Category Archives: equities

4/12/17: The Other Hockey Stick (not Bitcoin)

Financialization of the global economy is now complete, thanks to the world's hyperactive Central Banks and the age of riskless recklessness they engendered.


The notable 'hockey stick' that is, dynamically reminiscent of the Bitcoin craze is now evident in the stock markets too, and it has zero parallels in the period. In fact, this is the highest global market capitalization level on record, as data from the World Bank augmented with current data through November 2017 shows:

You can think of the stratospheric rise in world equities valuations as a reflection of liquidity supply generated by the Central Banks since 2007. You can also think of it as a wealth buffer built up by the world's wealthy elites to protect themselves against potential future stagnation and political populism. You can equally think of it as a bubble.

Whichever way you spin these numbers, the rate of increase since 2015 has been simply unprecedented by historical standards, faster than the bubble and faster than the pre-GFC bubble.

7/6/17: Equity Markets Continue to Mis-price Policy Risks

There has been some moderation in the overall levels of Economic Policy Uncertainty, globally, over the course of May. The decline was primarily driven by European Uncertainty index falling toward longer-term average (see later post) and brings overall Global EPU Index in line with longer term trend (upward sloping):

This meant that short-term correlation between VIX and Global EPUI remained in positive territory for the second month in a row, breaking negative correlations trend established from October 2015 on.

The trends in underlying volatility of both VIS and Global EPUI remained largely the same:

The key to the above data is that equity markets risk perceptions remain divorced from political risks and uncertainties reflected in the Global EPUI. This is even more apparent when we consider actual equity indices as done below:

Both, on longer-run trend comparative and on shorter term level analysis bases, both S&P 500 and NASDAQ Composite react in the exactly opposite direction to Global Economic Policy Uncertainty measure: rising uncertainty in the longer run is correlated with rising equities valuations.

7/6/17: Markets, Investors Exuberance and Fundamentals

Latest data from FactSet on S&P500 core metrics is an interesting read. Here are a couple of charts that caught my attention:

Look first at the last 6 months worth of EPS data through estimated 2Q 2017 (based on 99% of companies reporting). The trend continues: EPS is declining, while prices are rising. On a longer time scale, EPS have been virtually flat in 2014-2016, but are forecast to rise nicely in 2017 and 2018. Whatever the forecast might be for 2018, 2017 increase would do little to generate a meaningful reversion in EPS to price trend

However, the good news is, expectations on rising EPS are driven by rising sales for 2017, and to a lesser extent in 2018. This would be (if materialised) an improvement on the 2014-2016 core drivers, including shares repurchases (chart below).

Next, consider P/E ratios:

As the chart above indicates, P/E ratios are expected to continue rising in the next 12 months. In other words, the markets are going to get more expensive, relative to underlying earnings. Worse, on a 5-year average basis, all sectors, excluding Financials, are at above x14. Hardly a comfort zone for 'go long' investors. The overvalued nature of the market is clearly confirmed by both forward and trailing P/E ratios over the last 10 years:

Forward expectations are now literally a run-away train, relative to the past 10 years record (chart above), while trailing (lagged) P/Es are dangerously close to crisis-triggering levels of exuberance (chart below).

In summary, thus, latest data (through end-of-May) shows continued buildup of risks in the equity markets. At what point the dam will crack is not something I can attempt to answer, but the lake of investors' expectations is now breaching the top, and the spillways aren't doing the trick on abating them.

24/1/16: High Yield Bonds Flash Red for Growth

An interesting regularity in the markets observed by JPM research: High Yield debt as a lead indicator of recessions… and of equities…


Some more academic links on the high yield bonds forward prediction of business cycles: