24/7/20: Bonds v Stocks: Of Yields, Investors and Large Predators

Corporates are reeling from the COVID19 pandemic impacts, yet stocks are severely overpriced by all possible corporate finance metrics. Until, that is, one looks at bonds.

Over the 3 months through June 2020, average 10 year U.S. Treasury yield has been 0.69 percent. Over the same period, average S&P500 dividend yield was 2.02 percent. The gap between the two is 1.33 percentage points, which (with exception of March-May average gap of 1.42 points) is the highest in history of the series (from 1962 on).

Given that today's Treasuries are carrying higher liquidity risk (declining demand outside the official / Fed demand channel) and higher roll-over risks (opportunity cost of buying Ts today compared to the future), the real (relative) bubble in financial markets todays is in fixed income. Of course, in absolute returns terms, long-term investment in either bonds or equities today is equivalent to a choice of being maimed by a T-Rex or being mangled by a grizzly. Take your pick.

25/2/2020: No, 2019-nCov did not push forward PE ratios to 2002 levels

Markets are having a conniption these days and coronavirus is all the rage in the news flow.  Here is the 5 days chart for the major indices:

And it sure does look like a massive selloff.

Still, hysteria aside, no one is considering the simple fact: the markets have been so irrationally priced for months now, that even with the earnings being superficially inflated on per share basis by the years of rampant buybacks and non-GAAP artistry, the PE ratios are screaming 'bubble' from any angle you look at them.

Here is the Factset latest 20 years comparative chart for forward PEs:

You really don't need a PhD in Balck Swannery Studies to get the idea: we are trending at the levels last seen in 1H 2002. Every sector, save for energy and healthcare, is now in above 20 year average territory.  Factset folks say it as it is: "One year prior (February 20, 2019), the forward 12-month P/E ratio was 16.2. Over the following 12 months (February 20, 2019 to February 19, 2020), the price of the S&P 500 increased by 21.6%, while the forward 12-month EPS estimate increased by 4.1%. Thus, the increase in the “P” has been the main driver of the increase in the P/E ratio over the past 12 months."

So, about that 'Dow is 5.8% down in just five days' panic: the real Black Swan is that it takes a coronavirus to point to the absurdity of our markets expectations.

6/3/19: Expectations Sand Castles and Investors

As raging buybacks of shares and M&As have dropped the free float available in the markets over the recent years, Earnings per Share (EPS) continued to tank. Yet, S&P 500 valuations kept climbing:

Source: Factset 

As noted by the Factset: 1Q 2019 "marked the largest percentage decline in the bottom-up EPS estimate over the first two months of a quarter since Q1 2016 (-8.4%). At the sector level, all 11 sectors recorded a decline in their bottom-up EPS estimate during the first two months of the quarter... Overall, nine sectors recorded a larger decrease in their bottom-up EPS estimate relative to their five-year average, eight sectors recorded a larger decrease in their bottom-up EPS estimate relative to their 10-year average, and seven sectors recorded a larger decrease in their bottom-up EPS estimate relative to their 15-year average."

Bad stuff. Yet, "as the bottom-up EPS estimate for the index declined during the first two months of the quarter, the value of the S&P 500 increased during this same period. From December 31 through February 28, the value of the index increased by 11.1% (to 2784.49 from 2506.85). The first quarter marked the 15th time in the past 20 quarters in which the bottom-up EPS estimate decreased while the value of the index increased during the first two months of the quarter."

The disconnect between investors' valuations and risk pricing, and the reality of tangible estimations for current conditions is getting progressively worse. The markets remain a spring, loaded with the deadweight of expectations sand castles.

2/12/17: Bitcoin Craze Heads for the Moon

Just about 10 days ago, I wrote about the Bitcoin being a bubble. And since then, few things happened:

1. The bubble has now gone into public euphoria stage, witnessed by an ever-growing number of discounted brokerage platforms actively selling access to Bitcoin markets with leverage in excess of 100:1.
2. The bubble has gone from hyperbolic to hyperbolic+ trajectory, adding a massive degree of volatility to the trend. Earlier this week, Bitcoin managed to drop some 21 percent within a day and then go back above pre-drop levels within less than 24 hours. The confirmation phase is now complete with buy-on-the-dip 'investors' triggering waves of herding.
3. And the hype has gone institutional. In my post, I said "This is not just a shoe-shine-boy moment, folks. It is white-powder-under-the-nose-and--empty-bottles-of-vodka-on-the-floor hour for high school dropouts with cash to burn." Yeah, read this from as always excellent Matt Levine of (not always excellent) Bloomberg View: "One of the presenters at the conference... “Decentralization will change more in our lives over the coming years than possibly any other technological shift we’ve seen,” he says, likening the crypto rush to the Reformation. He describes building anarcho-capitalist city-states on the back of the blockchain. “If you’re going to built a new city, you’re not going to have the DMV – we don’t like the DMV,” he says at one point. Later: “We can actually tokenize the moon with a startup society.” When I ask him about the SEC’s role in the space, he waves the question off as irrelevant. “Under crypto-anarchy,” he explains, “we’ll get to determine the government that we want.”" Nasa should worry now, not just the SEC, for one day, the International Space Station will have to be flying through clouds of Bitcoins spread around space by the Moononizers of anarcho-capitalist-libertarian variety who securitized their moonhomes using blockchain contracts enforceable only under the anarchy laws.

Yes, bottles of vodka are empty now. 'Investors' have moved onto magic mushrooms.

21/6/17: BusinessInsider: The Most Important Charts in the World

My contribution to the BusinessInsider "The most important charts in the world from the brightest minds on Wall Street" is out. See my chart here: http://www.businessinsider.com/most-important-charts-markets-finance-chartbook-2017-6?op=0#/#constantin-gurdgiev-52 and the full deck of charts here: http://www.businessinsider.com/most-important-charts-markets-finance-chartbook-2017-6.

21/5/17: Student Loans Debt: The Bubble is Still Inflating

Having covered the latest news on the U.S. household debt continued explosion (see http://trueeconomics.blogspot.com/2017/05/19517-us-household-debt-things-are-much.html) and the ongoing deepening of the long term insolvency within the U.S. Social Security system (here: http://trueeconomics.blogspot.com/2017/05/19517-reminder-social-security-is-only.html), let’s take a look at the second largest source of household debt (after mortgages): Student Loans.

According to the data from the New York Federal Reserve, 1Q 2017 total volume of student loans outstanding in the U.S. was USD1.344 trillion, up on USD 1.310 trillion in 4Q 2016, marking the highest level of Student Loans debt in history. However, the Fed methodology does not include some of the more predatory types of loans extended to students.  This means that other sources report student debt at the end of 2016 to be between USD 1.44 trillion and USD 1.5 trillion (see for example https://studentloanhero.com/student-loan-debt-statistics/).

Setting aside the issues relating to data reporting, even by the official U.S. Fed standards, student loans debt is almost double the U.S. households’ credit cards debt, and is more than 10 percent higher than combined credit cards and HE revolving debt volumes.

Crucially, default rates on Student Loans are currently higher (at 11%) than for any other form of debt (credit cards defaults, second highest, are at around 7.45%).

With an average debt load of over USD36,000 per student, the expected Fed rates hikes through 2017 alone are likely to take some USD 270.00 per annum from household budgets already under severe strain from low income growth, and sky high and rising rents.

Meanwhile, the U.S. bankruptcy code now excludes Student Loans from protection, courtesy of 2005 Congressional decision, presided over by Joe Biden. Of course, Biden’s political machine was supported by one of largest student loans underwriter, the MBNA. President Obama promised to undo Biden’s changes to the bankruptcy code, but in the end did absolutely nothing to keep his promise and, in fact, made matters worse (https://www.bloomberg.com/news/articles/2015-10-14/obama-administration-hits-back-at-student-debtors-seeking-relief).  Subsequently, during his Presidential election campaign, Donald Trump said “That's probably one of the only things the government shouldn't make money off -- I think it's terrible that one of the only profit centers we have is student loans.”  Since election, however, the Trump Administration is yet to do anything on the issue.

In simple terms, American students have no friends in high places… but legislators like Joe Biden can roam free across campuses and events extolling own ethical virtues… for a fee... often paid for by students' tuitions.

15/4/16: Corporate Finance, S&P500 and Bubble Trouble...

Classical corporate finance tells us that companies should be valued on their earnings with past earnings being indicative of future earnings (predictive component). Which is tosh. In today's world that is.

Q4 2016 saw highest payouts to shareholders (combined cash dividends and share repurchases) in over 10 years (couple of slides from my course presentation):

And yet... yet... earnings have hit the brick wall back in Q3 2014 and have been trending down ever since:

You really can't call S&P500 anything but a sail-in-the-Fed-wind. There are no fundamentals sustaining it above 1600-1650 range. At least, not corporate fundamentals.

Unless, of course, one expects the recent extraordinary payout performance to remain indefinitely present in the future. Which only a sell-side analyst or a lunatic can...

8/5/15: Irish Residential Property Prices: Q1 2015

Updating residential property price indices for Ireland for 1Q 2015:

• National property prices index ended 1Q 2015 at 80.7, up 16.79% y/y - the highest rate of growth in series history (since January 2005), but down on 4Q 2014 reading of 81.4. Latest reading we have puts prices at the level of October 2014. Compared to peak, prices were down 38.2% at the end of 1Q 2015. National property prices were up 25.9% on crisis trough in 1Q 2015.

• National house prices ended 1Q 2015 at index reading of 83.8, which is down on 84.6 reading at the end of 4Q 2014, but up 16.55% y/y - the highest rate of growth in the series since September 2006. Relative to peak, national house prices were still down 36.5%.At the end of 1Q 2015, house prices nationally were up 25.5% on crisis period trough.
• National apartments prices index finished 1Q 2015 at 66.4, up on 4Q 2014 reading of 64.2 and 25.5% higher than a year ago. Apartment prices are down 46.4% on their peak and up 45.3% on crisis period trough. Y/y growth rates in apartments prices is now running at the highest level in history of the CSO series (from January 2005).

• Ex-Dublin, national residential property price index ended 1Q 2015 at 75.3, marking a marginal decline on 4Q 2014 reading of 75.5, but up 10.74% y/y - the highest rate of growth since May 2007. Compared to peak, prices are down 41.5% and they are up 13.9% on crisis period trough.
• Ex-Dublin house prices finished 1Q 2015 at the index reading of 77.1, which is virtually unchanged on 77.2 reading at the end of 4Q 2014. Year-on-year prices are up 10.78% which is the fastest rate of expansion since May 2007. Compared to peak prices are still 40.6% lower, although they are 14.2% ahead of the crisis period trough.
• Dublin residential property prices were at 82.5 at the end of 1Q 2015, down on 83.8 index reading at the end of 4Q 2014. Annual rate of growth at the end of 1Q 2015 was 22.77%, the highest since October 2014. Dublin residential property prices are down 38.7% compared to peak and up 44% on crisis period trough. Over the last 24 months, Dublin residential property prices grew cumulatively 40.3%.
• Dublin house prices index ended 1Q 2015 at a reading of 86.9, which is below 88.8 index reading at the end of 4Q 2014, but up 22.05% y/y, the highest rate of growth in 3 months from December 2014. Dublin house prices are down 36.9% on pre-crisis peak and are up 42.93% on crisis period trough. Over the last 24 months, cumulative growth in Dublin house prices stands at 39.5%.
• Dublin apartments price index ended 1Q 2015 at a reading of 73.7, up on 70.2 reading attained at the end of 4Q 2014, and up 29.75% y/y - the fastest rate of growth recorded since September 2014. Compared to peak, prices are still down 42.2% and they are up 59.2% on crisis period trough. Over the last 24 month, Dublin apartments prices rose cumulatively by 51.3%.

Longer dated series available below:

And to update the chart on property valuations relative to inflation trend (bubble marker):

As chart above clearly shows, we are getting closer to the point beyond which property prices will no longer be supported by the underlying fundamentals. However, we are not there, yet. Acceleration in inflation and/or deceleration in property prices growth will delay this point significantly. One way or the other, there is still a sizeable gap between where the prices are today and where they should be in the long run that remains to be closed.

27/8/2014: Irish Property Markets: Some Foam Under the Cork...

Time to worry is… about now… or rather in a couple of months...

Irish residential properties price index for July was released by CSO. The data is showing continued established trends in prices recovery with further amplification in the worrying trends of double-digit y/y increases in Dublin property prices. While I generally prefer to provide more detailed analysis on a quarterly data, which will be available at the end of October, the current rates of increases in prices are now worrying and deserve at least a brief comment.

Overall, National Residential Prices Index rose to 75.3 in July 2014, which is up 13.4% y/y. July marks third consecutive month of double-digit y/y increases in prices. And the rate of increases is accelerating for the fourth consecutive month. This is worrying. The level of index remains low - 42.3% off its pre-crisis peak and only 17.47% up on crisis trough. But cumulated 24 months gain is now 16.0% (an annualised rate of increases at 7.71%). Thus, as I noted before, the main concern is not the level of prices, yet, but the the rate at which prices are moving up.

Furthermore, the rate of price increases in the Apartments segment of the market is clearly outstripping price increases for houses in all months since June 2013, with exception of February 2014. This too is worrying as this suggests investment motives buying acting strongly to push prices up for rental properties. The result will likely be misallocation of investment and rising rents.

In Dublin, the growth rates are even of greater concern.

Once again, levels are not a problem: Dublin residential properties index currently sits at 76.6 which is 43.5% lower than pre-crisis peak and 33.68% higher than crisis period trough. Dublin fell hardest and fastest of all markets in Ireland during the crisis, so it is bouncing back now faster too. So much is fine. But the rates of increase in prices y/y are now running at double digits for 12 consecutive months in a row, with last three months the rates of prices increases in Dublin at above 21 percent. sooner or later it will be time to call this a 'feeding frenzy' and if the credit supply to the sector were to improve, all stops will be pulled out of the buyers. Psychology here is not pretty.

So is it 'finally' time to call this a bubble? Not yet. I will make my next call on this on foot of September data (due in October), but in general, the levels of prices are still benign compared to pre-crisis peaks, pre-bubble trends and the 'natural rate' of price increases that can be expected to prevail from the 1990s on. But I am beginning to worry that a combination of:

1. Tight supply of suitable properties
2. Rising rents and lack of retail investor professionalism in structuring functional investment portoflios
3. Psychology of the buyers, reinforced by the media and real estate agents commentary, 
4. Expectations of further tax easing in the Budget 2015, especially targeted to property markets, and
5. Continued accumulation of cash in certain sub-sectors of economy

are all adding up to a rising pressure on the investors and buyers to go into the market to secure 'any' deal at 'any' valuation as long as it is remotely affordable.

This is not a 'champagne cork' moment, yet, but we have lots of foam in this market, with little to slow down the cork for the moment...

24/7/2014: Residential Property Prices: June 2014 Detailed Breakdown

In the previous post I covered Residential Property Prices Index data from the point of view of the 'bubble' dynamics. Monthly data is covered in the CSO report here. So to avoid doing what every one else in media is doing (regurgitating the press release), here is the analysis of data based on quarterly aggregates and longer-term changes. This strips-out some of the monthly-level volatility and is probably better suited to comparatives across time.

Starting with the RPPI nationwide:

• Q2 2014 average is at 76.9 which is well ahead of 69.4 average for Q1 2014 - a rise of +3.55%. 
• Cumulated 24 months growth is now at 13.9% or 6.72% annualised. This is robust, but very much in line with what can be expected in a recovery phase, given the rates of market collapse during the crisis.
• Compared to Nama valuations, we are still down 24.8%
• Compared to pre-crisis peak we are down 43.5% and compared to crisis trough we are up 15.1%.

Here are the annual growth rates in the series:

• National Houses series are driving the overall National Index. Houses series are up 3.55% - same as National - in Q2 2014 compared to Q1 2014. 24 months cumulated gain is 13.6%, slightly below National gains. Compared to crisis peak, National Houses index is 41.8% lower, while compared to crisis trough it is 15% up.
• Apartments up 3.62% q/q in Q2 2014 and cumulated gains are 19.8% over the last 24 months. Relative to peak these are down 54% and relative to crisis period trough they are up 24.7%. There is a lot more volatility in Apartments Index than in the Houses Index.

Ex-Dublin:

• Ex-Dublin Properties Index is up only 0.1% q/q in Q2 2014. There is basically no growth in the series. Over the last 24 months, series rose just 2.35% cumulatively. Compared to peak, ex-Dublin national prices are 45.8 down and compared to crisis-period trough they are up only 5.6%. This is very anaemic. 

Dublin:

• Dublin All-Properties Index is up 7% in Q2 2014 compared to Q1 2014. This is fast. Cumulated gains over last 24 months are 29.1% (annualised rate of 13.6%) which is also very fast. Compared to peak, prices in Dublin are down 44.5%, which is worse than National (-43.5%) and relative to crisis period trough prices are up 30.2% (which is better than National at 15.1%).
• Nama valuations are off 17.2% in Dublin, which is much better than outside Dublin.
• Dublin Houses Index is up 7.2% q/q in Q2 2014 - very fast rise. Cumulated gains over 24 months are 28.9% (annualised rate of 13.5% - also very fast increases). Compared to peak, Dublin Houses prices are off 42.7% and compared to trough they are up 30%.
• The above dynamics are starting to concern me - we are witnessing very fast increases from very low levels, so while we are not yet in over-pricing territory, we are converging toward long-term equilibrium prices at a break-neck speed. The next 3 months data will be probably non-representative due to two late-Summer months, but September-December data will be crucial. 
• If we witness gradual de-acceleration in growth rates, things are out of excessive exuberance zone - for that we need rates of growth y/y to decline to 7.5-14% range.
• If we witness stabilisation in rates of growth in excess of 14% we are likely to see serious risk of over-pricing emerging in the medium term.
• So watch this space... especially the last chart below...

24/7/2014: Looking for that Property Price Bubble: Dublin, June 2014

Irish Residential Property Price Index for June is out today. Headlines are burning hot with

• 12.5 hike in prices nationwide (y/y);
• June m/m rise of 2.9% - faster than 2.3% in May
• Dublin property prices up 3.3% m/m and 23.9% y/y
• Dublin House prices up 3.1% m/m and 24.4% y/y

There is no avoiding the talk about a 'new bubble'.

In the past, I clearly said that in my view:

1. Current levels of prices are not signalling bubble emergence in Dublin
2. Rates of increases in Dublin prices are concerning, but levels are yet to break away from the national historical averages
3. Trend-wise, we are way below the levels of Dublin prices consistent with normal long-term behaviour in the series.

Here are updated charts on long-term trends.

First, looking at annual series and applying two trend assumptions: actual inflation and ECB target (long-run inflation). By both metrics, we are still below (using 3mo MA through June 2014 as 2014 figure) equilibrium, but rate of convergence is accelerating:

On monthly basis, here are historical series, linking ESRI and CSO data sets:

As above clearly shows, Q2 2014 levels of prices in Dublin are barely above 2000-2002 average.

So the dynamics can signal a bit of an exuberance on the market demand side, but levels are still very much conservative compared to longer-term trends.

9/6/2014: 2 charts, 2 markets, same nagging sensation...

Two charts worth paying close attention to:

The first one from Deutsche Bank:

The above is showing ratio of S&P500 Price/Earnings ratio to VIX (quarterly) volatility indicator. Recent uplift in the series is down to simultaneously:

• Rising equity price relative to earnings, and
• Falling markets volatility

The second one is via TestosteronePit, showing the first bit: rising equity prices relative to falling earnings, except not for S&P, but for European equities:

Care to draw any conclusions as to rational expectations vs short-term profit chasing?..