Nick Sorrentino - (An important interview) Saving the Net from the surveillance state (And Crony Media): Glenn Greenwald speaks up (Q&A)
Posted: 12/7/2013 12:10:00 AM EST

In the attached interview Glenn Greenwald (the former Guardian reporter who has worked closely with Edward Snowden) speaks about the danger of a surveillance state, and the complicity of the #oldmedia. Where the press once was at least somewhat adversarial it has become a lapdog. In many ways it is mere propaganda for the crony capitalist state.

Greenwald also speaks of the need for a free Internet, and why privacy must be respected for human beings to be truly free. (In this country the 4th Amendment should protect us from a ubiquitous surveillance state but the government has tossed aside this part of the Constitution it seems.)

“But if we know we’re being watched all the time, then we’re going to engage in behavior that is acceptable to other people, meaning we’re going to conform to orthodoxies and norms. And that’s the real menace of a ubiquitous surveillance state: It breeds conformity; it breeds a kind of obedient citizenry, on both a societal and an individual level. That’s why tyrannies love surveillance, but it’s also why surveillance literally erodes a huge part of what it means to be a free individual.”

Think what you want about Greenwald and Edward Snowden – and Snowden camping out in Russia was a mistake – they, in the words of a very socially conservative friend of mine – “did us a favor.”

In the interview I am particularly taken by how much Greenwald is a citizen of the Net. Many of the experiences he has had online, pushing personal political assumptions, learning about new cultures and new ideas, engaging in real debate outside of his insulated world, are similar to my own and to the experiences of millions of other people around the world.

It is the marketplace of ideas, and it must be defended.

Click here for the article.

See more at Against Crony Capitalism.org

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John Ransom - Ten Year Notes Continue to Sag
Posted: 12/7/2013 12:05:00 AM EST

Welcome to John Ransom’s Stocks in the News where the headlines meet the trendlines:

Stock number one: Ballard Power Systems

And the headline says: Partnership Fuels Ballard Power's Gains- The Street.com:

In what is turning out to be a positive day for alternative fuel-cell developers, Ballard Power Systems (BLDP) soared 25.2% to $1.79 by mid-morning Friday. The micro-cap has risen 35.6% this week.

The Canada-based business is making gains after signing a non-binding memorandum of understanding with Van Hool NV, Europe's fourth-largest bus manufacturer, to develop zero-emission fuel-cell vehicles. Van Hool has committed to 27 fuel-cell buses, powered by Ballard technology, in operation across Europe through 2014.

Note: This stock recently traded at $1.79. The company’s stock price peaked near $130 back in 2000. In the day Ballard was like the Tesla of solar—which is why I included it today.

Symbol: BLDP

Dividend: NA

Forward PE: NA; Trailing PE: NA

Estimate Trend: NA

Ransom Note Trendline: Avoid Ballard.

BLDP Chart

BLDP data by YCharts

Stock number two: Sell Lumber Liquidators Holdings, Inc.

Fastenal November Daily Sales Above Oct- Yahoo Finance:

Fastenal Company (FAST) released decent sales results for the month of November wherein net sales rose 3.1% year over year to $621.3 million. Currency was a 0.4% headwind.

November daily sales grew 8.2% to $13.1 million, showing an improving trend from growth rates of 2.9%, 7.2%, 5.7% and 7.7% in the months of July, August, September and October, respectively. The daily sales growth was flat from November last year.

Fastenal carries a Zacks Rank #4 (Sell). Better-ranked stocks in the building products/ building construction sector include Liquidators Holdings, Inc. (LL), Builders FirstSource, Inc. (BLDR) and CaesarStone Sdot-Yam Ltd (CSTE). While Lumber and CaesarStone carry a Zacks Rank #1 (Strong Buy), Builders FirstSource holds a Zacks Rank #2 (Buy).

Symbol: LL

Dividend: 3%

Forward PE: 30; Trailing PE: 31

Estimate Trend: None

Ransom Note Trendline: Buy Lumber Liquidators

LL Chart

LL data by YCharts

Ten-Year Treasury

Market Action: Taper Concern Still Hovers- Cheat Sheet

Just when you thought it was gone – it’s back. After stocks managed to advance last Wednesday following three positive economic reports, financial commentators had reached the conclusion that the Federal Reserve’s new mantra, “tapering is not tightening” had finally sunk in, and that investors no longer had the same fears concerning cutbacks to the Fed’s bond purchases.

Thursday’s trading action demonstrated that the only difference is that the fear has been reduced to concern. Instead of a huge stock selloff in the wake of positive economic data, we saw a more restrained, 0.43 percent decline in both the Dow and the S&P 500. The yield on the ten-year Treasury note rose slightly to 2.87 percent.

Symbol: ^TNX

Dividend: N/A

Forward PE: NA; Trailing PE: NA

Estimate Trend: Steady

Ransom Note Trendline: Avoid Ten-Year Treasury

^TNX Chart

^TNX data by YCharts

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Mike Shedlock - EU Simmering in a Pot of Misery
Posted: 12/5/2013 11:38:00 PM EST

A Gallup survey shows rising European joblessness is accompanied by falling living standards as Nearly Half of Younger Southern Europeans Underemployed

In 2013, nearly half of 15- to 29-year-olds in six southern European countries are underemployed -- meaning they are either unemployed or working part time but wanting full-time work.



Though the unemployment rate is the labor market indicator that typically grabs headlines, underemployment may be almost as damaging to younger people in terms of their own long-term prospects and their countries' labor productivity. Temporary and part-time jobs are those most often available to young people, and they are often the first to be laid off because they lack seniority. Underemployment rates are much lower among southern Europeans aged 30 to 49 (26%) and those aged 50 and older (24%).

Young people in southern Europe almost universally (90%) say it is a bad time to find a job in their communities, versus about two-thirds of young people in western Europe (67%) and eastern Europe (68%). However, at 57%, labor force participation among young southern Europeans is as high as it has been over the last several years, suggesting that those who find themselves out of work do not have the option of leaving the workforce altogether -- to pursue educational opportunities, for example -- until the labor market improves.

What's Needed vs. What Happened

What's needed is work rule reform, easier standards to fire people, fewer government workers, lower minimum wages, less regulation, and less taxation.

What happened was higher taxes thanks to pressure from the IMF, Troika, and EU nannycrats. Economic pundits incorrectly labeled the result as "austerity".

Yes, austerity did not work as implemented, as Keynesian economists predicted. But Austrian economists predicted the same thing.

Raising taxes in the midst of a recession is a downright foolish thing to do, and it happened in spades. The results speak for themselves.

Explosive Mix

Nearly half of young Europeans are simmering in a pot of misery. Something has to give because "austerity" as implemented is not working.

This is going to boil over in a political explosion of some sort, and when it happens, fully expect heads of state to say "no one could possibly have seen this coming".

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Read more at http://globaleconomicanalysis.blogspot.com/2013/12/simmering-in-pot-of-misery-nearly-half.html#kA0lL3VSyBSBip0G.99

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Nick Sorrentino - Rand Paul proposes turning Detroit into a nearly tax free “Freedom Zone.”
Posted: 12/5/2013 11:33:00 PM EST
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John Ransom - Key to Biotech: Find Cures, Make Money
Posted: 12/5/2013 11:24:00 PM EST

Welcome to John Ransom’s Stocks in the News where the headlines meet the trendlines:

Stock number one: Puma Biotechnology

And the headline says: Breast Cancer Drug Data Boosts Puma Biotechnology- Investor's Business Daily:

Puma Biotechnology (PBYI) stock vaulted 42% to a new high in morning trading on the stock market today after the company reported surprisingly strong data from a phase-two trial of its breast cancer drug.

The study gave a regimen of Puma's neratinib combined with paclitaxel (better known as Bristol-Myers Squibb's (BMY) Taxol) to 115 patients with breast cancer at Stage 2 or worse, and compared those patients with a control group given paclitaxel combined with Roche's (RHHBY) blockbuster Herceptin. The results not only favored neratinib, according to Leerink Swann analyst Howard Liang, but presaged a good result for another study comparing neratinib to GlaxoSmithKline's (GSK) Tykerb.

Note: Roche’s Herceptin did about $6.5 billion in sales last year. Valuation for PBYI is likely to be expressed in percentage of worldwide market for breast cancer drugs.

Symbol: PBYI

Dividend: NA

Forward PE: NA; Trailing PE: NA

Estimate Trend: NA

Ransom Note Trendline: Buy Puma for speculative accounts.

PBYI Chart

PBYI data by YCharts

Stock number two: Microsoft Corporation.

Here's Why Microsoft and Electronic Arts are Plunging- Motley Fool

Microsoft was underperforming the Dow early on Thursday, shedding more than 3% after closing near a multiyear high on Wednesday. Speculation circulated that Ford CEO Alan Mulally would not be named Microsoft's next CEO. Mulally, who has had successful executive stints at Ford and Boeing, was widely expected to take over the Windows maker following Steve Ballmer's retirement.

Although he isn't know for being a tech visionary, Mulally helped design Microsoft's recent reorganization and may be best equipped to help remake Microsoft's corporate culture. Admitedly, it's only speculation, and Mulally could still be named Microsoft's next CEO, but for now, investors appear to be reacting by selling shares.

Symbol: MSFT

Dividend: 3%

Forward PE: 13; Trailing PE: 14

Estimate Trend: None

Ransom Note Trendline: Sell Microsoft

MSFT Chart

MSFT data by YCharts

Morgan Stanley

Citigroup, Morgan Stanley Downgraded on Fed Taper Fears- Barron's

Investors have been grappling for months with worries surrounding Federal Reserve policies. Upbeat economic reports reinforced fears that later this month the central bank could start to taper its $85-billion-a-month bond-purchase program. The Fed’s easy-money policies have been credited for helping fuel the 2013 stock market.

Symbol: MS

Dividend: N/A

Forward PE: 12; Trailing PE: 19

Estimate Trend: Steady

Ransom Note Trendline: Avoid Morgan Stanley

MS Chart

MS data by YCharts

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John Ransom - Krispy Kreme Not So Sweet Deal
Posted: 12/3/2013 1:53:00 PM EST

Welcome to John Ransom’s Stocks in the News where the headlines meet the trendlines:

Stock number one: Abercrombie & Fitch Co.

And the headline says: Abercrombie shareholder wants CEO replaced or company sold- Reuters:

An Abercrombie & Fitch Co (ANF) shareholder urged the teen apparel retailer to replace Chief Executive Mike Jeffries after his contract expires in February, failing which the company should consider selling itself.

Engaged Capital LLC, which owns less than 1 percent of the company's shares, said in a letter to the board on Tuesday that the expiration of Jeffries' term is an opportunity for the board to set a new direction for the company.

Symbol: ANF

Dividend: 2.3%

Forward PE: 15; Trailing PE 19- Respectable PEs

Estimate Trend: Downward

Ransom Note Trendline: Avoid Abercrombie & Fitch Co.

ANF Chart

ANF data by YCharts

Stock number two: Corning Inc.

What's In It For Corning And Samsung In The Samsung Corning Precision Deal? - Seeking Alpha

Corning (GLW) recently announced that it will buy out Samsung’s 43% stake in Samsung (GM: SSNLF) Corning Precision Materials (SCP), in exchange for $1.9 billion worth of new Corning convertible preferred shares. Additionally, Samsung will make an investment of $400 million in convertible preferred shares, which would give Samsung a 7.4% stake in Corning based on its current share count [1]. The shares are convertible at $20 per share after seven years, or can be forced for conversion if the share price rises above $35. SCP manufactures LCD substrates that are used in TVs, laptops, monitors, mobile phones and cameras.

Symbol: GLW

Dividend: 2.3%

Forward PE: 11; Trailing PE: 14

Estimate Trend: None

Ransom Note Trendline: Sell Corning

GLW Chart

GLW data by YCharts

Krispy Kreme Doughnuts, Inc.

Krispy Kreme Shares Plunge As Investors Go On A Diet- Investor's Business Daily

Investors are on a diet from Krispy Kreme Doughnuts' (KKD) stock, as shares plunged Tuesday after the chain issued a weak outlook Monday.

Shares were down 16.8% to 20.41, below its 50-day line and at a two-month low, on the stock market today. Competitor Dunkin' Brands (DNKN) shares dipped 0.3% to 48.32.

Late Monday, Krispy Kreme reported a 33% jump in earnings to 16 cents per share, beating analysts' estimates by a penny. But sales rose 7% to $114.2 million, just under forecasts for $114.6 million. Company same-store sales increased 3.7%.

Symbol: KKD

Dividend: N/A

Forward PE: 26; Trailing PE: 62

Estimate Trend: Downward

Ransom Note Trendline: Sell Krispy Kreme

<KKD Chart

KKD data by YCharts

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John Ransom - Mark of Death? Penny's Gathers in Dollars from Heaven
Posted: 12/2/2013 2:32:00 PM EST

Welcome to Stocks in the News, where the headline meets the trendline.

Stock number one: Rockwood Holdings

And he headline says: Rockwood to From Venture With Tianqi for Lithium Unit- Bloomberg:

Rockwood Holdings Inc. (ROC), the world’s largest producer of lithium products, agreed to form a joint venture with China’s Chengdu Tianqi Industry Group Co. that will give it a stake in Tianqi’s Australian mining unit.

Rockwood will take a 49 percent stake in a venture controlling Talison Lithium Pty Ltd., with Tianqui holding the other 51 percent, Princeton, New Jersey-based Rockwood said today in a statement.

Symbol: ROC

Dividend: 2.7%

Forward PE: 36; Trailing PE: 5- estimates likely to be revised on the deal.

Estimate Trend: Downward

Ransom Note Trendline: Avoid Rockwood Holdings

ROC Chart

ROC data by YCharts

Stock number two: ZOOM Technologies, Inc.

And the headline says: ZOOM TECHNOLOGIES INC Financials- Edgar Online Financials

On November 19, 2013, an email transmitted to the Company by Marcum Bernstein & Pinchuk LLP ("Marcum"), the Company's independent registered public accounting firm, indicated that the Company's previously issued unaudited financial statements for the period ended September 30, 2013 could not be relied on because they were not reviewed by an independent registered public accounting firm in accordance with Statement on Auditing Standards No. 100, Interim Financial Information ("SAS 100"). On November 19, 2013, the Company accidentally authorized filing of the form 10-Q for the period ended September 30, 2013 (the "Original 10-Q") prior to completion of the review by Marcum.

Symbol: ZOOM

Dividend: N/A

Forward PE: None; Trailing PE: None

Estimate Trend: None

Ransom Note Trendline: Avoid Zoom

ZOOM Chart

ZOOM data by YCharts

Stock number three: J. C. Penney Company, Inc.

And the headline says: The 5 most interesting stock stories right now- CNBC

I know. You're probably getting tired of hearing about JCPenney. There are times I get tired of talking about it. But what can you say about a stock that is both the worst performer in the S&P 500 this year and the best performer in the S&P 500 in November?

Plus, this is the make-or-break month for the retailer. Everybody is watching new/old CEO Mike Ullman's turnaround plan closely. At least part of the stock's recent run is on holiday optimism. If Penney can post solid comps in December, watch out to the upside.

Symbol: JCP

Dividend: N/A

Forward PE: None; Trailing PE: None

Estimate Trend: Upward

Ransom Note Trendline: Sell JC Penny

JCP Chart

JCP data by YCharts

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Nick Sorrentino - Full List of Obamacare Tax Hikes
Posted: 11/25/2013 2:19:00 PM EST

Obamacare was crafted in the back rooms of Congress. Congressional staffers and industry lobbyists scribbled away, writing the massive law deep into the night, night after night. Everyone wanted to make sure they got what they wanted. The insurance industry and Big Pharma made sure they got new mandates forcing Americans to buy their products. The politicians got lots and lots of new taxes wedged skillfully into the nooks and crannies of the bill.

Here’s a list of these new taxes.


I thought that families that made under $250k/year weren’t going to see their tax bills rise. I am pretty sure that’s what the president said.

But I suppose we’ve learned by now that what this president says, and what he does are 2 different things.

For more visit Against Crony Capitalism

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Mike Shedlock - Hussman's Open Letter to the Fed; The Problem with Bubbles; Textbook Pre-Crash Bubble; Reflections on Not Chasing Bubbles; Integrity vs. Respect
Posted: 11/25/2013 2:17:00 PM EST

John Hussman's last three weekly emails have been outstanding. Let's take a look at a couple short snips from the first two articles and then a longer snip from his letter to the Fed.

Textbook Pre-Crash Bubble

November 11: Textbook Pre-Crash Bubble by John Hussman

Hussman: "The problem with bubbles is that they force one to decide whether to look like an idiot before the peak, or an idiot after the peak."

This is exactly how I have felt for two years running. It reminds me of 1999-2000 when tech stocks put on that last big rally. Avoiding a bubble is incredibly hard to do, and this one has been exceptional.

Here is a chart from the article with Hussman's comments.

Though I don’t believe that markets follow math, it’s striking how closely market action in recent years has followed a “log-periodic bubble” as described by Didier Sornette (see Increasingly Immediate Impulses to Buy the Dip).



A log periodic pattern is essentially one where troughs occur at increasingly frequent and increasingly shallow intervals. Frankly, I thought that this pattern was nearly exhausted in April or May of this year. But here we are. What’s important here is that the only way to extend that finite-time singularity is for the advance to become even more vertical and for periodic fluctuations to become even more closely spaced. That’s exactly what has happened, and the fidelity to the log-periodic pattern is almost creepy. At this point, the only way to extend the singularity beyond the present date is to envision a nearly vertical pre-crash blowoff.

At this horizon, even “buy-and-hold” strategies in stocks are inappropriate except for a small fraction of assets. In general, the appropriate rule for setting investment exposure for passive investors is to align the duration of the asset portfolio with the duration of expected liabilities. At a 2% dividend yield on the S&P 500, equities are effectively instruments with 50-year duration. That means that even stock holdings amounting to 10% of assets exhaust a 5-year duration. For most investors, a material exposure to equities requires a very long investment horizon and a wholly passive view about market prospects.

Hugh Hendry Throws In Towel

On November 22, InvestmentWeek reported long-time bear Hugh Hendry threw in the towel. 'I can't look at myself in the mirror': Hendry reveals why he has turned bullish

Speaking at Harrington Cooper's 2013 conference, Hendry said he is no longer fighting the "two-way feedback loop" which is continuing to boost risk assets.

"I can no longer say I am bearish. When markets become parabolic, the people who exist within them are trend followers, because the guys who are qualitative have got taken out. I have been prepared to underperform for the fun of being proved right when markets crash. But that could be in three-and-a-half-years' time."

"I cannot look at myself in the mirror; everything I have believed in I have had to reject. This environment only makes sense through the prism of trends."

Trend Is Your Friend Until It Changes

Hendry is now looking for ‘auto-correlations' that benefit from this feedback loop. "You have got to be in things that are trending," says Hendry.

Why Now?

The market has been trending ever since March 2009. There were a few pullbacks along the way, but every one was bought with vigor. Does that mean the next one will be bought?

Hardly. And why should it?

My friend Pater Tenebrarum at the Acting Man blog commented via email ...

"Hendry's change in stance is akin to Druckenmiller covering all his shorts in Internet stocks in November of 1999 and going long tech. The internet stock shorts he covered topped out two weeks later (they topped well before the Nasdaq did), the Nasdaq's final high came in early March, about 3 months later. Thereafter, an 85% decline in the index - and 3/4 of the internet stocks in which Druckenmiller covered shorts eventually went to ZERO, while the remainder fell between 90% to 99%."

Hendry is aware, but unconcerned about that possibility.

Said Hendry ... "I may be providing a public utility here, as the last bear to capitulate. You are well within your rights to say ‘sell'. The S&P 500 is up 30% over the past year: I wish I had thought this last year. Crashing is the least of my concerns. I can deal with that, but I cannot risk my reputation because we are in this virtuous loop where the market is trending."

Wow. Given valuations, crashing should be everyone's big concern. But if it was, prices would not have gotten this ridiculous in the first place.

Reflections on Not Chasing Bubbles

November 18: Chumps, Champs, and Bamboo by John Hussman

“The seed of a bamboo tree is planted, fertilized and watered. Nothing happens for the first year. There´s no sign of growth. Not even a hint. The same thing happens – or doesn´t happen – the second year. And then the third year. The tree is carefully watered and fertilized each year, but nothing shows. No growth. No anything. Then the bamboo tree suddenly sprouts and grows thirty feet in three months.” ? Zig Ziglar

This story is more than a quote about persistence – it’s actually a reasonable description of risk-managed investing.

At bull market peaks, it often seems that the market is simply headed higher with no end in sight, and “buy-and-hold” appears superior to every alternative. Meanwhile, the reputation of value-conscious investors and risk-managers goes from “champ” to “chump.” Then, the bamboo tree suddenly sprouts, and the entire lag is often replaced by outperformance in less than a year. Only after the fact does the reputation of risk-managed strategies surge from “chump” to “champ.” By then, it’s unfortunately too late to be of help to many investors who capitulated in frustration at the peak.

As Jeremy Grantham at GMO has observed, “we often arrive at the winning post with good long-term results and less absolute volatility than most, but not necessarily with the same clients that we started out with.

Hussman's Open Letter to the Fed

November 25: An Open Letter to the FOMC: Recognizing the Valuation Bubble In Equities by John Hussman


The chart below is from one of the best tools that the Fed offers the public, the Federal Reserve Economic Database (FRED). The chart shows the ratio of corporate profits to GDP, which is presently at a record. The fact that profits as a share of GDP are more than 70% above their historical norm should immediately raise a question as to whether current year earnings or next year’s projected “forward earnings” should be used as a sufficient statistic for long-term cash flows and equity market valuation without any further reflection. Then again, more work is required to demonstrate that such an approach would be misleading. We’re just getting warmed up.



A simple way to see the implications of the present elevation of the profit share is to relate the level of profit margins to subsequent growth in profits over a reasonably “cyclical” horizon of several years. Remember, when one values equities, one is valuing a long-term stream, not just next year’s earnings. Investors taking current-year or forward-year profits as a sufficient statistic should be aware that high margins are reliably associated with weak profit growth over subsequent years.



The next relevant question is to ask why profit margins are presently so high. One might argue that the profitability of companies has achieved a permanently high plateau. Despite historical mean-reversion in profit margins (which tend to collapse over the full course of the business cycle), maybe this time is different. As it happens, we can relate the surfeit of corporate profits in recent years rather precisely to the extraordinary combined deficits of the household and government sectors during the same period. ....

Corporate profits as a share of GDP are nearly the mirror image of deficits in the household and government sectors. A simple way to think about this is that dissaving in both sectors helps to support corporate revenues and limit the need for competition, even when wages and salaries are depressed. It follows that most of the variability in corporate profits over time is driven by mirror image variations in the household and government sectors. ....

The fact is that valuation measures driven by single-period earnings (whether trailing earnings or forward operating earnings) are poorly correlated with subsequent market returns, mainly because they impose the counterfactual assumption that profit margins can be held constant over time.

Though Fed officials including Alan Greenspan and Janet Yellen seem attracted to the seemingly elegant simplicity of these “equity risk premium” models, they seem somehow oblivious to the fact that they don’t actually work.
Why is the historical record of these simple “equity risk premium” estimates such a cacophony of noise? The answer should be immediately apparent. It turns out that the error between these estimates and actual subsequent 10-year S&P 500 total returns (in excess of 10-year Treasury yields) has a correlation of 0.86 with – you guessed it – profit margins. With profit margins at the highest level in history, the record suggests that these models are grossly overestimating prospective equity returns at today's all-time stock market highs. Unfortunately, this evidence also suggests that the faith expressed in these “equity risk premium” estimates by Janet Yellen and others is likely to coincide with their most epic failure in history.

My strong disagreement should not be confused with disrespect, and none is intended, but wasn't it Janet Yellen who in October 2005, at the height of the housing bubble, delivered a speech effectively proposing that monetary policy could mitigate any negative economic consequences of a housing collapse, and arguing that the Fed had no role in preventing further housing distortions? Given the lack of concern with the present elevation of the equity markets, these remarks from 2005 have a rather ominous ring in hindsight:

“First, if the bubble were to deflate on its own, would the effect on the economy be exceedingly large? Second, is it unlikely that the Fed could mitigate the consequences? Third, is monetary policy the best tool to use to deflate a house-price bubble? My answers to these questions in the shortest possible form are, ‘no,’ ‘no,’ and ‘no.’”

The reason that the Fed does not see an “obvious” stock market bubble (to use a word regularly used by Governor Bullard, as if to imply that misvaluations cannot exist unless they smack their observers with a two-by-four) is because while price/earnings multiples appear only moderately elevated, those multiples themselves reflect earnings that embed record profit margins that stand about 70% above their historical norms.

We can demonstrate in a century of evidence that a) profit margins are mean-reverting and inversely related to subsequent earnings growth, b) margin fluctuations are largely driven by cyclical variations in the combined savings of households and government, and importantly, c) valuation measures that normalize or otherwise dampen cyclical variation in profit margins are dramatically better correlated with actual subsequent outcomes in the equity markets.

If one examines the stocks in the S&P 500 individually, the median price/revenue multiple is actually higher today than it was in 2000 (smaller stocks were more reasonably valued in 2000, compared with the present). This is a dangerous situation. In this context, the dismissive view of FOMC officials regarding equity overvaluation appears misplaced, and seems likely to be followed by disruptive financial adjustments.

One obtains a similar view, with equal historical reliability, from the ratio of nonfinancial equity capitalization to nominal GDP, using Federal Reserve Z.1 Flow of Funds data. On this measure, equities are already beyond their 2007 peak valuations, and are approaching the 2000 extreme. The associated 10-year expected nominal total return for the S&P 500 is negative.

Fed Policy

Hussman concludes with a discussion on Fed policy ...

The policy of quantitative easing has run its course. It undermines planning, as every economic decision must be made in the context of what the Federal Reserve may or may not do next. It starves risk-averse savers, the elderly, and the disabled from interest income. It lowers the bar for speculative, unproductive, low-covenant lending (as it did during the housing bubble). It relaxes a constraint that is not binding – as there are already trillions of dollars in idle reserves at U.S. banks, on which the Federal Reserve pays interest both to keep them idle and to avoid disruptions in short-term money markets. It undermines price signals and misallocates scarce savings to speculative pursuits. It further skews the distribution of wealth, and while the extent of this skew has a scarce chance of persisting, the benefits of any spending from transiently elevated stock market wealth will accrue to primarily to higher-income individuals who are not as constrained as the millions of lower-income, low-asset families hoping for some “trickle-down” effect. We have seen numerous variants of this movie before, and we should have learned the ending by now.

Importantly, the magnitude of the “wealth effect” on employment is dismally small. Even if the entire relationship between stock market fluctuations and employment fluctuations was causal and one-directional, it would still take a roughly 40% advance in the stock market to draw the unemployment rate down by 1%. Unfortunately, price advances do not create the underlying cash flows to support them, so the strategy of manipulating stock prices higher also involves a piper that must be paid.

The intent of this letter is not to criticize, but hopefully to increase the mindfulness of the FOMC as to historical evidence, the strength of various financial and economic relationships, and the potentially grave consequences of further relaxing constraints that are not binding in the first place.

Integrity vs. Respect

In the opening paragraph, Hussman, stated (to the Fed) "I don’t question your motives or integrity."

I side solidly with Hussmanon this point although many believe this is all part of some "grand plan" for the Fed or big banks to take over the world.

Yet, I cannot offer Hussman's same sense of "no disrespect".

We are in this mess, precisely because the Fed blows bubbles of increasing magnitude over time. It happens time and time again, and every time banks are bailed out at the expense of the poor and middle class.

The Fed deserves no respect for what they have done and the problems they have caused. They deserve no respect for missing the dotcom bubble, for missing the housing bubble, and for missing this bubble.

John and Aretha can sing "Respect", but I sure can't.

One Hell of a Time To Become a Trend Follower

Everyone who believes in valuation metrics would do themselves a favor to click on the three links by Hussman that I presented, and read the articles in entirety.

As I stated upfront, avoiding bubbles is incredibly hard to do, and this one has been exceptional. But that is precisely the problem with bubbles.

Hussman points out (and I agree) "The associated 10-year expected nominal total return for the S&P 500 is negative."

Read that sentence again and again until it sinks in. Here is another way of putting it. "10 years from now, the S&P is likely to be lower than it is today". That is how over-valued equities now are.

Yes, Hussman sounds like a broken record. And so do I. But this is one hell of a time to become a trend follower.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Read more at http://globaleconomicanalysis.blogspot.com/2013/11/hussmans-open-letter-to-fed-problem.html#lSwFEwzTtgUYTpyr.99

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John Ransom - Avoid Lions Gate Despite Hunger Reprise
Posted: 11/25/2013 2:16:00 PM EST

Groupon, Inc

Groupon: Why Valuation Might Be A Concern At Current Levels- Seeking Alpha

“Groupon, like many Internet stocks such as Zynga (ZNGA) and Angie's List (ANGI) have benefited from some sort of social stock craze that is going on in this market,” says George Kesarios of Seeking Alpha. “However, eventually the market comes to its senses and marks down the excess price of stocks accordingly. And while many stocks or sectors can remain extremely expensive for a very long time -- giving the impression that this is the ‘new norm’ -- eventually what comes around goes around and investors learn their lesson the hard way.”

Symbol: GRPN

Dividend: N/A

Forward PE: 36; Trailing PE: N/A

Estimate Trend: Downward

Ransom Note Trendline: Avoid Groupon

GRPN Chart

GRPN data by YCharts

Ford

Fiat Punts Chrysler IPO To 2014- Forbes

“Italian carmaker Fiat Group said Friday that it will not be able to launch a planned initial public offering of Chrysler before the end of 2013,” says Forbes, “determining the timing is ‘not practicable.’ The hangup remains a disagreement on pricing between Fiat, which owns 58.5% of the automaker, and an healthcare trust for retired autoworkers, which controls the remaining 41.5%.”

Symbol: F

Dividend: N/A

Forward PE: 9; Trailing PE: 12

Estimate Trend: Upward

Ransom Note Trendline: Buy Ford

F Chart

F data by YCharts

Lions Gate Entertainment Corp.

Lions Gate’s ‘Catching Fire’ Breaks ‘Hunger Games’ Record- Wall Street Cheat Sheet

“It was a big three days for Lions Gate’s (NYSE:LGF) Catching Fire this past weekend,” says the Cheat Sheet, “and Jennifer Lawrence managed to draw quite a crowd. According to the BBC, the second installment of the Hunger Games series sped to the top of the U.S. box office, scoring $161 million in its opening weekend. The film’s release became the most successful November opening of all time and even surpassed the first Hunger Games’s opening weekend, which took in $152 million when it was released in March 2012.”

Symbol: LGF

Dividend: N/A

Forward PE: 20; Trailing PE: 21

Estimate Trend: Falling

Ransom Note Trendline: Sell Lions Gate

LGF Chart

LGF data by YCharts

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