5/18/16

Chicken Little's Criteria for becoming Bullish

In his 1963 essay, Sir Karl Popper writes, "the scientific status of a theory is its falsifiability, or refutability, or testability."

Sir Karl Popper 
Chicken Little's ramblings are not a scientific theory. However, in a Popperian spirit, I examine five criteria, which would make Chicken Little bullish. 


Five criteria for Chicken Little bullishness.

Chicken Little loves owning stocks. From 1981 through 2000, Chicken Little was fully invested in stocks.

Owning stocks when they go up is tremendous fun. Conversely, fearing collapse and crying at night, is no fun at all. So what would it take for Chicken Little to become beefy? 

1. New high in the Dow Jones Industrial Average
2. Rising US Corporate profits
3. Real Corporate Profits, not fake 
4. Destruction of Financial Safe Havens 
5. Global Stock Market Rally

Chicken Little Dreams of becoming Bullish


1. New high in the Dow Jones Industrial Average.


Nothing says bull market more than higher prices. We are approaching the first anniversary of the all-time high in Dow Jones Industrial Average. 

The all-time high in the Dow is 18,351; as I type this we sit at 17,527. There is no need to even consider a bullish view until the Dow can make a new high.   



Chicken Little Criterion #1: Dow above 18,351


2. Rising US Corporate profits


First quarter 2016 profits were 6.1% lower than the same period a year earlier. The 6.1% decline is collated by Wall Street analysts, but my favorite way to examine is to look at Ed Yardeni's charts

Corporate profits need to increase to have a sustained bull market. 

Chicken Little Criterion #2: Rising Profits 

3. Increased quality of US Corporate profits


Perhaps worse than the decline in profits, is the fact that these profits are artificially high for two reasons. 

First, these earnings per share figures are boosted by share buybacks that decrease the number of shares outstanding. CNN writes, 

Stock buybacks ... new high ... in 2015




Second, there is an increasing use of accounting techniques to increase earningsNot only are profits declining, but those profit figures are artificially high. 


Chicken Little Criterion #3: Real Profits, not Fake

4. Destruction of Financial Safe Havens



Gold and long-term US Treasury bonds are the safe-haven investments for people who fear the end of the financial world. These safe-haven assets have had the best performance over the last year. 

symbol5/19/20155/18/2016% price change
Dow Jones Industrial Average18,35117,527-4.5%
Non-US stocksEFA$67.93$57.25-15.7%
Emerging market stocksEEM$42.78$32.19-24.8%
Long Term Treasury BondsTLT$118.49$129.499.3%
Gold GLD$115.89$120.103.6%

These safe-haven assets should go down in price if there is a real bull market in stocks. The destruction of the safe-haven trade means a decline in gold prices and a rise in yields on long-term Treasury bonds. 

Chicken Little Criterion #4: The End of Safety


5. Global Stock Market Rally


US stocks have had a negative year with the Dow Jones Industrial Average 4.5% lower than it was a year ago. Stock markets outside the US have had a much rougher time. EAFE, an international collection of stock markets that includes Europe and Japan, has lost 15% of its value in the last year. Emerging market stock markets have lost a quarter of their value in the last year. 

Non-US stock markets have been crushed, and are nowhere near their all-time highs. To give them a chance, Chicken Little only asks for an end to the declines. There is little chance that international stocks will regain their former peaks any time soon. 



Chicken Little Criterion #5: Global Stock Market Rally
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On May 19, 2017, we will either be celebrating the second anniversary of the bear market in the US stock market, or be in the midst of the 9th year of the bull market. 

In the critically-acclaimed movie, the Penguins of Madagascar, one of heroes states, "Don't tell me where he (the villain) has been, tell me where he will of has been next." Chicken Little looks forward to seeing where markets will of have been a year from now.  Here is a checklist for bullishness: 


 #1: Dow Jones Industrial Average above 18,351

 #2: 2016 US corporate profits greater than 2015 

 #3: Gold price below $1,258

 #4: 30-year Treasury interest rate above 2.66%

 #5: Non-US stock markets higher than today 
                    (EEM > $32.19 , EFA > $57.25) 
  

Chicken Little wants to be brave




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