Barron\'s - 05.08.2019

(Michael S) #1

M4 BARRON’S August 5, 2019


ble. The CAPE “is just the price over 10-


year average earnings,” Shiller explained.


It has its uses. Shiller created the Bar-


claysETN+ShillerCAPE exchange-traded


note (ticker: CAPE) in 2012 to put his re-


search to use. The ETN looks at nine sectors


and buys the four cheapest that also have the


strong momentum. As a result, investors are


purchasing cheaper sectors while avoiding


value traps that can sink a portfolio. The


ETN has returned about 14% a year, on av-


erage, over the past five years, better than


the 11.2% return of the S&P 500 and the


12.7% of the Dow Jones Industrial Average


over the same span.


Shiller might not see a bubble in U.S. eq-


uities, but that doesn’t mean he hasn’t spot-


ted them elsewhere. Bitcoin, Canadian real


estate, and marijuana stocks were three as-


sets he referenced when talking about bub-


bles. He demurred on how extended valua-


tions are, and is as fascinated by how


bubbles form as what might happen next.


Real-estate prices in Toronto have been


advancing at about 8% annually for 10 years,


according to National Bank of Canada data.


And Toronto housing affordability has deteri-


orated by about 50% since the end of the fi-


nancial crisis. Perhaps risk-averse investors


shouldn’t look for condos north of the border.


Marijuana stocks, meanwhile, are still


bubbly despite a recent pullback. The Hori-


zons Marijuana Life Science Index ex-


change-traded fund (HMMJ.Canada) is


down about 40% from its 52-week high, but


stocks in the fund still trade for about 25


times trailing sales. Stocks in the S&P 500,


in comparison, trade for about two times


trailing sales. What’s more, Canadian pot


company Aphria (APHA) gained more than


37% on Friday after sales topped analyst


expectations by 7%. Aphria stock is up 23%


year-to-date, down 13% over the past year


and trades for 9 times trailing sales. It has


VITALSIGNS


Friday's Week's Week's
Close Change %Chg.

DJIndustrials 26485.01 – 707.44 – 2.60


DJTransportation 10374.43 – 402.24 – 3.73


DJUtilities 817.87 + 2.11 + 0.26


DJ65Stocks 8769.46 – 216.95 – 2.41


DJUSMarket 729.19 – 23.96 – 3.18


NYSEComp. 12839.51 – 395.99 – 2.99


NYSEAmerComp. 2463.95 – 84.35 – 3.31


S&P500 2932.05 – 93.81 – 3.10


S&PMidCap 1914.53 – 68.61 – 3.46


S&PSmallCap 938.14 – 24.37 – 2.53


Nasdaq 8004.07 – 326.14 – 3.92


ValueLine (arith.) 6103.70 – 213.76 – 3.38


Russell2000 1533.66 – 45.31 – 2.87


DJUSTSMFloat 30105.17 – 986.05 – 3.17


LastWeekWeekEarlier

NYSE Advances 1,180 1,938


Declines 1,883 1,125


Unchanged 44 51


NewHighs 603 485


NewLows 250 163


AvDailyVol(mil) 4,027.5 3,340.6


Dollar
(Finexspotindex) 98.10 98.01

T-Bond
(CBTnearbyfutures) 158-190 154-110

CrudeOil
(NYMlightsweetcrude) 55.66 56.20

InflationKR–CRB
(FuturesPriceIndex) 173.35 177.16

Gold
(CMXnearbyfutures) 1445.60 1418.50

Advisors technical analyst John Kolovos.


From there, though, things start to look a


lot like they did in the 1970s. Kolovos isn’t


referring to macro factors that caused wild


swings in the market—there are clearly


enormous differences between the runaway


inflation of the ’70s and the Fed’s battle to


ensure no deflation in the 2010s—but to the


market’s gyrations themselves.


In the mid-1960s, the S&P 500 began


seeing periods of higher highs and lower


lows, ultimately resulting in a massive bear


market in 1973-74. Kolovos doesn’t see the


same thing happening now, but finds the


pattern of higher highs and lower lows wor-


risome. If they were to continue, it would


mean that the S&P 500 would undercut its


December low of 2351.10—a drop of at least


22% from this year’s peak.


Is such an outcome set in stone? Hardly.


But such trading patters occur in “very


emotional market environments of wide


bullish and bearish extremes,” Kolovos says.


This could pretty much describe today.


Bubble Spotting With Shiller


When the stock market is in turmoil, it’s a


good time to step back and consider the


long term. And there may be no better per-


son to discuss the long term with than No-


bel Prize winner Robert Shiller.


The Yale University economics professor


is co-creator, with Karl Case, of the S&P/


Case-Shiller U.S. National Home Price In-


dex, as well as the cyclically adjusted price/


earnings ratio, or CAPE. In prior eras, he


warned about tech-stock and housing valua-


tions—before they collapsed.


When we sat down in his disheveled,


wood-paneled office fit for an Ivy League


icon, he didn’t seem all that nervous about


valuations. According to Shiller’s CAPE ra-


tio, stocks are expensive, but not as expen-


sive as they were during the dot-com bub-
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