Buzz on the Street: Investors Become Anxious as Markets Whipsaw
A look back at the happenings on Wall Street this week, as seen by Minyanville's Buzz & Banter.
Here is a small sampling of this week's activity in the Buzz.
Monday, August 5, 2013
Good morning and welcome back to the flickering pack. Following a stiff lift to all-time highs and a few bites of humble pie, we power up our weekly pup to find stateside stocks mixed as we power up a fresh five-session set. Some top-line vibes, in no particular order:
If you read one article on the Goldman Sachs (NYSE:GS) programmer who was convicted of stealing code and sentenced to eight years in federal prison, this should be it. Michael Lewis has always had a way with words.
If you haven't read "both sides" of the FOMC-Treasury debate -- with excellent input from Mark Dow -- I highly suggest you chew through it this weekend. You always want to know what your counter-party is thinking, if your counter-party happens to be human.
NYSE internals are 9:5 negative (not yet at tell status); the financials are soft (ex Goldman, which is up a buck), as are the metals. To that point, I dusted off the Gold vs. S&P chart below for schnitz and giggles; if the past is a prologue, either gold should rally or stocks should decline (or both).
I usually get asked to do TV gigs when the markets are in turmoil; today, I was asked to do a segment on the floor of the NYSE around 3:15 with my ol' pal Liz Claman. I'll be there for the quick hit; it remains to be see what type, if any, turmoil will precede the segment.
I'm watching the Facebooks (NASDAQ:FB), Yelps (NASDAQ:YELP), LinkedIns (NASDAQ:LNKD) and Teslas (NASDAQ:TSLA) of the world for clues to our forward fuse. If they get all JDS-Uniphase(NASDAQLJDSU)-like, circa 2000--particularly with year-end performance anxiety edging closer -- we would be wise to pay attention.
If the tape doesn't come in (for sale) in August, September or October, we could see some pretty nutty ketchup (performance anxiety) in November and December.
Lemme get this to you; as always I hope this finds you well.
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Clear and Present Markets
1. The government wants oversight of Apple's (NASDAQ:APPL) iTunes and App Store. This is interesting in that the government has not traditionally regulated technology, and it opens up technology to the slippery slope of regulation by those that infamously described the internet as "a series of tubes". One ruling on digital books pricing is leading to overreach into every digital item Apple sells. Apple's failure to settle this case, the way Amazon and others did, could prove a critical failure of leadership because it is eroding the core strength of the Apple ecosystem.
Part of the reason there is so much competition and price deflation in technology is that it has not really been regulated. Regulations create barriers to entry and allow for monopolistic pricing. If the government starts regulating iTunes, Amazon (NASDAQ:AMZN) is next, and then Netflix (NASDAQ:NFLX). Hollywood is at the heart of this. They fear Apple, after seeing what happened to the music industry, and spent millions to bring Washington insider Chris Dodd in to run their lobbying group after his "retirement" from the Senate. iTunes and the App Store are a place to purchase inexpensive, safe content for our mobile devices, and are the heart of Apple's long term strategy. Oversight of the retail outlet will begin to dismantle the primary differentiator between Apple and its competitors, precisely at the time when video content is being disrupted by digital delivery models. Apple pressed for lower price points to increase sales by monetizing sales lost to theft, and the result of government oversight is likely to be higher prices in the App Store and more P2P file "sharing".
2. I found it interesting that Jet Blue (NASDAQ:JBLU) is repositioning itself as an "up market" carrier, attempting to differentiate itself in a commoditized industry. As prices have fallen and bankruptcy has tarnished the image of many airlines, there is no "premium" provider to the mass market. Jet Blue was the first "hipster" brand, using technology in every seat and an all coach cabin to differentiate itself. Jet Blue runs the risk of losing its core market as it courts "business class" pricing, but it bears noting that most suits still ride in taxi cabs. Jet Blue already has these customers, and with so much competition I'm not convinced they will stay as the prices climb.
3. With corn prices continuing to fall, watch what happens in the food space. The staples group has struggled with weak traffic and cost inflation for years, and finally delivering margin expansion could make the high PE multiples look more rational in hindsight. However, this business is so competitive that companies often don't match price increases, or get promotional to drive volume and gain share. This has happened to Kraft (NASDAQ:KRFT) in the cheese and deli segments. I also recently took a position in Darden (NYSE:DRI) as I expect lower food prices will allow them to lower menu prices, and bring back some of the traffic they have lost to the "fast casual" chains like Chipotle (NYSE:CMG) and Panera (NASDAQ:PNRA). Consumer behavior has changed, and we will get a sense of how durable the share gains of private label and fast casual restaurants are as lower food prices enable more price competition. I will also be watching Sysco (NYSE:SYY) as higher case volumes will be indicative of improving trends in the restaurant sector.
A Measured Move Could Set Nikkei Price Target at 11,500
While US Equity Markets continue to make new all-time highs, European and Japanese equity markets are hovering just below their May highs. As much as this divergence is a sign of strength for US equities, it is also a sign that Europe and Japan are still correcting and navigating through time and price. Of the two, I find the Japanese Nikkei 225 (INDEXNIKKEI:NI225) to be the most fascinating, as much of the early year euphoria has been replaced by a wide-ranging, volatile pullback that is entangled in politics and monetary policy questions. That said, I want to focus on some key support and resistance levels, as well as a potential Nikkei price target, should the index continue its correction through price.
After an historic 7-month run from October to May (tracking nearing 90% gains, no less), the Nikkei 225 gave way to parabolic pressures, falling nearly 9% from intraday high to low on May 23 alone. This started a stealth bear market that the index has recently been crawling back from since the mid-June lows. Let's take a quick look at the chart and try to highlight a current corrective pattern, as well as a scenario that would disrupt this pattern (and likely see the bulls dancing again).
See the chart below.
First and foremost, note that the chart below is an EOD chart, and has not pulled in last night's session (which was down roughly 200 points – currently at 14,258.04). That said, the open gaps have served as magnets for the recent daily rally, as the Nikkei tests the "lower" highs made in July. Note that those highs also coincide with the big "B" on the chart. This is important because the bearish corrective path could setup an A-B-C measured move. This would mean that the highs recorded in July would need to hold as resistance and the subsequent downturn would need to equal the initial drop from the May highs to the June lows ("A"). This would yield a Nikkei price target of roughly 11,500, give or take a couple hundred points. This area is just below the 200-day moving average, and just above the 0.618 Fibonacci retracement of the Oct-May bull-run at roughly 11,400.
As mentioned above, this A-B-C measured move pattern would be offset by a move in price above the July highs. So, the lower highs at point "B" will be important to watch over the near-term. Note that I mention this pattern more as an observation. I do not have a position in the Nikkei, but the divergence with US equities is interesting and bears watching.
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Tuesday, August 6, 2013
Out of Nintendo
I took today's pop to toss Nintendo (OTCMKTS:
Given that Wii U sales are somehow even more horrendous than estimates, and that reported 3DS sales didn't quite hold up to the hooplah, I think the stock's due for a breather.
I'll look to get back in at a lower price because people still seem to undervalue, if not outright hate, the Nintendo franchise.
Large Call Volume in VIX
There was very large call option volume in the VIX (INDEXCBOE:VIX) this morning. The featured trade is in the August $18 and September $17 calls as each traded some 125,000 contracts shortly after 11:00 EDT. This appears to have done as a spread with a sale of the August and purchase of the September for a $0.76 net debit. As the August strike had sufficient open interest to cover the volume and the September does not, it's safe to assume someone is simply rolling down a long volatility position as a form of portfolio protection. On face value, some might have taken the surge in call activity as signal that a spike in volatility was imminent. But this trade reflects basic hedging and is therefore a somewhat positive market signal. This illustrates the value of reading behind the headlines of unusual option activity. That surge in call activity was enough to drop the overall put/call ratio from about 1.13 down to 0.71 during that 30-minute span. The ratio is slowly creeping higher.
Meanwhile, over in VXX (NYSEARCA:VXX), a trader seems to have a much more sanguine view of near-term volatility and is taking a decidedly different approach of rolling down a short put position as several large block trades of 500-1000 contracts were registered in the August $14 put that expires this week and the also in the August $13 puts that expire next week. This also appears to a roll down and would be a bet that volatility remains muted and that structural downward bias caused by the daily roll and rebalance of the VXX i to keep it reflecting a 30 day option will push that index to new lows next week.
Hanging in There
The market continues to do what it needs to do to hold on to the bullish case. Now, I do think it is probable that we top in August, but I want to let the market tell me that rather than just guessing. That means I will sell after the turn, not before.
As for today, the market broke below the breakout range this morning and re-captured it. Also, it is holding on to the trendline after briefly breaking it. Contextually, these are signs of a weakening trend, but just because the trend is weakening, doesn't mean it is over. I would not be surprised to see one more push higher before this thing is finally done. In the meantime, our old friend NYMO (McClellan Oscillator) got down around -40 today, refueling the market for a push higher, should it want to.
Interestingly, this is the first down day that we see all three of my key sectors leading down. Retailers, banks, and transports are all more red than the markets overall. This is another sign of growing internal weakness. Staying long up here may be running on borrowed time, but I am in the business of maximizing trend returns, so I remain long above 1692, with additional stops below at 1685, 1672, and then the 50-day moving average.
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Wednesday, August 7, 2013
Step Right Up
Attempting to pick a top to this crazy, up-trending market has felt very similar to playing one of those games at a carnival or fair - somehow you just know the odds are against you, and yet, you try anyway. Contrarians continue to be obstinate victims of Ben Bernanke's QEInfinity-lubricated ring toss game, while the Federal Reserve's recent comments about its future plans appear to have been interpreted by the market as "no definitive news is good news." Investors realize that the Fed's asset purchase program will end at some point and the target interest rate will eventually rise, but for now they continue to make hay while the sun shines. How powerful has this recent running of the bulls been? Well, between the intermediate low in the S&P 500 (INDEXSP:.INX) on June 24 and the hitherto high on August 2, the index rose about 9.6%. This is impressive enough, but when you also consider that during this run it never retraced more than 1.5%, you have a bona fide market melt-up. It is tough to buy the dips when there are no dips.
So what is an investor to do? If you have stayed with positions through the recent uptrend, you likely have some gains that you want to protect and not give back to Mr. Market when the inevitable correction happens. Will the past two days' weakness beget more downside risk? While no one knows for sure, internally, equities do appear to be losing strength when gauged by the NYSE Advance/Decline Line, an indicator that measures the change over time of the difference between the number of advancing and declining issues (see chart). When the indexes are making new highs, technical analysts also want to see the Advance/Decline Line making new highs to show robust breadth across the overall market and not just a few issues leading the way. Not only did the A/D Line not confirm the recent highs in the S&P 500, it has broken down to new short-term lows, signaling that fewer stocks are taking part in the move. While this by itself is not an immediate reason to sell, it is a divergence from the pattern seen year-to-date and does not augur well.
Once again, it may be foolish to try to call a top in this juiced-up market, but investing/trading is all about evaluating potential rewards against the risk and making sure the former's probability and magnitude are sufficient enough to justify the latter. Right now, if we postulate that we may finally see some weakness in the coming sessions, it may be better to wait until support is found and holds before initiating any new long positions. In the short term, probable support in the S&P 500 is most likely to occur around the following levels based on past support/ resistance, Fibonacci retracements, and volume-at-price readings: 1675, 1650, 1620, 1600, and 1560.
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China vs. the Taper
UBS (NYSE:UBS) economist George Magnus wrote an important op-ed in today's FT. Whereas a lot of the talk has been about the Fed and if/when the tapering of bond purchases would begin and what that means for markets, Magnus puts that discussion in the context of what that means versus China. The analysis should give many folks a moment of pause.
Magnus contends, and I agree, that many investors and analysts still think this is a cyclical slowdown coming in China. I certainly don't as I've been discussing here on the Buzz now for nearly the past two months. China needs to be monitored. Sure, there are questions about the data and what a real "boots on the ground" view would look like over there, but the fact is, China is getting ready to undergo some serious changes.
First, they're not the source for cheap labor anymore. Second, if they're not "making stuff" then their imports of raw materials and commodities will probably see some tapering of their own. Third, it's becoming clear their economic growth has been roid-raging on a lot of credit. When levered, illiquid assets can't command the values they used to. This has implications far beyond that asset class as the banks that financed that growth face exposure to credit, liquidity, and for some, solvency risks. Like Lord Voldemort coming back to take over the wizarding world, a systemic banking issue in China would bring back the Dark Lord of Deflation.
But enough hyperbole. Why bring this up now? Simple. China's GDP deflator has slumped to a 0.5% annual rate. Two years ago, this was at 7%. In an emerging market economy where inflation usually runs in the mid-single digits and real growth adds 2-3% of real growth on top of that, this is a huge change. I don't know for sure, but it seems clear to me that questions about destruction of aggregate demand, like the ones we've been hearing for the past 4 years, should be on the table for any discussion about China.
Magnus goes on to estimate that the reduced income and wealth effects could affect up to 35-40% of China's economy as they look to unwind the massive amounts of real estate investment that have accumulated there. If he's even half right, the problems from Fed tapering will be a rounding error.
Long Bond Breaks Downtrend
The September long bond future (USU3) broke out of its downtrend on the daily chart this afternoon following the decent 10-year auction. The downtrend started on May 9th and has held ever since. For the very short-term, 30-and-60-min RSI is in the upper band so we need to see a bit of chop overnight to work it off, if not a small dip tomorrow. One concern for me has been the general lack of volume of the rally over the last few days. I am currently short an OTM August iShares Barclays 20+ Year Treasury Bond (NYSEARCA:TLT) monthly put spread that I may roll to September by the end of the week.
Note that on 30-year Treasury Yields (INDEXCBOE:TYX) (the CBOE's 30-year yield index) the uptrend (for yield) has been broken, but not on the generic 30-year yield chart on Bloomberg, if we want to get technical.
Last, but not least, the bid-cover ratio for today's 10-year auction was the lowest since March 2009, which pre-empted a massive spike in yields, for whatever that is worth.
As a side note, I just rolled up my August Russell 2000 ETF (NYSEARCA:IWM) put spread as barring a significant down move the risk/reward wasn't favorable anymore. I'll be looking to redeploy that tomorrow or Friday into something longer dated. Note today was the 3rd down day in a row for the SPX, if we should close in the red.
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Thursday, August 8, 2013
Rule-of-4 Sell: DXJ
The WisdomTree Japan Hedged Equity (NYSEARCA:DXJ), which is an ETF for the Nikkei with a currency kicker hedge, is flirting with a Rule-of-4 sell on a break of a rising 3-point trendline.
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If the signal is generated, it implies a test of the 200 DMA.
Remember when the Japanese market fell out of bed in May? It sent shock waves across global markets.
So, any further decline and test of the 200 needs to be watched carefully as this divergence between the US and the Nikkei should be resolved sooner rather than later with the Nikkei turning back up after an A-B-C-bullish correction or a sell-off in the US.
Gold Breaks Out
After holding key support above $1,270/65 yesterday, spot gold prices have rocketed to $1,315.
In so doing, it has hurdled its nearest-term resistance line at $1,302 in what looks like the conclusion of the handle portion of a May-Aug cup-and-handle pattern.
If today's gains are sustained, my work will argue that gold -- and the SPDR Gold Shares (NYSEARCA:GLD) -- has started a new upleg that projects toward a retest of the July high in spot gold at $1,349.31.
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T-Report: Rolling Stones vs Lead Zeppelin (or QE & the Economy)
Does QE Help the Economy?
In the short run, it doesn't matter. All that matters is that next injection of Fed money, which boosts asset prices. The fact that the asset class that benefits most, stocks, is rich, and the asset class they are actually buying, treasuries, isn't responding to further purchases is a bit counterintuitive but par for the course.
Yesterday, we went through our analysis on tapering and our view that Fed "easing" is overly priced into the market and is set to disappoint. Today, we want to take a closer look at the impact QE has on the economy and what that can mean for stocks and QE going forward.
The "Rolling Stone" View
The bull case is pretty simple. QE has helped the economy and continues to help the economy. Both indirectly via asset price inflation and the wealth effect and somewhat directly through interest rates. The help to the economy will be enough to create a virtuous circle of growth so that not only will QE no longer be needed, but the economy will also grow without it.
It is compelling to believe because it is a very optimistic view. It makes you feel good to think that after 5 years the economy is finally getting ready to stand on its own two feet. There seem to be several issues with this.
For at least a year, we have been told that lower rates are good. Low mortgage rates are good. Low yields on corporate bonds are good. The low cost of debt is good and helps the economy. That largely makes sense (now is not the time to rail against the negative real short term rates this Fed likes).
But if it is true, we have seen rates rise across the board dramatically in the past few months.
Rates have spiked since May 2, and rates are higher than at any time in the past 2 years. We saw an improvement of growth with lower rates. That wasn't the sole driver, but it is an important one.
From any project "NPV" standpoint, where a company analyzes a project, there are really two key components. The expected revenue (or revenue scenarios) and the financing costs. Financing costs for any potential project have shot up. For companies to want to expand, then 1 of 2 things need to have happened. Either their revenue projections shot up fast enough to offset the increased funding costs or their range of scenarios improved enough that the project makes sense.
I find it hard to believe any company became so excited about the "growth" of the past 2 months that they are betting on much higher revenue. It just seems that the data hasn't been good enough to warrant that kind of optimism.
I am willing to believe that some companies will reduce their downside risk in the analysis as stability seems far more likely than any renewed weakness. That could be enough to keep some projects moving forward. If QE has finally convinced company management teams that the renewed recession scenario is off the table, it could spur growth, in spite of higher rates. I am dubious about that scenario as it is unclear what QE has really done, but it is plausible enough that I am not willing to bet against it.
In any case, we now have higher rates in spite of ongoing QE and that increase has been so quick that I expect it to be a drag on the economy in the coming months. Remember; the "don't fight the Fed" gang always says it takes about 6 months for rate cuts to work their way into the real economy. The same should be expected from a yield spike.
The Wealth Effect
The wealth effect really comes down to housing. The wealth effect of stocks seems limited to a select group of individuals and to pension funds. It is great that pension funds are digging out of their hole, but that doesn't seem to be a big boost to the economy in the short term. Lately, the stock wealth effect seems to have encouraged private equity firms to IPO as much as they can. Hardly a help for the average American and somewhat reminiscent of the Blackstone Group (NYSE:BX) IPO just ahead of the last time we hit a wall.
The increase in housing prices is real. That helps virtually everyone. The problem is that we are only in the "breathing a sigh of relief" stage. Everyone is relieved that the worst is over, but few are "up" on their purchases, and even fewer are comfortable spending based on their house value going up. Being upside down less on the mortgage is a good thing, but the benefit really accrues to the bank. I am not downbeat on housing, I am just careful about getting too far ahead of the actual impact.
So I don't think the wealth effect of QE is big at this stage for the real economy, though it has been big for the stock market.
What if Tapering Doesn't Impact the Economy?
Let's assume the Fed tapers and the economic data remains on track. What then? I would argue faster tapering. There are many that question how useful QE is. If the Fed tapers and the economy responds with a shrug of the shoulders, that should increase the rate of tapering. Ben is under pressure to consider tapering, and in an ideal world, would love to leave his term as chairman having "saved" the economy and ended all "alternative" measures. That would be a best case.
So if tapering doesn't hurt the economy, expect an accelerated program, which should hurt stocks more than bonds. Bonds have a reasonable rate of inflation and growth priced in. Stocks have an accelerated growth path priced in.
What if Tapering Does Impact the Economy?
What if we taper and get a steep decline in economic activity? Do we just "untaper" and buy more? Probably, but will the market buy that? Maybe.
In this topsy turvy world that we have created, it is possible, maybe even likely that we taper, see worse data and untaper, and markets rally as QE forever becomes the new norm.
The "Lead Zeppelin" Scenario
While the Rolling Stone scenario is appealing, the Led Zeppelin (apologies to the band) scenario is scary, probably as unlikely, but a real possibility. I assume a lead zeppelin doesn't fly, and in this scenario, the economy and markets won't fly either.
We start with some tapering. The combination of tapering and higher rates slows the economy down. Then for whatever reason, probably politically motivated, the Fed stays the course. The Fed doesn't immediately re-introduce more QE. With the Fed chairmanship up for grabs, that scenario is less far-fetched than it seemed a month ago when most of us thought Yellen was a lock.
In that case, the weaker data, no obvious way to return to better data, and far less Fed money than the market has priced in and demands will cause a sell-off. It shouldn't be a big sell-off, but given positioning and the lack of liquidity, it will be bigger than it should (10% or more).
Too much good news and hope is priced into equities. Remain cautious here. The downside once again seems greater than the upside. We continue to think high yield bonds offer value here. Treasuries are okay. IG CDS is a good short.
In the medium term we are bullish on credit as we think treasury yields are fairly priced or too high, and the economy will do well enough to justify spreads. In fact we expect renewed interest in structured credit products by the end of this year and early next, but that is a story for another day.
Friday, August 9, 2013
Getting Short Facebook, but Defining Risk vs Reward
Facebook (NASDAQ:FB), the social networking celebrity, recently had positive Q2 results, but certain analysts are remaining bearish on the stock and cite that over-speculation might be in play for the company's investors. The recent hubbub has been over the fact that the company broke past its $38 IPO price for the first time since its rocky start after going public over a year ago, but Facebook is still having trouble competing in the mobile device market. The switch from the traditional desktop platform to the mobile device industry has been Facebook's biggest challenge, though the company is making initiatives to extend its success like creating TV ads and developing smartphone games. However, now analysts say the company's excessive optimism over the past quarter's results are transforming the company's stock from propitious holdings to overweight shares. According to the number crunchers, Facebook "still has a long way to go to justify its current stock price." One marketing expert in particular calculated that in order for the stock to be worthy of its current price trends and assuming a 15% annual return rate, yearly revenue for Facebook would have to reach $25.5 billion by 2017, giving the company a market cap of $149.8 billion. This revenue estimate is over four times the $6.1 billion revenue brought in by the company over the past year, and Facebook's current market cap is less than $90 billion. Given that Facebook is in a precarious transition period from focusing on computers users to smartphone customers, most other analysts remain conservative on their estimations of the company's growth and are only expecting $14.3 billion in revenue for 2016. Also, with FB's beta level at 0.88, investors should not be expecting high volatility from this company, which would be needed to encourage fast growth and support the company's current stock prices.
My Trade: Buying the FB October-September 37 Call Calendar Spread for $.55 debit
My Risk: $55 per 1 lot
My Reward: Unlimited. If the September 37 Calls expire worthless, then I will be Long the October 37 Calls for $.55 and in theory have Unlimited Reward
Greeks of this Trade:
Waiting for a Price Flip in Procera Networks
I'm waiting for a price flip in Procera Networks (NASDAQ:PKT) and for my early turn technical analysis work to show me the way. I can't find a good reason for the huge drop from the gap higher. But remember; the selling window opens (for insiders), and these small/mid cap's have no institutional sponsorship. Thus, in the absence of a massively strong catalyst, these names get sold, sometimes more sharperly than many anticipate.
Combine that with the fact that Procera Networks probably had a good bit of pre-earnings buying following the strong reports from so many peers, and you have the recipe for an algo-sell fest.
Bottom Line: I feel better about Procera Networks after the report than before, especially as the name has now come in a good 10-15% plus. But I'm also not going to step in front of the algo freight train just yet. I'd rather pay $0.25-0.50 more off of whatever base forms than try to exactly bottom tick this stock. Though, that being said, if I see 12.50, I'll put in a buy tranche no matter how bad the chart action looks. From that level, I'll likely get some bounce, upgrade, or catalyst, which will let me sell it for something in the low $14s.
Yen and Treasuries
The Yen versus dollar bid in place since the beginning of the month is in line with the ZN (ten-year note futures) bid (see chart). This is a warning both on carry and a weak economy, with rotation out of equities into safety. Aside from a one-day scare, equities have been ignoring the paradigm. But someone is wrong, and it rarely is the bond market. It will be interesting to see how this plays out next week during option expiration. But with the yield on the ten-year struggling at 2.6%, some might be looking back at 2.75% wishing they had parked there until October after a 20% equity run year to date.
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There is lots of talk about how low yields should foster higher P/Es than where we are now. Allow me to use a historical precedent to debunk that theory. The last strong era of 2.5% yields in the early 1950's had a P/E ratio in the single digits to low teens. We are currently above 19 P/E (lagging). If you remove the freak blow up of recent years, this is a level that has marked resistance for the better part of 100 years (see chart 2). Many pundits could be falling victim to generational perception - one's lifetime experience - as opposed to analyzing hard data on a longer-term basis.
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