large poultry company which had recently gone to a float and 'the metrics look right'. We had very detailed knowledge about that company and knew that, while the figures looked fundamentally good on paper, there were things which would mitigate against future success - such as very high energy costs. When I mentioned this to the broker over morning tea he expressed surprise, knowing nothing about this. As my accountant always says, 'they look at a set of figures and zero in on that tiny aspect of the company'. In short, share trading requires constant attention from a number of angles!!

In Australia many categorize 'retail' shareholders this way; a 'small' shareholder is regarded as holding a portfolio under 1 million dollars in value and a 'sophisticated' shareholder is one who has 2 million dollars or more of holdings. A 'large' portfolio is one which contains many many different companies but tells little about its value.

[jserraglio]

Obviously an excellent outcome for him!!! But I suspect there were other forces at play, such as the willingness to take risk.

Actually, he took very few risks. It was all about slow and steady growth over 6 decades.

[Belle]

Ah, the 'set and forget' strategy is now very much a thing of the past. Unfortunately.

I wondered if this article might interest you, taken from today's "Australian":

Bitcoin the ultimate online gambling game
JOHN ABERNETHY The Australian January 23, 2018
Today’s interest rate settings and market yields — both for official cash rates and 10-year bonds — exist despite observations of world economic growth of more than 3 per cent a year, world inflation of at least 2 per cent and rising, and with no major economy threatened by recession. The sustained ­period of pathetically low interest rates inevitably brings us to bitcoin and its astronomical rise in price last year.

Whatever the reasons for the chaotic pricing of Bitcoin, it seems “the needy and the greedy punters of the world” now have something more lucrative to bet upon than the “two flies on the wall”. In a world where monetary manipulation has pushed traditional investing towards speculation, the ultimate “online” gambling game has evolved — bitcoin punting!

Bitcoin punting is commonly mistaken by many market commenters as a type of investment. With bitcoin followers adopting “real market” concepts — in this case “market capitalisation” — the bitcoin players are trying desperately to convince the majority of non-believers (indeed the overwhelming majority of people) that there really is a future for bitcoin.

Clearly it would be fabulous if there is a real future for bitcoins. The world’s immense debt problems could then be solved by a cryptocurrency that evolved from nothing and created trillions of value to repay the trillions of dollar debts that had previously been funded by the printing of money. Never before would so much value have been created by the burning of energy to solve mathematical problems — but then again, some $15 trillion of fiat currencies has been printed by the European, Japanese and US central banks over the past five years.

Market capitalisation is an interesting concept. It normally reflects the total market value of an individual company or index or a market. Each of these have their value and market price derived from the perceived value of the cash flows likely to flow from their underlying businesses. The equity market capitalisation changes constantly as earnings projections are adjusted and required returns (driven mainly by bond yields) ebb and flow with the perception of risk.

The problem with bitcoins (like gold) is that they don’t generate cash flows and so their value is ­influenced by a whole range of largely illogical factors. Many of these factors are driven by the intertwining of human weaknesses and psychology, with herd behaviour being especially important. In comparison, gold is different to bitcoin because it does have some practical uses. While I suspect bitcoin is a “con”, it may well be the result of the “con” of massive and unrelenting quantitative easing (QE) that continues to go unchecked in Europe and Japan. Indeed, if it were not for their QE programs, arguably the Japanese and most European governments would now be bankrupt.

Similar to gold, bitcoins are not printed but are mined, with their value enhanced as the cost (mainly electricity and energy) and the time involved in mining increases over time. This is in stark contrast to the printing of money or currencies, which has been undertaken by major central banks at an accelerated rate since the GFC and at seemingly little cost.

At this point, there is reported to be 21,000 bitcoins in existence and who owns them is subject to much conjecture. There is no real regulated centrepoint market where participants can assess the demand and supply, or indeed the leverage in the market.

With such lack of transparency, manipulation is easy and early and large holders of bitcoin may well be able to leave the market without the hapless buyers (punters) having any idea.

John Abernethy is managing director at Clime Asset Management.

[jserraglio]

Ah, the 'set and forget' strategy is now very much a thing of the past. Unfortunately.

He was constantly managing. He just refused to buy crap or be lured into fads like the one that led to the dot-com bubble. A name asset management firm took a look at his portfolio in the wake of the Great Recession and admitted they could not have managed it any better for him than he had. Not bad for a guy that never finished high school. The only financial adviser he ever had TMK was a fellow worker on the factory floor at Lincoln Electric that encouraged him in the '50s to invest some of his yearly bonus into company stock.

As for Bitcoin, I've been reading about it but fortunately don't have any ready money to flush down the toilet. I am a terrible gambler, and the only stock I own is 100 shares of GE my dad gave me when it was worth twice what it is now. He must have foreseen their downfall and unloaded whatever he had.

[Belle]

What a remarkable man!! He was obviously well aware of the need for lifelong learning and the pleasure and benefits which derive from it. I'm sure I would have enjoyed talking to your father and chewing the fat about Bitcoin. Yes, the dot.com bubble; I was a bit young when all that hit and didn't hold any shares as I was busy teaching and raising 4 kids. A friend of ours nearly lost everything on currency speculation; he was then and still is now the type of person who might easily succumb to some get-rich scheme or other. He had a large farm of the type we also had and he'll always remain in my memory because he was generous and kind and had a tennis court on his property which was only ever used for hanging the washing!! He and his wife were not unlike Ma and Pa Kettle!!!

Actually there are a couple of people who are probably a lot like your father who come to our monthly shareholders' meetings. They seem clued into what's going on and appear to have a working class background. I'm often looking for tips from them, but none are usually forthcoming. When I made a comment to them about an energy company in this country which I knew to have dubious practices I noticed them furiously write the name of that stock down. I sold mine and I'll bet they sold theirs.

[lennygoran]

the only stock I own is 100 shares of GE my dad gave me when it was worth twice what it is now. He must have foreseen their downfall and unloaded whatever he had.

I wonder if he would have enjoyed this interview CEO Barra had with David Rubinstein whose interviews have been airing on PBS Thirteen-I've enjoyed them-people like Gates and Buffet. Regards, Len

https://www.bloomberg.com/news/videos/2 ... arra-video
PS-the show takes a minute or so to get set up

[lennygoran]

Oops, just realized I confused GM with GE-well maybe he'll interview the CEO of GE soon? Regards, Len