So this week we learnt Vladimir Putin put an end to the Wolfowitz Doctrine as expertly pointed out by Zero Hedge by firing missiles from the Caspian Sea, through Iran and Iraq to hit ISIS targets 1,500km away in Syria.
Putin really is taking Obama to the cleaners. he did it in Ukraine and my prediction is he’ll do it in Syria.
We also learnt that he NYSE (the largest in the world by market capitalisation) has recorded pre-Lehman levels of short interest: 18.4 billion shares, just below the level recorded on 31 July 2008.
Does that mean that another gigantic stock market collapse is just around the corner?
For those who don’t know, short interest on the New York Stock Exchange measures the amount of NYSE shares that have been sold short and are still open positions.
Traders and investors the world over view short interest as an indicator of investor sentiment: the higher the short interest, the more bearish investors are about NYSE stocks.
Well I’m not a bear just yet although the short interest figure confirms that my high cash position is justified when considering the amount of buybacks that have occurred over the years that would have significantly reduced the amount of shares outstanding.
As an indicator short interest is worth noting but not on it’s own.
Take the IMF’s chief economist Maurice Obstfeld, warning this week that the world is on the brink of a global recession:
Six years after the world economy emerged from its broadest and deepest post-war recession, a return to robust and synchronised global expansion remains elusive…
Well you don’t say.
The IMF has historically defined a global recession as being when GDP fails to grow by more than 3% – though successive chief economists have chosen different definitions as they have come and gone.
Emerging economies and China are (still) shouldering the blame for the gloomy outlook as are volatile commodity prices.
It appears that central bank money printing has lost it’s shine and now China et al must take up the slack lest we all succumb to the financial abyss.
The cheap debt, the buybacks, the declining labour force participation: everyone knows the global recovery is a falsehood.
How The Failed Recovery Influences Your Stock Selection
On an individual stock level there’s one particular company that caught my eye this recently:
— David Thomas (@djthomas) September 23, 2015
Since the whole saga surrounding Volkswagens alleged criminality is still unfolding I’m remaining tight and have not opened a position. Yet.
My belief is that the fines Volkswagen will have to pay will dwarf anything that they’ve made provision for. In other words I expect a lower share price than today.
Unless and until the authorities on both sides of the Atlantic are satisfied they’ve found out how deep the rabbit hole goes investors will simply not trust Volkswagen again with their hard earned cash.
And that is really the point in so far as the failed recovery will only ever really influence the balance of cash or bonds in my portfolio.
More importantly the influence of sentiment (is there excessive exuberance or unjustified pessimism?) and general stock market valuation (what is the current trailing PE Ratio?) will have a far greater bearing on how cash v equities is allocated.
My thoughts on the situation today:
- there is exuberance but it is not yet excessive (although it is close)
- The S&P 500 has a PE ratio of 20.29 (fair value)
As you can see from the above PE Ratio chart from Robert Shiller’s website, historically the S&P 500 PE ratio tended to fall from it’s current level.
Here at Sharesandstockmarkets.com I’ve always prided myself on following the value approach and so remain heavily in cash (treasuries).
As for the general market it is neither cheap nor expensive and the existence of exuberance means buying only those stocks that represent the highest risk/reward.
They exist but they are becoming much harder to come by.