Volatility Begets Volatility…Until the Emotion is Spent

Mike Williams | 3rd January 2019

Over The Years…

Panics and corrections (and even bear markets) tend to all have one end result: the transfer of stocks from the hands of short-term traders into the hands of long-term investors.

It happens even when that process hurts for a while.

However, and it’s a big one, for long-term investors extremely oversold conditions are unquestionably a welcome sign.

You could think of it like stocks being on sale, where valuations are cheaper and prospective long-term returns have improved.

For traders, the outlook is much less certain.

While a near-term bounce is likely, it may not hold (if history is a guide).

And we should expect the next few months to be a choppy ride as those long-term values are solidified and fear is once again singed into our psyches.

Here’s why stocks are cheap:

The two charts above are pretty startling. I remind you these are trailing P/E's!

So, do we really feel we are closing in on periods as bad as the lows of 2009? In fact, forward P/Es for 2019 are even lower and now stand as follows:

Keep in mind those earnings expectations are already being brought down by all the fear and angst being poured over us in the media.

We should all expect to see the norm (after the tax benefit bumps) in the earnings season. It has been this way for ages - analysts ratchet down the number and then beat the number. Numbers come down in bulk as earnings seasons approach and then rise back to peaks as they unfold and report.

“In the end, panics are nutty things…”

Panics remind me of when a fuse gets lit and no one knows where it will burn.

Of course, logic eventually returns but that requires patience that only a few investors retain.

And if you don’t believe me think about the mind-numbing emotion and media misinformation that even now blocks us from recognizing these realities.

It is the same potion that shows us how every other time this sh*t happened (in the rear view mirror) now clearly appears to us all as "great times to be an investor."

On that basis, it's not hard to imagine fear reaching even higher levels, commensurate with prior episodes of panic attacks, and prices can indeed washout to lower levels.

The Flip Side?

Today's levels of prices are also "vulnerable" to any good news.

In other words: What could go right:

Maybe the Fed will reconsider its plan to raise rates twice next year.
Maybe China will deal (actually they already are offering concessions).
Maybe the government shutdown won't be any more painful than the ones before.

I’ve distilled some words of wisdom from several famous investors:

1) The price of a stock is only important on the day you have to sell it;

2) One should delight when stocks become cheap, not despair; and

3) Betting against the long-term success of the United States has never proven to be profitable.

Reality Break

Larry Ellison was being interviewed by a WSJ reporter about his investment in TESLA. His comments - as you can expect - were not widely covered because they highlight the chasm which has formed in recent years.

This gaping hole in reality is most likely due to the ease of social media - where one can gain "a following" through hype and then be perceived as knowledgeable.

It's a kick for sure and crazy for most, but read Larry's response and I suspect you will get the point:

The beneficial overflow here is when you take the comments above from Larry and replace the reporter with an analyst.

Then overlay that entire perspective on the complete garbage that is - for the most part - spewed out in almost every earnings season these days.

In short, there’s actually very little traditional “news” these days. Instead we’re being fed opinions that are sold as news.