Birinyi’s S&P 3200 Call – Bull From A 30-Year Bull – David Stockman’s Contra Corner 08-05-15

Salient to Investors:

David Stockman writes:

Laszlo Birinyi says S&P 3200 will be reached by 2017 because there is no reason it cannot keep rising. Since first meeting Birinyi in 1986, I do not ever recall when he was not bullish on equities. His call is wrong because the central bank fed 30-year bull run is over.

The S&P 500 Index’s inflation-adjusted gain of 6.2% per annum since January 1986 compares to only a 2.2% annual gain in real GDP and therefore is unsustainable – two more decades at this spread and the stock market’s capitalization would be several hundred times larger than GDP. From 1956 through the eve of the Greenspan Fed, the Index’s inflation-adjusted gain rose by only 1% per year; while US GDP grew at 3.5% per annum, or 60% more than during the last thirty years.

From 1956-1986, real median family income rose from $36,000 to $60,000, or at 1.7% annually, but has risen less than $4,000 since, at only 0.2% per year. The reason the stock market has gained over the last 30 years in the midst of decelerating real GDP growth and stagnating family incomes is because the Fed’s balance sheet has expanded 22 times, or 11.5% per annum nominal, 9.2% real, and 4 times the growth rate of real output.

During this bull market run, household, business, financial and government debt outstanding has risen $50 trillion, versus only a $13 trillion gain in GDP. In the 100 years prior to 1971, debt rose at 1.5 times GDP growth in real terms: since then it has risen at 3.5 times real growth up to the financial crisis. This huge growth of debt and leverage has come despite the household savings rate declining since 1971, thus has not been funded from honest savings but from fiat credit. This would have caused consumer inflation but for China, the oil exporters and the Asia including Japan buying US dollars by printing huge amounts of their own money, thereby inflating their own currencies and suppressing their exchange rates, and flooding the world with artificially cheap goods. The tidal wave of wage compression flattened labor costs in the developed market tradeable goods industries and spilled over onto their suppliers.

In a world of honest money and credit funded from real savers, China’s exports could not have risen 40 times in less than 3 decades, or at 17% annually – China would have run out of capital to build cheap factories and would have suffered soaring exchange rate increases long ago.

East Asian central bank printing presses recycled the Fed’s monetary inflation back into US financial asset inflation, fueling a massive increase in stock market speculation, LBOs, stock buybacks, and M&A, and the real reason why US stock market capitalization has risen from 60% of GDP from Greenspan’s appointment to 200% today. The true rate of US productivity gain since the late 1980s is a small fraction of pre-1986 levels.

ZIRP, QE, and the Greenspan/Bernanke/Yellen “put” fuel a cycle of debt funded speculation that drives asset prices ever higher, which then become the collateral for an even bigger credit-funded bid for financial assets.

Since 1986, the sum of the market value of equities and credit market debt outstanding has risen from $12 billion to $93 trillion. This bubble cannot continue because the central banks have reached the limits of money printing.  When the Fed begins normalization later this fall, they cannot reverse course because a new round of massive balance sheet expansion would be a repudiation of the last 20-years of Fed policy and trigger a collapse of confidence and selling panic.

China built the biggest pyramid of credit and speculation in history – from a few hundred billion of domestic credit in the early 1990s to $28 trillion today – but capital is now fleeing, upwards of $800 billion in the last year alone. China’s central bank is having to sell its dollar liabilities and shrink the renminbi supply in order to keep its exchange rate from collapsing. The world’s central banks lack the firepower to keep inflating the global financial bubble.

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Birinyi Says You Can Toss Out the Old Tools for Calling S&P 500 – BloombergBusiness 08-05-15

Salient to Investors:

Laszlo Birinyi said:

  • The market is now so dominated by institutional investors, hedge funds and service industries, that sentiment drives prices more than anything else, so predictions based on valuation data going back a hundred years are bound to fail. Recent developments in Amazon, Google, and Chipotle clearly show this is not your grandfather’s market.
  • “This time is different” and “greed and fear are constants” are only clichés.
  • Using cyclically adjusted P-E ratios going back to 1926 would have predicted the S&P 500 returning less than 1 percent a year in the decade after the dot-com bust instead of the actual return of almost 5 times as much.
  • 3 of the 4 biggest bull markets of the last century have occurred since 1982. The S&P may not be cyclical. If this bull market mirrors the performance of the 1990 bull market, then the S&P 500 will rise to 3,200 over the next 2 years.

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Individuals Pile Into Stocks as Pros Say Bull Is Spent – Bloomberg 07-14-14

Salient to Investors:

  • Individual investors have added $100 billion to equity mutual funds and ETFs in the past year, 10 times more than the previous 12 months, and vs. outflows of $300 billion in the 5 years through 2012 and inflows of $102 billion in Q1 2000 just before the tech bubble burst in March 2000.
  • Laszlo Birinyi at Birinyi Associates says we are in the last of the four bull market stages – the exuberance phase, but that the durable and sustainable bull market will surprise to the upside – to 2,100 on the S&P 500 by December – because we are not yet at a boiling point as skepticism indicates many investors have yet to buy.
  • Terry Morris at National Penn Investors Trust sees limited upside given Wall Street’s target has already been reached and typically late individual investors are buying.
  • Nick Skiming at Ashburton says individuals investors invest when they can only see blue skies.
  • David Kostin at Goldman Sachs upped their S&P 500 forecast to 2,050 on rising earnings and faster economic growth and relative attraction to bonds.
  • Julian Emanuel at UBS says the switch from the Fed as primary driver to corporate profits and a growing economy increases volatility and produces more muted returns, so he expects stocks to pause or correct a little.
  • Garry Evans at HSBC expects the S&P 500 to finish 2014 at 2,000 due to relatively expensive valuations.
  • Walter Todd at Greenwood Capital Associates said we are closer to the end of the bull market than the beginning, but it won’t end in the next few months.
  • Bloomberg says that since 1999 approx half of the time the S&P 500 ended the year over 10 percent away from the average strategist prediction in January of that year. The average strategist predicts the S&P 500 to reach 1,978 at year-end.
  • The S&P 500 is at 16.6 times estimated earnings, near the highest in 4 years, after lasting 64 months, or a year longer than average. Analysts estimate S&P 500 Q2 earnings rose 4.5 percent.

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By the Time You Know Stocks Are in Correction It’ll Almost Be Over – Bloomberg 06-27-14

Salient to Investors:

Laszlo Birinyi at Birinyi Associates said:

  • Investors and analysts are obsessed with the idea of a correction despite their vain efforts to foretell one.
  • Corrections are event-driven and not organic.
  • Of the 6 bull markets since 1982 – with 14 bull-market corrections – this one has had the most at 4.
  • One exceptionally bad day usually accounts for about 25% of the entire correction, and is more likely to occur toward the end of the correction – in the final month in 7 correction.
  • Only 6 catalysts triggered corrections, but none from traditional technical analysis. The US economy was at least partially blamed for 8 of the 14 corrections, followed by foreign economies for  7, the Fed and interest rates for 5, US politics for 4, fundamentals for 3, and geopolitics for 2.

The US market has risen for more than two years without a 10 percent correction.

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Apple to IBM Push Buyback to Record Trading – Bloomberg 12-16-13

Salient to Investors:

Bloomberg and Birinyi Associates data show stock buybacks have increased each of the last 4 years and were 6.4 percent of daily trading in the Russell 3000 Index by value through September, exceeding 2007’s level of 4.1 percent and reflect a seven-year decline in equity volume. Birinyi data show companies authorized $728 billion in repurchase programs in 2013 versus $467 billion at this point in 2012.

Companies took advantage of record-low interest rates to raise an unprecedented amount of debt financing and repurchased stock, helping boost per-share US earnings for four years. With cash at a record, buying by companies is poised to continue.

Martin Leclerc at Barrack Yard Advisors sees continued or increased buybacks because things are good.

The 100 stocks in the S&P 500 with the most buybacks relative to market value have returned 40 percent, including dividends, in 2013 versus 27 percent for the index – and 270 percent versus 190 percent since March 2009. S&P said S&P 500 companies had $1.14 trillion of cash on June 30 and are on track to top that for Q3 – almost twice the level in October 2007.

The S&P 500 PE is at 16.7 versus the average since 1998 of 19, and earnings are forecast to rise 5.3 percent to $109.40 in 2013, and sales to rise 4.1 percent in 2014 and 4.5 percent in 2015.

Paul Zemsky at ING Investment Mgmt said we are nowhere near the overall valuation where companies will not buy stock back.

Bank of America Merrill Lynch said investment-grade corporate bonds issued in 2013 is at a record and the average yield of 3.11 percent is almost 1.8 percent below the decade mean.

Edward Yardeni at Yardeni Research said many companies are using their cash flow to buy back shares or borrowing to buy back shares and that will continue at the current pace.

12 of 35 economists expect the Fed to taper at its December meeting, 9 predict January and 14 predict March. 86 economists predict 2013 GDP of 1.7 percent versus 2.8 percent in 2012 and an average of 2.3 percent per quarter since 2009.

Bruce McCain at KeyCorp said share buybacks have boosted earnings but signal the economy is not strong enough to support corporate investments.

Jeffery Kleintop at LPL Financial said a slowdown in buybacks would not be negative as companies shift in 2014 to investing in fundamental growth and not financial engineering, which is much more healthy.

Thomas Garcia at Thornburg Investment Mgmt said buybacks are good and show companies have cash flow.

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Birinyi Diverges From Einhorn Short Forecasting S&P 500 at 1,820 – Bloomberg 10-31-13

Salient to Investors:

Laszlo Birinyi at Birinyi Associates said the S&P 500 Index has a 51 percent chance of rising to 1,820 by February 2014 and a 75 percent chance by April 2014.

David Einhorn at Greenlight Re said he has become more conservatively positioned, and continues to be short companies with conventional valuations, rather than speculative story stocks that have caused excessive pain for other short sellers.

The average forecast of 19 Wall Street strategists is for the S&P 500 to reach 1,718 by year-end, with a range of 1,440 to 1,800.

The S&P 500’s P/E ratio is at 16.7.

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Buybacks to Dividends at Risk With Record-Low Yields Ending – Bloomberg 09-03-13

Salient to Investors:

Higher debt costs will reduce buybacks and dividend increases.

Borrowing costs for S&P 500 companies fell to 1.4 percent of sales the last 12 months, a record low in 11 years of data. Corporate bond yields are increasing the most since 2009 and are at 4.3 percent versus the 5.7 percent average since the start of the financial crisis and 6.9 percent average in the decade before the start of the bull market.

Paul Zemsky at ING Investment Mgmt said part of the profitability story will start eroding and will have more of an impact on financial transactions, like buybacks and dividends.

The median economist expects the Fed to taper in September.

Birinyi Associates said authorized US stock buybacks reached a 6-year high of $505 billion so far in 2013 after more than $1.7 trillion of repurchases since 2009, but announcements have slowed to less than $50 billion in each of the past two months versus over $68 billion average in 2013 thru June. Repurchases dropped 3.2 percent to $118.5 billion in 2003, the last year before the Fed started raising rates.

The 100 stocks in the S&P 500 with the most buybacks relative to market value have beaten the index since March 2009, advancing 236 percent versus 141 percent for the benchmark.

Companies that increased dividends every year for the last 25 years rose 169 percent in this bull market. The dividend yield on the S&P 500 averaged 2.12 percent for the 12 months through May, 0.38 percentage points higher than the 10-yr Treasury.

Earnings per share for S&P 500 companies were over $100 a share in 2012 versus $60 in 2008 as net income rose faster than sales, margins expanded for 9 straight quarters from 2009 through 2011, and interest expense fell to 1.4 percent of sales in the last 12 months versus 2.4 percent in September 2012.

Profit expansion slowed to an average 4.2 percent the last six quarters versus the 28 percent mean during 2010 and 2011.

Kevin Caron at Stifel Nicolaus said with profitability close to peak levels, to get earnings to rise further, who else are you going to fire? What else are you going to cut? Caron said the trillion-dollar question is what drives the rally from here?

James Paulsen at Wells Capital Mgmt said when the Fed starts raising rates, and suddenly all the Armageddon stories are no longer, greater confidence in the economy would lead to an acceleration of corporate activity into capital investment. and by the time rates get back to normal, US executives will want to reinvest in their business instead of buying stock.

Analysts project S&P 500 earnings will growing at 10.6 percent in 2014 and 2015, or twice the pace of 2013.

P-E ratios for the S&P 500 rose to 16 times earnings in the last 12 months, versus the average of 15.5 times since March 2009, 18.8 times mean in the 2002-2007 rally, and 28.1 times in the last two years of the 1990s.

The most indebted companies in the S&P 500, which had beaten the index by 6 percentage points through May, have declined 3 percent in the last 3 months, versus a 0.1 percent gain in the Index.

Mark Luschini at Janney Montgomery Scott said companies should have locked in record-low borrowing costs by now, and if they haven’t taken advantage of this window of low rates already, shame on them.

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Ratings Ratio Worst Since 2009 as Profits Slow: Credit Markets – Bloomberg 06-26-13

Salient to Investors:

Corporate creditworthiness in the US is deteriorating at the fastest pace since 2009 with earnings growth slowing as yields rise from record lows.

Moody’s said the ratio of upgrades to downgrades fell to 0.89 times in the first 5 months of the year after reaching a post-crisis high of 1.55 times in 2010  S&P said the proportion has declined to 0.83 from 1 a year earlier.

Moody’s cut credit rankings on 194 US companies and raised 173 in the first 5 months of 2013, the weakest ratio since the first five months of 2009. S&P has cut 138 US companies through June 17 and upgraded 114 companies.

Analysts forecast earnings growth of 2.5 percent in Q2, the least in a year.

Ben Garber at Moody’s Analytics said the trend of improving credit quality has slowed as profits are slowing, and as the recovery matures, companies are liable to get more aggressive in taking on share buybacks and dividends.

Rob Leiphart at Birinyi Associates said rather than using cash to pay down debt, companies in the S&P 500 Index are trying to boost their share prices by buying back almost $700 billion of stock in 2013.

Anthony Valeri at LPL Financial said that after cutting expenses as much as they could to improve profitability, companies need further revenue growth to boost earnings. said the average cost of new 30-yr, fixed-rate home loan has climbed to 4.58 percent versus the record low 3.36 percent in December.

Investors are pulling back from auto debt, the largest part of the asset-backed market, threatening to constrain financing to borrowers with blemished credit histories.  John McElravey et al at Wells Fargo said subprime vehicle debt accounted for 13.2 percent of asset-backed issuance this year compared with 10.5 percent in 2012.

Earnings growth at S&P 500 companies is poised to slow from 2.7 percent in Q1 and 8 percent in Q4 2012.

The ratio of cash to total assets for S&P 500 companies is at 10.3 percent versus the low of 5.6 percent in March 2007.

Rajeev Sharma at First Investors Mgmt said companies have done a great job cleaning up their balance sheets but now the focus has moved on to dividends and share buybacks, making the ratings agencies apprehensive.

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Lost Decade for Bonds Looms With Growing Return for Equities – Bloomberg 06-24-13

Salient to Investors:

10-year Treasuries yield 2.61 percent versus the S&P 500 aggregate earnings yield of 6.4 percent – more than double the average spread of 1.9 points since 2000.

Investors are avoiding longer-term Treasuries, concerned that returns will be depressed for years, and money managers foresee the end of a rally that began in the early 1980s.

Howard Ward at Gamco Investors said the lost decade for bonds has begun, and stocks are likely going to be the asset class of choice over the next 10 years. Ward said the tide has turned and the economy is doing better, so bond investors will have a hard time making any money.

Lipper said investors withdrew $9.1 billion from fixed-income mutual funds and ETFs last week , the second-highest total in more than 20 years.

JPMorgan Chase, Barclays, Bank of America, Morgan Stanley and Goldman Sachs all recommend stocks over most bonds as equity returns outpace company debt by the most since at least 1997.

Jim O’Neill ex-Goldman Sachs said the global economy is in the early stages of the recovery of the equity culture and perhaps the end of a 30-year growing love affair with bonds. O’Neill said when game starts to change with central banks, it is inevitable bonds will suffer.

Mohamed A. El-Erian at Pimco said liquidity is king and what we are getting is cascading liquidity failures – when you change the liquidity paradigm, you get massive technical unwinds and volatility.

Average analyst estimates predict profits for S&P 500 companies will rise more than 10 percent in each of the next two years after almost doubling since 2008. That would translate to yields of 8.3 percent assuming no change in the stock index. The S&P 500 is at a14.7 times 2013 profit forecast.

Leon Cooperman at Omega Advisors said the stock market multiple is low relative to interest rates and there is room for rises – fair price for the S&P 500 is 1,600 to 1,700.

Jeffrey Gundlach at DoubleLine Total Return Bond Fund said you will lose less in Treasuries for the next few months if rates rise than many other asset classes. Gundlach said government bonds are also caught up in price deflation of assets and commodities, but if bond yields rise further then equities and commodities will clearly tank.

Bill Gross, at Pimco said sellers of  Treasuries in anticipation that the Fed will ease out of the market might be disappointed unless we have inflation close to 2 percent. Gross recommends buying Treasuries while the Fed continues to purchase debt, even given the 30-year bull market for bonds is over. Gross said real growth to lower unemployment below 7 percent is a long shot over the next 6 to 12 to 18 months.

Laszlo Birinyi said the S&P 500 could climb to 1,700 as we still haven’t seen the real rush to equities – the market has a long ways to go.

The Fed says equity investors may reap unusually high returns during the next 5 years because stocks are inexpensive as measured by the Fed Model, which compares earnings yield for equities with government bond yields. The spread was a record high of 6.6 percent in March 2009 and then fell to 0.3 percent in December 2009.

Rick Rieder at BlackRock said with 10-yr yields rising, equities represent better value than Treasuries, particularly on the longer end of the curve – we have seen the lows on interest rates. Rieder recommends government debt due in less than 5 years, estimating that 10-yr Treasury yields will move closer to 3 percent in 2014.

David Rosenberg at Gluskin Sheff says the only way bond yields will come down and revisit those lows is if the economy relapses, and the odds of that happening at least in the next year have dropped significantly – the economy has managed to crawl through. Rosenberg is shorting government debt and buying high-quality corporate and speculative-grade securities, and bank stocks and insurer stocks. Rosenberg said the stock market would not be where it is without the bond market where it is, and the Fed is using the bond market as a tool to generate a higher stock market and it’s certainly working – the secular bull market is over.

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Schwab Topping Goldman Sachs Presages American Return to Stocks – Bloomberg 06-09-13

Salient to Investors:

Shares of discount brokers are gaining the most since 2003 relative to the S&P 500, a sign that small investors are joining the 4-year bull market. Discount broker stocks beat the market by at least this much in 1997, 1999, 2003 and 2009, years in which the S&P 500 rallied an average of 14 percent from June 10 through December. Inflows into stock mutual funds totaled $108.5 billion during the last six months of 1997, $91 billion in 2003, and $12.3 billion so far in 2013.

Bulls say this shows individuals are preparing to buy shares, bears say buying by individuals who missed the rally indicates we are close to a top.

James Paulsen at Wells Capital Mgmt says when the retail investor finally gets more confident about the future, flows follow.

Jerome Dodson at Parnassus Investments said the huge run-up in stocks this year and the appearance of an improving economy getting better will attract more people wanting to enter which tends to push the market higher.

S&P 500 earnings are forecast to rise 6.6 percent in 2013 and 11 percent in 2014, while banks in the S&P 500 will rise 6.2 percent in 2013 and 5.6 percent in 2014.

James Butterfill at Coutts said trading by private investors provides no insight into the direction of the market because the inflows we are seeing are coming on the back of very low volume.

US equity trading is down 1 percent to 6.38 billion shares per day on average in 2013 versus the average of 8.13 billion from 2009 through 2012.

TD Ameritrade’s Investor Movement Index is bullish and at the highest level since June 2011.

Laszlo Birinyi at Birinyi Associates says individuals will push stocks higher as flows tend to multiply late in the rally, when gains force skeptics to capitulate, in the last ‘exuberance’ leg.

US equity ETFs have attracted $79 billion in 2013, on track to the highest annual inflow since at least 2009.

The Stoxx 600 Financial Services Index is up 12 percent in 2013 versus the 5.6 percent advance for a gauge of European banks – the last time gains in European brokerages exceeded banks by that much, in 2006, the Stoxx Europe 600 Index rose a further 14 percent in half2 2006.

Colin McLean at SVM Asset Mgmt said the inflows do not indicate the end of the rally because there is still a lot of money to come in.

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