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I’ve written about this before but here are what I consider the latest signs that we’re in the later stages, rather than the beginning to mid-stages, of the credit & business cycle. First, here’s Josh Brown’s take on it (emphasis mine):

I’ve never seen a seller’s market quite like the one we’re in now for privately held companies. In almost any industry, especially if it’s white collar, professional services and has a recurring revenue stream. There are thirty buyers for every business and they’re paying record-breaking multiples. There are opportunities to sell and stay on to manage, or sell to cash out (and bro down). There are rollups rolling up all the things that can be rolled up.

He goes on to explain why private equity (PE) firms, flooded with cash, can’t sit still and chill out. Do go over to the link and read the whole thing.

Reading the Signs

But also consider the following:

Those are anecdotal but all of the above can only happen if markets are rising and credit is loose. These conditions also mean that investors have to be optimistic about the kind of returns that they get.

When there’s more money chasing available assets, it bids the price of these assets up and the only way that the assets can provide the same return is if the asset’s earnings power increases. This is typically a strategy based on hope and optimism. Conversely, the best time to buy is at the depths of the market when pessimism is everywhere because that strategy is based on things getting less bad which is much more realistic.

What Conservative People are Doing

Another good cue is to see what more conservative investors do. Unknown to many investors, Warren Buffett wrote long-term equity-indexed put options from 2004-2008 and these options have started to expire, and Berkshire Hathaway has also unwound some of their other derivative exposures. Now, while Buffett constantly exhorts that it’s futile to time the market, he’s no stranger to letting cash build up when he cannot find good deals.

This is the crucial difference that many people do not understand. What Warren Buffett means is that he cannot predict whether the markets will go up or down on a certain date and time but what he does is judge whether a deal presented to him is likely to provide a satisfactory rate of return. Whether the rate of return is likely to be satisfactory depends greatly on valuations, which in turn depends greatly on the state of credit and optimism in the markets.

If Buffett is letting cash build up, what do you think he thinks about current valuations in the market?

What does it say about the Singapore Markets?

Of course, valuations in the U.S. markets may be high but what about Singapore? After all, the local market has been beaten down pretty badly since the start of the year. Many local investors are probably also feeling the pain because of how badly seemingly conservative stocks like SPH and Singpost have been beaten down by the market.

Also, if you check out the Cyclically-Adjusted Price-to-Earnings (CAPE or PE10) ratio of the STI, it is currently under the historical average and median which means that for long-term investors, the STI is not necessarily expensive. However, if U.S. markets drop, remember that local markets will not be immune to negative sentiments.


Let me know your thoughts on the markets in the comments below.