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Buffett’s favourite Valuation Metric Has Surged Over 100% And That Isn’t A Good Thing (Pragmatic Capitalism)
Warren Buffett’s favourite valuation metric, the Wilshire 5,000 Total Market Index relative to gross national product, has breached the 100 per cent level. The Wilshire 5000 represents the broadest index for the U.S. stock market.
This has only taken place a few times, notes Cullen Roche. “It happened during the stock market bubble of the late 90′s, but then occurred again just briefly during the 2006-2007 period when the valuation broke the 100% range in Q3 2006 and stayed above that range for about a year. We all know what followed the 2007 peak in stock prices.”
Advisors Are Expressing Interest In The Treasury’s Floating Rate Notes (The Wall Street Journal)
Financial advisors and money market fund mangers are interested in the U.S. Treasury’s floating rate notes. These are securities that pay a regular coupon, however that coupon is tied to a moving market rate. These investors are being particular about the specific benchmark indices, maturities, etc.
David Glocke of Vanguard said, “This would be something I would have a lot of interest in. …As long as the price is right and there’s sufficient liquidity and it’s issued on a regular basis, it would be something I’d want to consider for the funds.”
Credit Investors Are Betting Against Junk Bonds (Financial Times)
As retail investors have jumped into junk bonds, credit investors like GSO and the credit arm of Blackstone have grown increasingly bearish on the asset class. These investors began to cut back on their junk bond holdings in late 2012 and have more recently taken short positions, betting that yields on junk bonds will rise.
“During 2012 and the early days of 2013, massive inflows into funds buying these securities led to a narrowing of the spreads between the interest rates on junk bonds and those on Treasury securities.
As the spreads came in, many of the big funds looked to get out, fearing that junk bond prices could suffer in any economic scenario. If the economy deteriorates, the rising probability of default could cause spreads to widen. If the economy improves, yields would rise – and prices fall – for all manner of fixed-income securities.”
Citi’s Panic-Euphoria model is a contrarian indicator that says when investors are panicking it’s probably a good time to buy, and vice-versa.
“The Panic/Euphoria Model has spiked to near its highs over the past three years, suggesting frothy levels have ensued,” Citi’s Tobias Levkovich wrote in a note to clients. “While a variety of other factors are constructive for equity indices, this proprietary gauge is starting to get perilously close to euphoria, cutting above the complacency readings seen in April/May 2012. In the past, when the model reached such levels, the equity markets experienced some modest consolidation.”
Legendary trader Richard Wyckoff continues to have a cult following on Wall Street. His 1931 book, The Richard D. Wyckoff Method of Trading and Investing in Stocks – A Course of Instruction in Stock Market Science and Technique, is still heavily referenced by hedge fund managers.
Drawing on his book BI’s Matthew Boesler explains that one of the crucial takeaways, is that to succeed, you have to understand what the big operators are doing. In particular, focus on how they manipulate a stock up or down so you learn how to react when you see it playing out before you.
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