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Vinny Catalano

Musings on the Markets

Updated: 2017-08-01T14:15:49.634-04:00


Valuation Levels


Taking last Friday's US large cap market close and using current and projected next twelve month's earnings, the justification for a well above average P/E ratio rests on no negative impacts to the key inputs of earnings, growth of earnings, and an appropriate discount rate. If, however, an exogenous event were to occur with the global economy limping along at just above stall speed, what are the odds that such an impact were to occur - specifically to earnings and its growth rate? And, therefore, shouldn't such a risk give one pause to the justification of an above average valuation level for equities?



Last Friday's Bloomberg radio appearance is available to listen to on my "Beyond The Sound Bite" media blog.

Bloomberg radio


Tomorrow's appearance on Bloomberg radio will cover my recent travels and events (8 events over a 6 week span) plus the key dynamic impacting the global economy and markets: an excess supply of just about everything and an insufficient demand to meet that supply.

To listen, "click here."

Key US Stock Market Levels


To subscribers of my newsletter who received on Monday an equity exposure reduction before the market opened, this is a quick follow up message re key market price points.

The first price point for the S&P 500 is 1867, its closing low reached on August 25. This number is significant primarily in the minds of the more bullish among us: a stock market correction (10 to 20%) is all that the markets are going through AND a nice and neat test at or around that 1860 level would be healthy. Cleanse the system of those who dare to question the wisdom of traditional equity analysis and all will be well. From that level one could - and I would argue should - assume a bounce back rally will ensue, thereby buttressing the bull market correction belief.

The second, and far more significant, price level for the S&P 500 is 1704, for at that price point the S&P 500 will have experienced a 20% decline, which puts it in the wheelhouse of an "official" bear market. This number matters more - and subscribers to this newsletter learned in this week's report - because at that price point the probabilities jump nearly fivefold (from 15% to 73%) that a US recession will occur sometime in the near future.

Hard to believe? Certainly, considering the GDP numbers of last week and the Fed's strong view that rates must rise - not just for this year but well into next and the year after (a fact also provided in this week's report).


In next week's report, I will elaborate on the prudent investment strategy adopted thus far. Until then, the above price points will provide some guidance on what seems like the hard-to-comprehend stock market action of late. It's really not all that hard. And not that incomprehensible - if you know where and what to look for.

Note: For Non Subscribers

If you are looking for a fresh perspective on how the global economy and financial markets work - how the asymmetrical features of a globally interconnected and interdependent economic and financial system functions - how network effects and speed change the traditional economic and investment dynamic, you might want to consider our subscriber-only service.

Information regarding our very affordable subscription service can be found here.

To read my most recent quote in the Financial Times and to listen to my recent Bloomberg radio segment, click here.

Recent Media Quotes and Appearances


My two most recent media quotes (Financial Times) and appearance (Bloomberg radio) can be found on my media blog "Beyond The Sound Bite."

Media Appearances and Twitter Posts


Recent media appearances can be found on my "media blog."

Recent Twitter posts can be found "here."

Recent Media Appearances


How nice! "Yahoo! Finance" picked up my Tuesday Wall Street Journal "News Hub" appearance.

This interview, along with my most recent Bloomberg radio appearance, can be also found on my "media blog."

The question is, "Is anyone listening?"

The "If...Then" Bomb


If the global economy were to turned down due to some unforeseen exogenous event, what could possibly be the governmental response given the fact interest rates are at 0%, central banks balance sheets are at unprecedented levels, and there is no political will for fiscal debt? In light of the fact that stocks are at valuation levels that leave little to no room for error, shouldn't a prudent investor feel some degree of concern?

To view my most recent media appearance which included what I call the "If...Then" bomb, "click here."

Recent Media Appearances


Last Tuesday's media appearances -, Bloomberg radio, and Business News Network - are posted.

To listen and view them, "click here."

Nick Colas on Bitcoin


Recently, I had the pleasure of interviewing Nick as part of NYSSA's newly created video series re his upcoming NYSSA presentation on Bitcoin.

To learn more and view the interview, "click here."

You Shoulda Been There!


In case you missed it, here are two recent media and event appearances that yours truly had the privilege to be involved in:

Wednesday's Bloomberg radio segments
"Taking Stock with Pimm Fox and Carol Massar"

excerpt from NYSSA's January 9 "Market Forecast" luncheon featuring Phil "The Thrill" Orlando and Rich "IH8ARNSL" Bernstein
"NYSSA January 9"

As John Lennon might say, "A splendid time was guaranteed for all".

Talking Head Time


8 events, 8 cities, 6 weeks.

From the raging bulls in New York to the humorous (but very insightful) comments of a fixed income expert (yes, Matilda, they do have a sense of humor) to the sanguine views of Dr. Doom himself (say what!?), my early 2014 events are in the books and ready to share with all who care.

Today, at 2:15 (eastern), I get to do exactly that on Bloomberg radio's very popular program "Taking Stock with Pimm Fox and Carol Massar". Who knows, I may actually say something of value.

To listen, click here.

Recent Media Appearances and Upcoming Events


My recent media appearances - "Taking Stock with Pimm Fox and Carol Massar",'s "Authers' Note", and "On The Money" with Steve Pomeranz, CFP - along with my early 2014 upcoming events, featuring the likes of Liz Ann Sonders, Sam Stovall, Phil Orlando, CFA, Don Rissmiller, Glenn Reynolds, CFA, Heidi Richardson, Jeffrey Saut, Dan Clifton, Shane Shepherd, Peter Petas, Rich Bernstein, Joe Kalish, Ed Clissold, Tom Tzitzouris, Matt Orsagh, CFA, Jeffrey Sherman, and a cast of Inside ETFs experts too numerous to mention, are listed on my media blog, Beyond the Sound Bite.

You Don't Need A Bubble...

2013-12-03T11:32:34.458-05:00 end a bull market.

Lots of talk of bubbles these days. In fact, I was interviewed on the subject just a few weeks ago. What seems to be left out of the chit chat about bubbles are the dynamics that go into bubbles (valuation model inputs) and the issue of how markets typically come to an end.

Granted, the popping of bubbles is one way to bear witness to the end of the current liquidity-driven global equity markets bull run. However, another, more likely (and more common) way would be a good, old fashioned garden variety market top. And, in that regard, there are few signs that the end of the party (replete with music and dancing and a punch bowl full of central bank liquidity) is at hand. For when the dominant players in the markets (investment professionals) are highly dependent on relative performance metrics (a/k/a alpha), trailing your peers is one of the best ways to lose clients (and your job, and your house in Greenwich). So, when one is flush with cash, dance and make merry is what you do - confident that one possesses the skills necessary to exit the dance hall just as the music ends and the central bank libations cease to flow.

Now, could such merriment lead to a bubble?

Bubble talk refers to the inputs that go into valuation models - earnings, growth rates, and interest rates - and their relation to price. History is used to reference prior periods when bubbles were formed and what followed when they burst. However, quantifiable as we want them to be, valuation models contain very highly subjective elements. They are tied to factors that reside in the social science worlds of the real and political economies and the financial economy. They are useful in the sense that they provide a zone of vulnerability where, in the past, bad things followed. They are, in many respects, like the psychology of investors in which rubber band-like qualities of investor sentiment can stretch beyond reason - and do so for far longer than one presumes*.

Bubble predictions are not, however, a statement of fact nor are they a justification for the need to explain how only an extraordinary event can disrupt the party underway. (Which is another way of saying "I, the investment professional, cannot possibly get it wrong on something so ordinary as a garden variety market top. It just has to be something unique - like a bubble!")

Investment Strategy Implications

Bubble talk is entertaining, interesting and somewhat informative. But understanding and appreciating the realities of a changed financial marketplace intersecting with the extraordinary economic, political, and monetary times we live in make for a more useful exercise. As for the signs of a market top, they just are not there. Divergences between markets exist but not to the degree that has in the past signaled the end of a trend. And the price and other momentum indicators are equally supportive of the existing trend in place.

That said, if one wishes to indulge in extraordinary items, perhaps a far more productive use of one's time might be the search for and understanding of how Black Swans form (the subject of my upcoming CFA Society San Francisco presentation next Thursday).

*"Markets can remain irrational longer than you can remain solvent."
John Maynard Keynes

And So It Goes


Since the bull market began in 2009, on three occasions (November 10, 2010, April 29, 2011, and March 30, 2013) I have posted a perspective from one of the voting members of the FOMC, St. Louis Fed President, James Bullard, and his seminal work, "Seven Faces of "The Peril'". In his commentary, Mr. Bullard provides a chart (see accompanying chart to your left) that illustrates quite clearly the underlying fear that drives the Fed toward its super easy (and, seemingly, never ending) monetary ease policy.

While yesterday's surprising decision to postpone the taper focused on the state of the US economy (and, to a degree, the financial markets' recent action), the real driver, I would argue, is the underlying fear that the US could, without a sustained intervention by the central bank, slip into deflationary territory - a place where government intervention has a very limited history of success.

Now, even if one doesn't fully (or, even, partially) buy the argument re the Fed fears of deflation, consider the very fact that the Fed was unwilling to engage in a measly $10 billion per month ($120 billion per year) taper in a $15 trillion economy. What does that say about an economy that has been on governmental intervention support for 5 years and counting?

To help illuminate the Fed's action as it relates to the state of the US economy, perhaps what my good friend, Dr. Vahan Janjigian, CFA, wrote today will help.

Investment Strategy Implications

Many who live inside the Wall Street bubble act and react according to the financial video game they play. Economists and financial theoreticians provide the intellectual cover, the legitimization of the illegitimate belief that the social sciences are more akin to the physical sciences and, therefore, are more science than art. And, in time, when things don't go quite as forecast, the outcome surprises. Should that outcome the next time the surprise occurs (and it will, it always does) turns out to be anything resembling the disaster of 2007-09 (or, more likely, worse), who will answer the question Queen Elizabeth posed at the London School of Economics, "Why did nobody notice it?".

And so it goes.

Talking Head Alert: Bloomberg Radio today


Today's appearance on "Taking Stock with Pimm Fox and Carol Massar" (4:15 to 4:45 PM eastern) will provide the opportunity to share with listeners what Pimm and I heard at the New York Society of Security Analysts' "Market Forecast" luncheon of August 8th. The event covered a wide range of important topics - economic, financial markets (both equity and fixed income), and currencies - with six excellent experts: Marc Chandler, Don Rissmiller, Alec Young, Tom McManus, Thomas Lee, and Jonathan Mackay.

In today's radio segment two central areas will be explored: What were the points of view expressed? Based on their questions to the panelists, what were the attendees areas of interest?

Discussing the first area is obvious - what did the six experts say and why? The second area, what was on the minds of attendees, is less obvious but no less important as it reveals the mindset of investors (primarily professional investors). While anecdotal on its own, it is insightful when compared with similar such events conducted throughout the US this year.

Having produced and conducted such events since 1998, I can assure you that everyone involved - panelists and attendees - has found the time well spent.

Note: I will also give my take on market related matters, including why Obama will pick Summers as the next Fed chair plus what alpha males, short term market momentum players, and overconfidence have to do with each other.

If spending your time in a productive manner is high on your list, consider tuning in today at 4:15 PM (eastern) via radio, app, or here.

Homebuilders - Pause That Refreshes or Trend Change?


Curious little item: Associated Press notes that "Confidence among U.S. homebuilders is at its highest level in nearly eight years, fueled by optimism that demand for new homes will drive sales growth into next year." Sounds good. Then why has the homebuilders sector fund, XHB, been faltering of late?

Too early to say whether it's either the pause that refreshes or the beginning of a trend change, but it is always worth noting when price action does not match the story - especially when the price action appears to be in the process of building a top or bottom.

To learn more about Blue Marble Research Advisory services and its integrated approach to investment strategy and decision-making, click here.

NYSSA Market Forecast: Thursday, August 8, 2013


This Thursday, August 8, The New York Society of Security Analysts will conduct its latest "Market Forecast" luncheon. Featured speakers are Tom McManus, Thomas Lee, Don Rissmiller, Alec Young, Marc Chandler, and Jonathan Mackay.

Bloomberg's Pimm Fox will conduct the special interview segment. Yours truly moderates the panel discussion. A spirited discussion and debate regarding the trends and themes impacting today's markets and economy will ensue. Insights will be gained. And actionable ideas will be rendered.

Then again, one could choose not to attend and continue to digest what they already know.

For details and to register, click here.

Technical Tuesdays: Curb Your Enthusiasm?


We begin with the following excerpt from Sam Stovall's (Chief Equity Strategist at S&P Cap IQ) latest missive:"Since WWII, bull markets have averaged four years in duration, mainly because of the treacherous third year. Of the prior 10 bull markets, five declined in price in year three, with three of these resulting in new bear markets."... "Surviving the critical third year has traditionally resulted in a revival of upward momentum. Indeed, of the six bull markets that celebrated their fourth birthday, five (83%) went on to celebrate their fifth birthday, recording an average price increase of 21%."So, lets do the math.On the bull's 4th anniversary date of March 9, 2013, the S&P 500 stood at 1551.18. If we add to that the average price increase noted in Sam's commentary, 21%, we get to 1877 next spring. Using a good operating earnings estimate for the twelve months ending March 2014 of $106, stocks will be priced at 17.7 times earnings. At virtually 18 times earnings, the most enthusiastic types will note that the rule of 20 roolz: 20 - inflation rate = appropriate P/E ratio*. Sounds good. Then there's this from Orcam Financial Group (via Pragmatic Capitalism via Marc Chandler's the fact that there is little to no advance signs of a market turn from such data plus the fact that the data seems to be coincident to each other** plus the fact that so much has changed in terms of the very structure of the market that such data is likely highly contaminated, all that one can do is note that the US equity market is at a point where problems ensued. Investment Strategy ImplicationsWhen looking to divine the future for equities, history is a mystery. As Sam is found of noting, it's a guide not gospel. And certainly no substitute for logic and analysis. Reliance on simplistic rules of thumb (like the rule of 20) is fool's gold. Investors operate in a changed environment yet far too many rely on tools and methodologies better suited for a more simple time. It's like the difference between analyzing an economy that is perceived to be closed when it is anything but. Accordingly, Given the interconnected nature of the globalized economy and markets plus the complexity of relationships and financial instruments plus the speed with which a seemingly minor incident can transmit and transmute itself throughout the global network, the rise to valuation normalcy is problematic for anyone who believes that the extraordinary economic and financial times we live in warrant a below average P/E. Count me in that camp. My enthusiasm is curbed. *Actually, according to one source, the rule of 20 is more like the rule 19.3, which would be nearly spot on given that inflation tends to run closer to 1% than 2% in the current environment. **I suppose one could argue that the fall off in NYSE margin debt precedes the drop in equity prices. But given that we are talking about only two episodes, this is hardly a large enough sample to work from. ***Technical Tuesdays is a service of Blue Marble Research Advisory and illustrates selected elements of market intelligence analysis. Market intelligence analysis - along with fundamental and thematic analyses - form the three-legged stool of the analytical approach employed by Blue Marble Research Advisory. We believe that only by integrating the three disciplines can one effective analyze the complexity of today's globalized economy and markets. To learn more about Blue Marble Research Advisory services and its integrated approach to investment strategy and decision-making, click here.[...]

A Bull For The Ages


Just how good has this bull market been? The best in the post WWII era, that's how good.

Source: J. Kleintop, LPL Financial, Bloomberg data
Note the time period is four years

Technical Tuesdays: Diverging Paths


The performance spread between the three major global markets - US, EAFE, and emerging markets - gets more pronounced with each passing day. This divergence is NOT a sign of strength in the overall global markets but a sign of weakness.

In a globally integrated economy, one would assume that happy times in one area that is not accompanied by something resembling happy times elsewhere signifies that something is seriously amiss.

Is this of concern to most market participants, specifically those that are US based? Apparently not, as higher highs and a gravitation toward normalcy in valuation models is well underway. And this drive to valuation normalcy is occurring despite the many unresolved and unknown outcomes inherent in these extraordinary times.

The prudent investor would argue that the extraordinary times we live in warrant a below average valuation level; that the uncertainty of extraordinary actions like QE to infinity should be questioned aggressively and not blindly accepted as being a sweet deal with no consequences.

Investment Strategy Implications

Does the fact that US marches to all-time highs on its own of some importance? Does it suggest that in a globalized economy and market where the interconnected nature of business and finance with the ability to transmit an occurrence at speeds greater than policy makers can react to create an environment where something, somewhere, somehow may manifest itself into something unforeseen faster than you can say high frequency trading? Does it suggest that something may be rotten in Denmark? One would think so.


Technical Tuesdays is a service of Blue Marble Research Advisory and illustrates selected elements of market intelligence analysis. Market intelligence analysis - along with fundamental and thematic analyses - form the three-legged stool of the analytical approach employed by Blue Marble Research Advisory.

To learn more about Blue Marble Research Advisory services and its integrated approach to investment strategy and decision-making, click here.

Bloomberg Radio Segments - July 3rd


My recent appearance on Bloomberg radio's popular program, "Taking Stock with Pimm Fox and Carol Massar" can be heard on my media blog: Beyond The Sound Bite. The markets, the economy (yours truly), the geo political (Ian Bremmer), and the changed market structure (Adam Sussman) were just some of the topics discussed.

The Changed Market Structure: How Markets Really Work


Today's "What's News" section of the Wall Street Journal online has a lead story titled: A Peek at Trucking Data, and Then the Stock Surged.
Glimpses of Key Figures Can Aid Investors in Truck Stocks, Soybeans, Bed Makers and Others.

Here are the opening three paragraphs:

"Just before the stock market closed March 4, an industry-research firm emailed a monthly report on commercial-truck orders to hedge funds and other subscribers that pay the group $1,700 a year for the exclusive service.

The early peek was worth the expense. The next day, after the bullish truck numbers were reported in the media, shares in truck makers surged, generating a tidy profit for investors who traded on the report in the late moments of the previous session.

Even as federal, state and congressional investigators examine the preferential release to investors of broad economic data—such as the University of Michigan consumer-sentiment survey—some investors tap numerous other more narrowly focused and less well-known industry indicators ahead of the rest of the investing public."

And here is my posted comment:

"Is this really about information for investing (i.e. longer term) purposes or is there the potential for collusion and short term profit by the use of the data that can serve as the justification for the short term market movements by those so inclined to be short term traders? For example, let's say that I am a short term oriented, story driven trader but I cannot, on my own, move a market but with a little help from friends can move a market, wouldn't I need some justification for action? And wouldn't I want that justification for action to serve as my legal cover? Enter the private service reports described in this article. As the article states, "The activity is widespread and legal. Federal securities law doesn't prevent investors from trading based on nonpublic information they have legally bought from other private entities.""

Investment Strategy Implications

Setting aside the misuse of the word "investors"*, this article describes an aspect of the financial markets as they function today but fails to connect the dots between the dominant forces in market action at the margin (short term trading), the nature of investors versus traders, and the points raised in the article. So, the larger issues here are (a) whether regulators have the insight and the authority to act on generally accepted market practices that are legal and (b) what is the longer term, lasting impact to the efficient functioning of the capital markets?

*Investors are longer term in nature. Getting the jump on a market is not what long term investors do. It's what traders do.

The Changed Market Structure is a new feature of this blog. Focusing on how the very structure of the capital markets have changed and the role financial innovation plays will be explored from time to time.

To learn more about Blue Marble Research Advisory and its integrated approach to investment strategy and decision-making, click here!

Investment Life In The Easy Money Vortex


Since hitting its intra day high on May 22 (1687.18) and its closing high the day before, on May 21 (1669.16), the S&P 500 has corrected 7.52% and 5.76% (intra day high to low and closing price, respectively), which was reached on June 24.

The current move puts the S&P 500 right around its highs, doing so in the one month of the third quarter with a good performance track record - July. In the process, however, the momentum of the current move has shown a marked deceleration from its previous foray into record territory at the same time other global markets are not following suit. And all this takes place ahead of the two of the worst performing months - August (10th worst) and September (the bottom of the barrel at #12) and its most volatile month, October.

It is, therefore, quite probable that a meaningful decline in the equity exposure will be recommended in this week's report, particularly if a new high in the S&P 500 is achieved without confirming moves in other key indices tracked.

As to the more significant issue of whether this is all taking place within a market topping process, that will take more time (but not as much as one might think) to be fully formed.

To learn more about Blue Marble Research Advisory and its integrated approach to investment strategy and decision-making, click here!

Technical Tuesdays: History's Mysteries


The following is, in part, an excerpt from this week's "The Effective Investor". Information on the report and related research service can be found via the links at the end of this commentary.
What's an investor to do when two conflicting factors come into play? As the table* to your left illustrates, July has a bullish history on its side. While not exactly a rip roaring performer (the 7th month of the year is the 7th best performing month of the year), it still has a respectable average (+0.87%) and probability of being an up month (53% of the time). However, July just happens to fall within that time period that contains two of the worst performing months of the year (August and September, ranked 10th and 12th, respectively), which is then followed by the very average performing October (ranked 6th) with the worst extreme numbers by far (-21.8%).

Investment Strategy Implications

For investors (as opposed to traders), what happens in July is of minor importance. It's what happens throughout the third quarter that matters quite a bit, as the high probability of a sideways outcome from mid May into the fall will produce one of two major trend impacts: either sideways = the pause that refreshes and a resumption of the bull or, sideways = a topping process from which the bear emerges from hibernation.

Right now, the performance discrepancy between the US equity markets and the rest of the world (see chart* to your left) stands out as an early indicator that the latter will be the result.

*Source: Sam Stovall, S&P Capital IQ; click image to enlarge


Technical Tuesdays is a service of Blue Marble Research Advisory and illustrates selected elements of market intelligence analysis. Market intelligence analysis - along with fundamental and thematic analyses - form the three-legged stool of the analytical approach employed by Blue Marble Research Advisory.

To learn more about Blue Marble Research Advisory services and its integrated approach to investment strategy and decision-making, click here.