Thursday, 17 July 2014

Yellen Yell to Sell

As we teeter in the Bradley Sideorgraph market turn period, Yellen's yell to sell has been joined by an upswing in Russia/ Ukraine hostilities, together with further US sanctions against Russian companies, Portuguese banks and the usual concerns of overvaluation that Yellen has only added voice to.

Yet Yellen's comments were particularly aimed at the tech and biotech sector, warning that P/E levels around 100 are risky. Too right they are, but raising interest rates by a percent or two is going to have minimal impact on these stocks as the reasons folks buy them at stratospheric P/Es are based upon hope about the future and dreams of rapid profits. If it was about interest rates these sort of stocks wouldn't have even got through IPO.

To that extent Yellen's concerns are generic and are not under the control of the Fed. Raising interest rates doesn't stop people buying lottery tickets.

One comparison that is being made is that between Yellen's latest comment and Greenspan's "irrational exuberance" speech of Dec '96.

The first thing to note is it took another three years of irrational stock exuberance before it all came tumbling down in March 2000. But it was different then wasn't it? Greenspan cut interest rates in the intervening period rather than raising them. As my old friend Macro Man points out, we now have a young generation of traders who have never experienced rising interest rates and what it does to market's so they will be in for a shock.

But that new generation has also be conditioned by tail risk. Like young lads sent to the front, they are all shell shocked and nervous as hell having been led into battle and taught by, tail risk glory hunters who made their killing in the Global Financial Crapout and subsequent Euro campaigns. They are programmed to look for tail risk. The condition they are not programmed for is irrational exuberance.

Though BAML have issued their Fund manager survey ( see a great run through here on GlobalMacroTrading) I guess what we need is data on how leveraged markets are in long equity positions vs 1999 (any help appreciated). It's leverage that kills and I don't believe anyone is mortgaging their house to buy stocks just yet, more likely the reverse - they are selling their stocks to buy a house.


Corey said...

Dunno how your interpretation of that siderogrsph can be bullish. Perhaps i have trouble seeing through the fact that it peaking only means a turn (direction not implied) or perhaps it's my conditional experience, which as you so neatly put it has been condition by the fat tails. Not that I'm capitulating, only reflecting. Still seems those expecting a correction or top far outnumber those calling for more room to run is reason enough not to IMO.

All this talk of equities and tops and when the fed will lift off - f that. Has anyone noticed what the LNG bond is doing? All these EM counties accumulating reserves to defend their currencies seemingly creating endless demand. Would think that it will break when super Mario gets in the game. He is still planning on that isn't he, or is he going to jawbone the ez out of the doldrums?

Polemic said...

hi corey. as you say the interpretation of a siderograph is not related to whether the graph itself goes up or down but turns in the graph are meant to mark dramatic change of mood in the market. So if the mood is to constantly call tops and fight an up move ... as you say the majority of commentary is that this is a bubble and must go down..then perhaps the turn in the s.graph will see that mood change so we can accelerate the upmove, as i assume all these nay sayers are short or underweight.

as for Mario jawboning.. it s been recognised EU policy to talk .. sorry guide the market.. long before they have to actually do something.

Interesting Lagarde is joing the "equites dangerously high" banter but I m sorry, my respect for IMF forecasts is pretty thin. And anyway. aswe keep saying. this time us different because traditional equity valuations are pretty screwed when the rate you use to discount us zero . 1/0 is a very large number.

price action after the horrendous mh17 event once again showing that bears just havent got the ammo.