A great example of the irrationality rising around these companies is last week’s three-billion dollar offer from Facebook to SnapChat. Facebook is willing to pay $3 billion for a company that shows zero profits on its income statement – just because it develops a beautiful app that is supposedly used by 10 to 30 million users. More irrational is the fact that the owners haven’t accepted the offer, probably delaying the deal because they expect the value to rise to the hundred billion dollar level. But, in this business, the same who love SnapChat today will probably find it useless tomorrow. This will most likely take place before the company has an opportunity to let earnings catch up with price. If that happens, it will be the price that will catch up with earnings, which, if you recall, happens at the zero level at this point.

Remember that when there are no earnings you’re exchanging money for fresh air and expecting this fresh air to turn into something more valuable in the future. The higher your expectations, the higher the risk you will be deceived. Be careful out there.

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After hitting a bottom in 2009 the S&P 500 index experienced a triple-digit appreciation; this year alone it has increased by 25%. The Federal Reserve has been pumping money into the economy, and with this help (which has been pushing investors out of the bond market in the direction of the stock market) we are […]

If today was one or two years ago, making general forecasts about the stock price of Apple Inc. (AAPL) would have been a lot easier. The answer is UP. By then, it was very clear that Apple’s stock price was more bullish than a bull and buyers were in control of the market. That can […]

There are two types of analysis which traders like us can use in making profit-winning decisions. We can either use fundamental analysis or technical analysis. Fundamental analysis involves understanding the economic environment and characteristics of a company (e.g. the industry where it operates, its products, its long term plans) in order to estimate its value. […]

However,  Janet Yellen is known for being dovish so the end for QE may be out of sight and seems unlikely to happen any time soon, in which case the FED will keep its asset purchase program mostly unchanged for quite some time. This will last until unemployment drops to 6.5% and GDP growth accelerates above 3%.

A few days ago, the ECB cut its key interest rate while some ECB officials made comments that ultimately ended up opening the gate for further measures. Their comments led the way for a negative deposit rate and bond purchasing. This international environment pushes the dollar up, something the FED doesn’t really want, a fact that adds more weight to those in favor of continuing monetary easing. This leads one to believe we can expect the current asset buying to stay unchanged.

In such a scenario there is doubt that any major corrections will occur in the stock market. Although the Schiller P/E points to overvaluation, the ratio will continue to rise for some time, while the FED manages downside risks. Eventually it is bound to be corrected, as it was in the case of the 2000 Nasdaq bubble–an issue of concern. Stocks are already up 150% since the bottom hit in 2009, making it time to prepare for a potential crash in order to avoid being caught off-guard. Reduce leverage and add some short positions to counter-balance portfolio risk. Gold and gold-related stocks could also help, especially since the risks of inflation are rising with the massive FED intervention.

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Over the last few years, we have been experiencing a very accommodating monetary policy. This policy has allowed for circumstances that are higher than ever in both the amount spent and elapsed time. The financial crisis of 2007-2009 was so harsh that central banks around the world have taken unconventional measures in order to sort […]

There’s Always an Option  In this current climate with the stock market hitting new highs, bonds underperforming, interest rates near zero, gold and other commodities falling, there is a quest for both yield and safety. The following strategy combines both stock and options and is called the cash secured short put. The purpose is to […]

We can’t forget about the current–and very accommodating–monetary policy that could also be reverted in the near future, potentially dragging corporate profits down. Very low interest rates reduce borrowing costs helping to improve profit margins. As seen above, companies took the opportunity to buyback stock and to inflate EPS, but as soon as interest rates increase again, financial costs will drag profits down.

One last item to take into account is business investment. Companies have not been investing in their business, or replacing old software and hardware. Rather, they have been taking the opportunity to let depreciation decrease, ultimately helping to enlarge their profit margins.

All the above factors point to the need to be careful about the future. The growth in profits we are experiencing seem to have a cyclical nature. Companies aren’t improving capacity, investing in new markets, or creating future growth capabilities, they are just getting as much as they can from the aftermath of the financial crisis and the favorable conditions created by the Federal Reserve. When these transitory factors exhale, the market may crash again. The long term valuation metrics will have to return back to historical averages, just like it did in the past.

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When stock prices rise for too long and lead valuation multiples into uncharted territory, investors typically argue that “this time is different,” coming up with brand new valuation techniques that relate stock prices to very creative corporate variables. This way they attempt to justify maintaining a bullish stance. Back in the late 1980s, Japanese stocks […]

The worst obstacle an investor must overcome is uncertainty. To make an investment decision, an investor needs to look at a company’s past, make some assumptions about the future, and come up with some trigger values that make it worth taking risks. But sometimes the past is confusing, made of inconsistent and volatile earnings and […]

After a surprise move from the Federal Reserve last month, we have come to expect another surprise to happen this week. In our point of view, the FED won’t taper its current bond-purchasing program. Its chairman, Ben Bernanke, is worried about the effects that such a move could have on the economy and government finances. […]

Trading options isn’t as easy as trading stocks, but it’s a great way of hedging a portfolio’s position and getting some leverage for a low cost. As a hedge, options work like insurance contracts, protecting for “damages”. As a leveraged instrument, options offer traders a way of making huge profits with few funds. But, unfortunately, […]

Shiller published several research articles about asset prices, but it was on “Irrational Exuberance” that he better explained why stock prices couldn’t grow forever without accompanying gains in dividends and earnings. The Yale professor believes we should look at historical values before engaging in any buying frenzy, especially those characterized by the tech and housing bubbles. When prices grow faster than dividends or earnings, P/E and P/Div multiples deviate from the mean. The market is then overvalued, and it will have to catch up with fundamentals sooner or later. Investors should avoid those assets.

Tradespoon’s valuation model includes measures that look at a stock’s deviation from mean valuation multiples as a way of screening the best investment opportunities.

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Last week, the Nobel Foundation announced the winners for the Nobel Prize in economics. This year, they decided to split the prize among three American academics: Eugene Fama and Lars Hansen of Chicago University, and Robert Shiller of the University of Yale. All three of the men have conducted their research on asset prices and […]