bonds credit Markets stocks

In Markets, Summer Melt-Up To Meltdown?

You can hardly blame anyone who's nervous

You can hardly blame anyone who's nervous
This content has been archived. Log in or Subscribe for full access to thousands of archived articles.

6 comments on “In Markets, Summer Melt-Up To Meltdown?

  1. I don’t think we should take that P/B-ROE regression at face value. First, the statistical relationship does not look that strong, and it’s definitely influenced by a few outliers. There’s also clear heteroscedasticity. Second, there really is not that much data represented—there are a few market cycles chopped into tiny pieces to produce a larger number of observations that arguably aren’t contributing much real information. Those few outliers might really represent a single period in time. Third, and most importantly, the theoretical relationship makes little sense. ROE is high right now because of low debt costs, an increased debt portion of many corporate capital mixes, and late-cycle profit margins, not because of intrinsic and enduring performance excellence. When the cycle ends, that leverage will come back to bite investors, with relatively small revenue decreases tanking ROE. I actually think that if you threw up a chart of corporate debt to (name metric) next to that one, the opposite point would be made: investors are paying heavily for highly leveraged companies. I would be curious to see the time labels on Goldman’s data. My guess would be 1999 and 2007 would be in the upper right corner, and 2003 and 2009 would be in the lower left, which would make the conclusions Goldman draws from the chart pretty disingenuous. A really cool chart would be 3D and show 12-year forward returns as well…ok, rant over.

    • Help me out here. What is a 3D chart? Are we not talking about price? Prices go up and down. That is adequately described by x and y. So what z are you talking about? 12-year forward returns? Returns that are fantasies? Pardon my opacity.

  2. PaulMiller

    ” There’s also clear heteroscedasticity”. Chris, that’s easy for you to say.

    • Dana Newman

      Reading about this stuff makes my variance not uniform. It makes me deviate from normal, and then I go all heteroskedastic on everybody.

  3. PaulMiller

    Reader Chris made an excellent point that today’s “normal” ROE and P/B relationship may only appear normal in that it falls within abnormal data points which probably occurred at previous market tops or unusual market conditions.

  4. market is going where ever earnings are going. Given the current interest rate forecast and earnings forecast, the SP 500 is on the upper end of fair value with forward P/E of around 17.5. Even though one could argue that the “risk/reward ratio” is skewed to the downside, that does not mean the market is going to drop 10% either. There is unlikely to be an even 10% drop unless earning forecasts get cut substantially (which seems unlikely in the short term since the forecasts are actually going up for Q2 2019 and also 2020) or unless the fed somehow screws up royally again. The feb 2018, oct 2018 and dec 2018 selloffs were all reactions to fed. Feb 2018 – projected 3 or 4 interest rate hikes due to rising inflation (huh? seems funny now) and no end to balance sheet runoff. Oct 2018 – october surprise “long way from neutral”. Dec 2018 – december disaster rate hike and “autopilot” in the face of the shutdown and slowing data.
    Until there is are substantial cuts to forward earnings forecasts, all dips are going to get bought. I am putting my money on a slow grind toward 3200 by year end. but i expect every 1 or 2% gain to be met with .75 to 1.75% selloffs. the wall of worry is very strong and is likely to keep a lid on any substantial upside (like a 5% straight up move followed by a 4.75% down move).

Speak On It

Skip to toolbar