I Won't Be Surprised If Stocks Crash Next Year (And You Shouldn't Be, Either!)

Henry Blodget|dic. 24, 2013 9:33 a.m.|4,550|15

MPI/Getty Images

The stock market continues to set new highs, which is exciting and fun for those of us who own stocks.

I own stocks, so I'm certainly enjoying it.

I hope stocks continue to charge higher through 2014, but I can't find much data to suggest that they will. I only have a vague hope that the Fed will continue to pump air into the balloon, the U.S. economy will finally start cranking again, and corporations will continue to find ways to cut more costs and grow their already record-high profit margins and earnings.

Meanwhile, every valid valuation measure I look at suggests that stocks are at least 40% overvalued.

That doesn't mean that stocks will crash. But it does strongly suggest that, at best, stocks are likely to produce lousy returns over the next 10 years.

Which valuation measures suggest the stock market is very overvalued?

These, among others:

• Cyclically adjusted price-earnings ratio (current P/E is 25X vs. 15X average).
• Market cap to revenue (current ratio of 1.6 vs. 1.0 average).
• Market cap to GDP (double the pre-1990s norm).

(See charts below.)

How lousy do these measures suggest stock returns will be over the next decade?

About 2% per year for the S&P 500, including dividends — a far cry from the double-digit returns of the past five years and the ~10% long-term average.

If stocks just park here for a decade and return 2% a year through dividends, that wouldn't be particularly traumatic. But stocks rarely "park." They usually boom and bust. So the farther we get away from average valuations, the more the potential for a bust increases.

So the higher we go, the less surprised I will be to see the stock market crash. 

How big a crash could we get?

According to the aforementioned valuation measures, and the work of fund manager John Hussman of the Hussman Funds, 40%-55%.

A 50% crash would take the S&P 500 below 900 and the DOW below 8,000.

Is that going to happen?

I don't know. But it wouldn't surprise me. 

One thing I do know is that no one else knows, either. We're all just dealing in probabilities. And, just as importantly, no one knows when. Valuation measures like the ones above are unfortunately not helpful in predicting short- or intermediate-term market moves. So, maybe the market will continue to move higher through 2014. I certainly would be happy about that.

But a careful study of history suggests that a crash is increasingly likely and that long-term stock returns from this level are likely to be crappy.

I've explained in detail here why I think the odds of a crash are increasing. And I've also explained why, despite this, I'm not selling my stocks. (In short, because I am a long-term investor, I am mentally prepared for a crash, and I am planning to ride out any crash, the same way I did with the 2008-2009 crash. And also because none of the other major asset classes are particularly compelling investments at these prices, either.).

Importantly, there are at least three sophisticated arguments about why the aforementioned valuation measures are wrong — and, therefore, that "it's different this time."

• Interest rates are likely to stay near zero for many more years, and in a near-zero rate environment, the fair value for stocks is much higher than it is in a normal rate environment.

• On average, stocks are getting increasingly less risky — and, therefore, that old "average" valuation measures don't apply. 

• Changes in accounting rules and aberrant earnings performance during the financial crisis have skewed average long-term valuation measures, making stocks look more expensive than they actually are.

These are all sophisticated arguments, and they merit close consideration.

After considering them, however, I don't find any of them particularly persuasive. Or, more accurately, I don't find any of them to be more persuasive than the long-term valuation measures I have cited above.

All of these bullish arguments, moreover, boil down to the following:

"It's different this time."

"It's different this time," are known as "the four most expensive words in the English language." Because, too often, when investors and analysts try to justify high prices by arguing that "it's different this time," it turns out not to be different, and the investors and analysts end up losing their shirts.

(I know this from experience. Back in 1999, I used a variety of "it's different this time" arguments to persuade myself and others that the dotcom stocks could continue appreciating. They could have. But they didn't.)

Of course, you can't just scoff at those arguing that it's different this time by saying that it's never different this time, because sometimes it is.

And that, among other reasons, is why it makes little sense to expend too much energy trying to forecast the market. Because it's really hard to be right consistently enough to avoid costing yourself serious money.

But making specific forecasts is different from managing your own expectations.

And my own expectations are that 1) stocks will have lousy returns over the next decade, and 2) the odds of a severe market pullback are steadily increasing.

I will therefore not be surprised to see stocks crash in 2014. And neither should you!

Below are some of the charts that show why I am concerned ...

1. Valuation.

The following three charts show three long-term, time-tested valuation measures, all of which suggest the market is drastically overvalued.

First, from Bill Hester of the Hussman Funds, a recent chart of Professor Robert Shiller's "CAPE" (cyclically-adjusted PE ratio). The blue line shows the prediction for 10-year returns. The red line shows the actual returns. If you have heard people say, "CAPE doesn't work anymore," you might want to read Bill Hester's analysis. He looks at all the arguments why CAPE doesn't work and concludes that it does. (We'll know for sure in 10 years.)

Hussman Funds

Second, in case you have been convinced that "CAPE" no longer works, here's a look at price-to-revenue. This measure is calling for a slightly better long-term return for the S&P 500 — just under 5% — but still a far cry from the long-term average.

Hussman Funds

Third, in case your favorite bulls wave away both earnings and revenue, here's a chart of market-value-to-GDP. It's the most pessimistic of the lot. This chart suggests that the S&P 500's average annual returns for the next 10 years will be negative.

Hussman Funds

2. A bogus (but popular!) valuation measure.

One thing that people do when stocks get expensive is to find ways to explain why they aren't expensive. They don't do this to hoodwink you. They do this because stocks have been expensive for so long that the obvious conclusion must be that they're not expensive — that it's different this time.

One measure that people are using right now to argue that stocks are not expensive is the difference between the "earnings yield" and "Treasury yield." Interest rates are low and earnings are high, so it appears that stocks are delivering far higher "yields" than bonds and are therefore cheap.

The problem with this analysis is that it doesn't work. Check out this chart below from John Hussman, which "backtests" the analysis. It doesn't have any predictive power at all.

Hussman Funds

3. Profits

Over the long haul, stocks track profits. And profits and profit margins are at record highs. Every time previously that profit margins have gotten way above or below average, they have violently reverted to the mean. Many people, including me, think this will happen again this time. The only question is when.

Here's a long-term look at profit margins. Note how high they are. Note what has happened every time this has been the case in the past.

Business Insider, St. Louis Fed

Byron Wien, a strategist at Blackstone, is worried about profit margins. He also just circulated this chart, which he says suggests that profit margins are "rolling over." This, he says, is bad news for earnings in 2014.

Blackstone, Wisdomtree

John Hussman is also worried about profits. He thinks profit margins are so out of whack that corporate earnings will decline at 10% per year for the next four years.

Hussman Funds

Hussman thinks that two things might cause profits to tank: 1) the decline of government deficits (which have been going directly into corporate coffers), and 2) increasing labor costs, as the labor market gets tighter. Hussman believes that these factors are already causing profits to miss estimates. This, Hussman suggests, may be why there are suddenly way more companies missing profit estimates than beating them:

Hussman Funds

4. When?

Market timing is always tough, and I don't know when profits and the market might break down. That really is anyone's guess.

John Hussman has posted a fun technical chart addressing this question, though. Technical analysis is generally bunk, and I would never bet a dime on it. But it's also often fun. And this chart is especially fun.

This chart suggests that the S&P rise off the 2009 bottom has followed a clear "fractal" pattern that is often seen near the end of speculative advances. This chart suggests that the S&P 500 (blue) might hit 1900 before collapsing. (It's at about 1,820 now).

Hussman Funds

Anyway, maybe it is indeed "different this time." So do what you want. But don't say you weren't warned!

El consumo de la clase media

El Consumo de la clase media por áreas geográficas

INFORMATION & TECHNOLOGY IT MANAGEMENT. Bridging the Gap Between IT and Your Business by THOMAS C. REDMAN AND BILL SWEENEY

For the past several years we have watched with increasing dismay at the increasing chasm between information technology (IT) groups and their business counterparts. From where we sit, both sides have legitimate beefs: IT complains that, despite the increasing penetration of technology intoevery nook and cranny of the business, it doesn’t have a seat at the table and no one understands how difficult their jobs are given the constraints under which they operate. The business complains that IT doesn’t understand the business, consistently overpromises and under-delivers, and slows innovation. CEOs, following the advice in Nicolas Carr’s famous HBR article, “IT Doesn’t Matter,” perceive little strategic opportunity in IT and devote as little time as possible to the issues. Finally, the usual calls for IT to get closer to the business only exacerbate the situation. Neither side fully appreciates how difficult this is. And half-hearted efforts are akin to putting in just enough energy to jump halfway across the stream.

Frankly, we are sick and tired of the bickering, especially since the most important point gets lost — the failure to derive the full advantage of information technologies does enormous disservice to companies. Further, the pace of technological change and the demands to do more with the data grow exponentially and will continue to do so for the foreseeable future. The problem, strategic or not, must be resolved. Smart leaders will ignore the posturing and work to close the gaps.

While we have no “silver bullet” solution, we do offer three steps that can help.

Quit making the same mistakes over and over again. It seems to us that, in far too many companies, IT doesn’t have a fair chance. We see the same mistakes — some subtle, most not so much — over and over. IT is asked to do things, such as improve data quality, which it simply cannot do. People are not given adequate opportunity to provide input, nor educated on the new process and applications they are expected to use, and they blame IT for imposing something on them they do not like. IT is asked to the table far too late to advise on the difficulties ofconsolidating systems after a merger, then faulted when the task takes longer and costs more. Or business silos blame IT because “systems don’t talk,” when the root issue is that siloed departments don’t like working together.

None of these examples are new or different. Worse, too often we find people on both sides fully cognizant that they’re heading for a train wreck, and then hopping onboard anyway. It is time to put a stop to this. Both sides must acknowledge the mistakes of the past, resolve not to repeat them, and develop the courage to speak up.

Find common ground on medium-term issues. The motivation for our second step is the simple observation that organizations develop trust when they know what to expect from each other. We propose business and IT work in that direction by bringing a few tough technological trade-offs front and center, with the goal of finding some middle ground. These may include the COO’s demand for high systems reliability vs. the product manager’s desires to bring new capabilities online quickly; the CFO’s desire that systems standardize processes to keep costs low vs. the CMO’s demands that these same systems be flexible to promote innovation; or the apparent attractiveness of the cloud to CEOs vs. legal counsel’s concerns about data protection.

To find that middle ground, both should describe the trade-offs from their perspectives, illuminating important subtleties along the way. There will be plenty of differences, but the secret here is to find areas of agreement. It’s not so hard. We recall one case where six big issues came up — and 27 areas of agreement. At least for a time, forget about the six, select a few of the 27, and get to work on them. Good things happen. And in time the business becomes a better consumer of IT and IT a better provider of business services.

Finally, companies should ask, “How do we expect IT to help us compete?” Today, this topic simply doesn’t come up often enough, leading to a one-size-fits-all approach to managing IT, often as a cost center. That’s fine for most functions and processes in most companies, where middle-of-the-pack IT is good enough.

But all companies have areas where middle-of-the-pack IT is not good enough. Companies must invest in these parts of IT for the long term. Importantly, the critical investment is less in any particular technology and more in building organizational capabilities. For while few information technologies qualify as strategic — after all, they will be woefully out-of-date in three to five years — developing the ability to keep pace with the technology curve in these areas must be viewed as strategic.

Seen sequentially, step one clears the emotional clutter that poisons the relationship, step two enables IT to achieve “trusted supplier” status, and step three helps build a true business partnership in the areas that need it most. But we’re less interested in the order. Like it or not, we live in a tech world, from Apple to Hadoop to Zip files. You can’t ignore the fact that technology touches every facet of our lives. Better to get everything you can, leveraging every byte and every ounce of knowledge IT can bring.

Toyota Way

1) Permitir o empoderar (por usar un anglicismo de empowerment) a los empleados para que decidieran, desde los niveles básicos de la organización o, mejor dicho, en los niveles más cercanos de donde están las decisiones a tomar. 2) Que tomaran decisiones por consenso, más que por mandato, decidiendo en la línea (y no en un cubículo). 3) Que decidieran basándose en los controles que se ven y no en impresos de una computadora. Este es el corazón de la cultura de Toyota, esto es lo que la hace tan competitiva

Obama proposes brain mapping project

Obama proposes brain mapping project



The president announced an initial $100m investment
US President Barack Obama has unveiled a new initiative to map the brain.

Speaking at the White House, he announced an initial $100m investment to shed light on how the brain works and provide insight into diseases such as Alzheimer's and epilepsy.

President Obama said initiatives like the Human Genome Project had transformed genetics; now he wants to do the same with the brain.

The project will be carried out by both public and private-sector scientists.

The project is called Brain Research Through Advancing Innovative Neurotechnologies - or BRAIN.

Mr Obama said: "There is this enormous mystery waiting to be unlocked, and the BRAIN initiative will change that by giving scientists the tools they need to get a dynamic picture of the brain in action and better understand how we think and learn and remember. And that knowledge will be transformative."

Next frontier

The project will begin in 2014, and will involve the National Institutes of Health (NIH), the Defense Advanced Research Projects Agency (Darpa), and the National Science Foundation (NSF).

The $100m investment will be used to develop new technologies to investigate how the billions of individual cells in the human brain interact.

Scientists will also focus on how the brain records, stores and processes information, and investigate how brain function is linked to behaviour.

Mr Obama said that while our understanding of the brain was growing, there was still a long way to go.

"As humans we can identify galaxies light years away, we can study particles smaller than the atom, but we still haven't unlocked the mystery of the 3lb of matter that sits between our ears," he said.

The project will also involve partnerships with the private sector.

This includes the Allen Institute for Brain Science, which has committed to spending $60m annually on projects relating to the BRAIN initiative, and the Salk Institute for Biological Studies, which has dedicated $28m.

An ethics committee will oversee the work.

Mr Obama said that it was worth investing in science, claiming that it would help to create new jobs and boost the economy.

He said that basic research was "a driver of growth".

"We can't afford to miss these opportunities while the rest of the world races ahead," he added.

The funding announcement comes after recent news of another push in neuroscience in Europe.

About 80 European research institutions and some from outside the EU will take part in the Human Brain Project, which is estimated to cost more than 1bn euros.

The project will use supercomputer-based models and simulations to reconstruct a virtual human brain to develop new treatments for neurological conditions.

BBC © 2013

The Right Way to Give Your Boss Bad News

No one likes a difficult conversation with the boss, but it can be a valuable tool for building a trusting relationship. Try these four steps the next time you need to share upsetting news:
Describe the problem. Provide a general overview and show the specific impact it has on your work and the company’s goals.
Identify your solution. Explain how you’ve already tried to solve the problem and what you’ve learned from those attempts. Recommend a specific approach, along with alternatives to give your manager options.
Discuss the benefits. Focus on concrete examples of how your idea will succeed. If you have tested your approach on a small scale with good results, share that information.
Accept responsibility. Demonstrate your commitment to ensuring success. Work with your manager to develop a final action plan.