El Pollo Loco IPO Soars To Insane 20x EBITDA Multiple

Submitted By Zerohedge

The “fear of missing out” (on the next Chipotle we presume) is strong with this one as El Pollo Loco (LOCO) went public at $15 on Friday, opened at $19 and today explodes to almost $33 at a mind-numbing ~20x EBITDA (market cap over $1.2 billion on a $53 million EBITDA)… crazy chicken indeed…

20140728_crazchicken

These kind of crazy stock run ups are indicative of speculative blow-off.

Jeremy Grantham 1999, Jeremy Grantham Today: "Over Next Seven Years, Market Will have Negative Returns"

As an investor It is difficult to sit out a party. I may even be more difficult as a money manager… Do so and you risk losing both clients and assets. Invest in unloved and undervalued assets and you do even worse.

But what is the alternative? Get drunk like everyone else?

We have to admit that this market has gone further, faster, than we thought possible. Bubbles of the current magnitude have never been blown back-to-back in such a short timeframe.

I am not the only one who see things that way. John Hussman has been preaching the same message and so has Jeremy Grantham.

Over Next Seven Years, Market Will have Negative Returns

We encourage you to read an interview of Jeremy Grantham, by Stephen Gandel, senior editor of Fortune: The Fed is Killing the Recovery.

The entire interview is worth reading. But here is one snip that caught our eye.

Fortune: Are you putting your client’s money into the market?

Grantham: No. You asked me where the market is headed from here. But to invest our clients’ money on the basis of speculation being driven by the Fed’s misguided policies doesn’t seem like the best thing to do with our clients’ money. We invest our clients’ money based on our seven-year prediction. And over the next seven years, we think the market will have negative returns. The next bust will be unlike any other, because the Fed and other centrals banks around the world have taken on all this leverage that was out there and put it on their balance sheets. We have never had this before. Assets are overpriced generally. They will be cheap again. That’s how we will pay for this. It’s going to be very painful for investors.

It’s well worth reading the entire interview. But we are biased. It supports our own view about market valuations and the Federal Reserve.

Jeremy Grantham 1999

Grantham is one of few who saw things correctly in 1998 and 1999. While others were partying like no tomorrow, Grantham sat things out. In the process, he lost 60% of his asset base simply for not acting like a drunken fool, like nearly everyone else.

Please consider this Forbes Interview of Jeremy Grantham from 2009. The section of most interest pertains to 1999.

Grantham did not lose client’s money. Rather, he lost accounts and assets. Clients who stayed with him did quite nicely.

Unfortunately, it’s a sad state of affairs that investors (speculators really), time and time again chase rising markets and managers with a current hot-hand rather than invest prudently. Then again, that’s precisely what it takes to make a bubble.

This bubble is in a rare class with 1929, 2000, and 2007. But we do not know when the party ends, nor does Grantham or anyone else.

Actually, it doesn’t matter, at least in the long run.

Stocks in general are poised for negative returns for seven years (perhaps longer) once again.  If the party lasts a lot longer, seven might turn into eight or ten, but that will not change the ultimate outcome.

What the VIX Says About Stocks Today

The market’s crystal ball is giving us a warning sign.  Watching the price action in Volatility Index (VIX) options is like staring into a crystal ball for the stock market.

The Volatility Index is a measurement of fear in the marketplace. When the VIX is high and rising, investors are scared and traders are bearish. A low and declining VIX indicates strong bullish sentiment and complacency among traders.

Fear GuageThe VIX is a good contrary indicator, and it does help warn investors when the market is at extreme levels. Today the VIX is a historically low levels. Some of the best forward looking clues about future stock market performance come from VIX options.

VIX options are European-style contracts – meaning they can only be exercised on option-expiration day. This eliminates any possible “arbitrage” effect (the act of buying an option, exercising it immediately, then selling the underlying security for a profit). So VIX options will often trade at a discount to their intrinsic value.

For example, on July 11, the Volatility Index closed at 12.08. But the VIX July 14 puts – which are intrinsically worth $1.92 – were trading at only $1.60. That’s a $0.32 discount to intrinsic value…
If it were a regular American-style stock option, you could buy the put, exercise it, and liquidate the position, picking up $32 for every contract you traded. The European-style feature prevents that from happening – because you can only exercise this contract on July’s expiration day.

This makes VIX options difficult to trade. It is remarkably difficult to profit by trading options on the VIX.

But we can still benefit from VIX options… they provide clues about where traders expect the VIX to be on option-expiration day.

The current VIX option prices tell us that traders expect the VIX index to move higher in the months ahead. The VIX July 12 calls closed last week at $0.75, while the July 12 puts were only $0.19. In other words, option traders were willing to pay three times more to bet on the VIX moving higher than on it moving lower.

The difference is even more significant going out to October. The VIX October 12 calls are trading for $3, while the October 12 puts are just $0.40. So options traders are willing to pay seven times more to bet on the VIX moving higher than on it moving lower by the October expiration day.

VIX option traders clearly expect volatility to move higher over the next few months. And rising volatility usually translates into falling stock prices. With the market trading at all-time highs, it’s time to be cautious on stocks right now.

Unprecedented Bear Market Formation

Inside Look: Check out this Unprecedented Bear Market Formation Since 2000
Think the current conditions in the stock market are normal? Think again. Here are 3 characteristics you should expect to see in wave b.

By Elliott Wave International

Editor’s Note: Below you will find a sneak peek from the just-published issue of Robert Prechter’s Theorist. It provides you an opportunity to see some of the research, analysis and forecasts that Elliott Wave International’s subscribers are enjoying inside their latest issue.

Figure 4 (below) is a diagram from Chapter 2 of Elliott Wave Principle. It displays a typical progression of prices and psychology in a bear market. We can apply this picture to the stock market since 2000. The real-life pattern is a bit more complex than this picture, because wave a itself was a flat correction, which ended in 2009. The dashed line in Figure 4 represents what the market has been doing since then: rallying to a new high in a b-wave. The entire formation has been tracing out an “expanded flat” correction (see text, p.47) of Supercycle degree.

Per Figure 4, among the characteristics we should expect to see in wave b are: “Technically weak,” “Aggressive euphoria and denial” and “Fundamentals weaken subtly.” The volume contraction in the stock market has now lasted over five years, which is extreme technical weakness, albeit only in that indicator. The 30+ charts we have shown of market sentiment reveal historically high levels of optimism regarding stocks. No doubt bulls would dismiss the idea that investors today exhibit “aggressive euphoria and denial.” But look at Figure 5.

It shows that the yield on junk bonds has just reached its lowest level ever. Junk bonds did not even exist prior to 1989. In 2009, investors were deathly afraid of them. Now they cannot get enough of them. They are thinking only about yield; they are ignoring risk to principal. That’s denial. Finally, fundamentals have not just weakened a bit but rather are awful. The economy is flat, the amount of debt is at a record high, and as shown in the June issue of The Elliott Wave Financial Forecast the quality of debt is at a record low.

There has never been an expanded flat pattern as large as Supercycle degree in recorded stock market history, going back 300 years. It’s a first. So, we are getting commensurate expressions of stupendous optimism, which will prove worthy of the record books. People think today’s market conditions are normal, because a benign present is always considered normal. But it’s not normal. It’s unprecedented.

Would you like to see the rest of the issue for free? For more details, the complete wave count, and EWI’s forecast for how they believe it will all play out, continue reading Prechter’s 10-page June Theorist now, completely risk-free.
Learn more here.


Stock Market’s Shaky Foundation

According to the stock markets in the U.S. and in Europe, the world’s economy is not just in good shape, but is in the best shape it’s ever been.

Stock Market's Shaky FoundationThe S&P 500,  the Dow and Nasdaq continue to surge upward. The S&P 500 is now 20 percent above the peak it hit in 2007, a moment everybody now recognizes was heavily overvalued.

An 20 percent gain above the prior all time high is an enormous and unusual event. Surely, you are thinking, there must be an equally compelling story and loads of fundamental data to support such a bull market?

There really isn’t.

Not a lot has changed between the prior 2007 peak and today. From a fundamental standpoint, not much at all. Per capita income is only up 8.1 percent between now and then, and yet the equity markets are rallying like the biggest income boom in all of history has occurred.

Worse, the per capita income data is obscuring the fact that what little income gains have been recorded went almost entirely to the top 10 percent of the population. So there’s no broad prospering middle class to drive an economic expansion of the sort that stocks seem to be pricing in.

The main narrative today has nothing to do with anything fundamental. Rather, it centers on the idea that as long as the central banks of the west and Japan continue to print, everything financial will just continue to go up in price while — somehow — price inflation will remain tame.

Our view here at Prepare and Prosper is that this narrative is wrong in every respect; except, perhaps, for those engaging in short term speculation that ignores both fundamentals and history.

In the immediate term, stock prices gyrate based on various assumptions that are often completely disconnected from reality.

But over the medium and longer terms, fundamentals drive prices; as it is ultimately corporate income and ultimately dividends that determine the value we ascribe to equities, and it’s the prospect of future earnings growth that drive the price multiple.

The Big Picture

Over the long haul equities are nothing more than a means of sharing the wealth that companies create, which itself is a product of the extraction and processing of real things from the real world.

Everything we think we know about the ‘fair value’ of equities was developed over a period of time when the future could always be counted upon to expand exponentially.

You know, sayings like “Over the long haul equities return 10 percent”.

Such a statement can only be true in an exponentially expanding world where exponentially more things are being extracted from the real world as time goes on.  In a world where there is only so much ‘stuff,’ it’s not possible for said ‘stuff’ to always be present in expansive and expanding quantities.

A huge enabler of the economic expansion of the past century has been oil. Without a doubt, petroleum is the master resource for a global economy. And it is no longer cheap.  The reason why it is no longer cheap, and never will be again, is a larger story than we have time for here, but recent data should suffice to show that global oil has averaged more than $100 per barrel for more than three years. That’s 4x higher than the 1987-2004 average of $23 per barrel

The anemic economic growth in the OECD countries, with their horrible job creation statistics and generally tepid recoveries (at best), is the very predictable result of what you get when oil becomes expensive.

If you hold the view, as we do at Prepare and Prosper, that the future economy cannot possibly grow at the same rates as it did in the past, then equities are in for a serious correction at some point.

That day may still be far in the future. But there must always be an eventual reckoning between the number of claims on the world’s wealth world and the actual wealth itself.

Further increasing the risk for equities is the fact that, as claims on wealth, they are the least senior of the lot.  The holders of bonds and preferred shares come first.  So when we wander over to that other, and much larger, corner of the financial universe where debt resides and note that all forms of debt, but especially corporate debt, have continued to grow exponentially both before and after the great 2008 credit crisis, we see that equities are whistling past this part of the story too.

A huge proportion of all the new corporate debt taken on since that little hiccup in 2009 has been used to buy back shares and thereby goose (through accounting, not by value creation) the earnings per share numbers so widely reported by the financial press.

Eventually, though, all that corporate debt will have to be paid back, and that activity will drain future cash flows and earnings. Again, steadily rising – nay, exponentially rising – levels of corporate debt are a massive collective bet that the future will be exponentially larger than the present.

The only narrative I can imagine that can accommodate a long-term decline of per capita resources coupled to steadily worsening net energy from petroleum, AND simultaneously support the continued exponential expansion of claims against those resources, is one that steadily transfers this wealth into fewer and fewer hands.

After all, if relatively few people end up owning most of the remaining wealth, does it really matter to them that there’s less of it to go around on a per person basis?  No, not if they have plenty for themselves.

As the recent travails in Ukraine have showed us, there’s only so far that such a deranged, kleptocratic view can go before it breaks down.

Alternatively, and far more likely, there’s no actual rational narrative of any sort in play right now — and so the center mass of the investing world is simply operating off of untested and unexamined beliefs that mainly rest on the notion that a prompt and perpetual return to exponential growth is what the future holds.

Again, we see this as dangerously myopic. But sadly, this view is not only rampant on Wall Street, but it’s also prevalent with our government as well as endowments, pensions, and insurance pools — entities with long-term fiduciary responsibilities that really aught to be asking themselves some hard questions these days.

Conclusion

In summary, over the long haul — by which we mean the next decade — current equity prices are making a colossal bet that exponential economic growth, which itself is linked to cheap oil, is going to quickly resume and persist long into the future. Are you comfortable making that bet? we’re not.

Of course there are a lot of variables in play here; but one could do worse than to simplify one’s economic prediction down to this: Until and unless the global supply of oil gets a heck of a lot cheaper, anemic economic growth will persist and therefore the holders of expensive financial assets that are priced for perfection will be badly disappointed.