Tuesday, November 18, 2014

"Jeremy Grantham's Bubble Watch Update: 'S&P To 2250 Before It Crashes'"

I may have gotten carried away in July's "If You Want to Make Serious Money Listen to GMO's Jeremy Grantham Right Now":
This is one of those moments in the market that, well, here's career counselor Billy S:

 There is a tide in the affairs of men.
Which, taken at the flood, leads on to fortune;
Omitted, all the voyage of their life
Is bound in shallows and in miseries.
On such a full sea are we now afloat,
And we must take the current when it serves,
Or lose our ventures.
Julius Caesar Act 4, scene 3, 218–224

From Barron's Wall Street's Best Minds column:
 GMO'S Jeremy Grantham Doesn't See a Bubble Just Yet...
That was reiterating the 2250 level Grantham had been talking about in May and was, because we happened to agree, one of the reasons we weren't too upset with the declines in early August and October.

S&P 500: 2,049.83 Up 8.51, today's new all-time high 2,049.98.

From ZeroHedge:
When GMO's Jeremy Grantham says that he is "still a believer that the Fed will engineer a fully-fledged bubble" what can one say but, yes: it did so a few years back.
Recall that back in May, Grantham so far accurately predicted that on the back of central bank liquidity, the overstretched market will stretch even further "at least enough to drive the market to its 2-sigma level of 2,250 and perhaps a fair bit beyond... And although nothing is certain in the market, this is exactly what I  believe will happen."
In fact, his prediction so far has been spot on in terms of not only magnitude but also timing, accurately calling for the recent swoon and subsequent rebound. Notably, he also offered his forecast for when the bubble would burst which he timed as follows:  "then around the election or soon after, the market bubble will burst, as bubbles always do, and will revert to its trend value, around half of its peak or worse, depending on what new ammunition the Fed can dig up."
So here is how the legendary investor predicts the upcoming timing of events in the near future, with a focus on the presidential cycle:
The Presidential Cycle

Regular readers know the score: +2.5% a month for the seven months from October 1 to April 30, in year three on average since 1932 (a total of +17%). This is now the 21st cycle. The odds of drawing 20 random 7-month returns this strong are just over 1 in 200 according to our 10 million trials. But 17 of the actual 20 historical experiences were up and the worst of the 3 downs was only -6.4%, so the odds of this consistency plus the high return would be much smaller. The remaining 5 months of the Presidential year have a good but not remarkable record, over .75% per month, but the killer here is that the remaining 36 months since 1932 averaged a measly +0.2% a month!

With the 7 months having returned over 10 times the average of the 36-month desert, it may seem like a nobrainer investment for those seven of us not intimidated by the obvious simplicity of the idea, but be advised that going into this particular cycle there appear to be more negatives than normal. (Though many of the previous 20 occurrences may well have seemed that way to investors at the time. Who knows?) The negatives this time  include the ending of the Fed’s bond purchase program. There is also talk of a rate increase early next year, given the recent recovery of the U.S. economy reflected in the improved employment report of early October (5.9% unemployed) and positive adjustments to the previous month’s employment numbers. Other negatives include the potential for escalation of several minor but intractable wars and the recent Ebola outbreak....

See also Investment Week:
GMO's Grantham: Presidential cycle 'sweet spot' points to US bubble