David Van Knapp

Investing in 2010: The Opportunity Continues

Congratulations on writing a well-reasoned article with an optimistic viewpoint. That tends to get punished on SA, which I know (from your other writings) you are prepared for. Interesting, there are no punishing comments here yet.

Articles with year-long predictions usually leave me bemused. Nobody knows the future, and often a variety of viewpoints--often contradictory--can be well-reasoned. Yours gets around that by focusing mostly on general themes. Those are harder to disagree with.

And thanks for your focus on using actual facts and not letting investment decisions be clouded by political preconceptions and emotional thinking. To me, that is the most important message of this article, not the specific stock/ETF suggestions nor the predictions of the way certain trends will go. Because nobody knows the future, it is better to be prepared with short-to-medium term projections, plus a willingness to change your tactics (if not your strategies or vision) in reaction to what the market is actually doing, not what you're convinced it ought to do. The market is simply not always rational, so everyone's strategy, IMO, should include a section about how they will deal with irrational or hard-to-fathom market moves when they happen, as well as what to do when, as you put it, "things change."

Serious Divergence: Great Depression Dow vs. Great Recession S&P 500

Well, at about Day 100, several article writers used charts just like this one to predict that the current rally was just like the 1930's-era rally, the market was obviously about to crash, they were shorting right away, etc.

If they actually did that, they got hammered. The market is up about 15% since then. Isn't it obvious that these two charts have nothing to do with each other? They make for an interesting historical comparison, nothing more. Suggestion: Make your investment decisions based on your best assessment of today's conditions, not on what happened 80 years ago under totally different conditions.

And use actual facts. There is no justification for the author's statement that the current rally has "an obvious note of mania" associated with it. That's exactly the kind of emotional thinking that gets investors and traders into trouble.

Dawn of a New Economic Year: January Indicators

With all respect, 2009 was not the strangest of all years. The market rally that began in March was similar to recession rallies that began about in the middle of 8 of the previous 9 recessions. See my article written last May with charts that show this. seekingalpha.com/artic...

While 2009's rally was sharper than most of those other comparable ralllies, so was the plunge that preceded it. I consider the rally of 2009 to be a garden-variety recession rally.

How Unusual Is This Outlier Rally? Can It Be Sustained?

I respectfully disagree with all three of the above comments. The simple answer is, nobody knows where the market will go from here. If the flow of news continues to be, on balance, positive, the market will probably continue to advance. If the news flow turns relentlessly negative, the market will probably pull back. You can't determine this on a day-to-day basis, but week-to-week or month-to-month.

A new earnings season is starting, so there will be lots of news to react to in the next few weeks. Earnings reports, revenue reports, and companies' forward-looking statements will be layered on top of the normal flow of economic statistics, pundit pronouncements, institutional pronouncements, and the like. Predictions like those above were made regarding the 4th quarter of 2009. The market went up 5%.

The Non-Consensus View of Things to Come

Hope you are right as to the return on stocks and growth in the economy. That said, don't your projections now go into the heap and become part of the consensus view for other economists and pundits to "go contrarian" to?

Personally, I think contrarianism is all screwed up, or maybe more accurately, there are so many versions of it that it is impossible to discern what's the "right" contrarian view. Most people accept that being contrarian to the "dumb money" is valid, hence the use of the AAII survey as a contrarian indicator, although I have never been cited to a study that shows this to be a valid approach, despite repeated requests. Consider this to be another request.

So then you go up to another level, say newsletter writers, and people figure out their consensus (vai say Mark Hulbert) and go contrarian to that. Of course, some of the newsletter writers formed their view by being contrarian to the dumb money, so going contrarian to them means you now agree with the dumb money.

Then you go to another level, say financial advisers, and someone figures out their consensus view, as this article has done, and goes contrarian to that. Of course, some of the financial advisers may have formed their view by trying to go contrarian to dumb money or to newsletter writers. So now you're back at one of those other two positions. And you are teed up, as is this article, for someone to go contrarian to that.

It's like a dog chasing its tail. It's circular. I've seen no studies that suggest any of it works, at any level. I humbly suggest that the best thing to do is what this author's organization apparently did: Sit down with the best information you can find and figure it out for yourself, using facts and good solid reasoning. Forget contrarianism, it's a red herring.

Seven Stocks Expected to Grow Their Dividends in 2010

Joseph,

You make excellent points about retired clients. I am in exactly that situation. My solution is a combination of the two choices you mentioned, plus the third choice offered by No Free Cake.

All of my wife's and my nest egg is not in a portfolio of dividend stocks. We are diversified, with money in various asset classes. One such class is what I call Capital Appreciation stocks (including some old mutual funds). It is from there that we sell some shares each quarter.

Another chunk of our money is in Dividend stocks. Over time, the growing dividends will yield more and more cash flow, reducing the need to sell shares of other assets.

Finally, what we withdraw each year is modulated by how much we have. I convert the standard 4% -per-year "safe" withdrawal rate into 1% per quarter. Where I depart from standard thinking is, I don't increment that amount 3% per year for inflation. I just withdraw 1% per quarter. So if our total nest egg has gone down (as it did during the bear market), the withdrawal goes down with it. That forces an automatic adjustment in our lifestyle if that amount is "not enough." It's pretty painless, because the decrease is just at the margins. Conversely, if our nest egg has gone up, the 1% amounts to a little more. That's pleasant and a nice reward for smart money management. Also, if the total nest egg goes up at least as fast as inflation, that's how we cover the lack of an automatic inflation increment in our annual withdrawals.

So the choice is not either-or, it's not binary. There's a blend of things going on. The dividend component is an important part of the mix, and as the dividends rise (and get re-invested), my expectation is that they will eventually reach a point where the withdrawals will all be of dividends, so the rest of the nest egg can be untouched.

Hedging into the New Year

Hey you Fibonacci fans: Educate me. Remember in 6th grade when we all learned about "significant digits"? You know, your result can't be any more precise than your least-precise data point. My question is, if you figure a Fibonacci retracement to the precision of 62.8%, how can you then justify a "prediction" that spans 700 points on the Dow? That seems to take some of the magic out of the precision (and the meaning) of 62.8%.

Just wondering.

Stock Market's Current Valuation - Not Extremely Overvalued

Good article. I like the idea of a monthly measure using consistent multiple indicators given a consistent emotionless interpretation. I do encourage you to keep a record of your valuations and to compare them to subsequent market movements.

Questions and comments:

1. Could you provide sources for "fair value" for the individual benchmarks? For example you state that "The average Price over book value of the S&P over the past 30 years has been 2.4" and that "Between 75-90% market capitalization as percentage of GDP is a fair value." What is the source for these interpretations of these two indicators? A separate "fact sheet" or Q&A about your methodology would be terrific.

2. I think arguments can be made both ways about including or excluding interest rates in the calculation of the market's valuation. I prefer to leave interest rates out, because I consider the decision whether to buy a stock (such as your example of buying JNJ versus a T-bill) to be separate from the determination of the market's valuation. Valuation clearly influences the decision, but the buy-hold-sell decision is a separate subject IMO. But you clearly state what you are doing, so the transparency makes it fine. Readers can mentally adjust your conclusion if they like.

3. As to dividends, so many things have affected corporate practices and investors' expectations regarding dividends over the years that I would drop that as an indicator. I'm not sure that the dividend yield of the S&P 500 is a meaningful indicator of the market's valuation any more (if it ever was). But again, anyone can mentally adjust your conclusion if they want to leave that indicator out.

Why Lower Volume Could Mean Higher Prices

I don't study volume, as I have never had occur to me even a hypothesis as to why high volume should correlate with rising prices. The charts in this article certainly don't suggest such a hypothesis.

So educate me. Those of you who have studied the matter: If you were starting with a blank sheet of paper, rather than with a pre-conceived notion that rising volume somehow "ratifies" higher prices, how would you state the proposition? How would you test it? If you've already done it, what have you learned?

Maybe there's no cause-effect relationship at all.

Thanks. Happy new year to all.

The Best Dividends for 2010

Greg, Don't feel bad, like I say, you can't win. As to suggestions, mine would be not to use your "proprietary formula" as all you reveal about your recommendations. Many of us here like to do our own research, and your formula is just a black box to me.

So this article, again I'm just speaking for myself, comes across as merely a list of stock ideas. There's no transparency as to how these stocks got chosen nor what makes them good ideas. The credibility is not helped when I see a 19.8% yield--that's a huge red flag to me, as it is for many serious dividend investors. (See mbkelly's remark above for a good description of a serious dividend investor...one who can say that he honestly cares little about price appreciation). Since you provide no information as to what makes that 19.8% yield safe, I just dismissed the stock. When I saw that you own none of these, credibility took another hit.

I guess I'd rather see one stock thoroughly discussed than several that are given one-paragraph treatment backed up by a black-box formula. I say that knowing that, on SA, articles with titles like "11 Best Dividend Stocks" are way more popular than "Long Case for Dynex Capital." Like I say, you just can't win.

Positioning for 2010: 10 Seeking Alpha Contributors Ready Their Portfolios

I maintain two real (not model) portfolios on my web site, and they are updated each month with current results. That's my money in there (not a stake from a company like Morningstar's stars get to use), and I am very careful with it. It also adds a hell of a lot of discipline to what I write knowing that the results will be published.

Speaking of which, I'd like to see SA track not only articles with predictions like this "article" (you do have to click the blue thingy), but also "long" articles, "short" articles, and even the commenters. Perhaps the thumbs up and down would change significantly if people realized, for example, just how badly--in dollars--the short ranters all year have gotten clobbered. You know, those who stated in July that before the year was out, the Dow would be at 5000 and the March lows would be retested. Just a couple days to go, not sure there's enough time left on the clock for you guys. You know who you are.

And none of that "He's right, just early" crap. The correct word for those rants is "wrong."

Housing ETFs Die a Quick Death

The products died because they were stupid products.

Just short of six months old, MacroShares' housing ETFs die a quick death after hitting an early termination trigger of less than $50M in deposits. Early volume in the summer faded away recently as interest waned.

Great. These were idiotic, and I wrote an article about it at the time. I was highly criticized, but I guess my critics didn't run out and buy shares to hedge their homes, which is what they said they were going to do.

The Best Dividends for 2010

You just can't win. I've written articles on specific stocks for SA, disclosed that I owned them, and received comments that say or imply that I'm just trying to pump the stock. As if. These are well-known dividend stocks I'm talking about, not little fly-by-nighters.

Anyway, I agree with you guys, I am usually more comfortable with someone's positive assessment if he/she owns it, or at least says it's on their watchlist or something like that, than if they recommend 5 stocks and don't own any of them.

What Investment Firms and Gamblers Know About CDOs, And You Don't

No, it's not, but there are valid analogies. The reason that market does not equal casino is that casinos are heavily regulated, and EVERY game has known odds (favoring the casino) that can be found in books that they sell at the Las Vegas airport. People don't go to Las Vegas to build wealth...they go there to have fun. They can choose to understand, or not, the odds against them when they play. Most don't care.

The valid analogies revolve around the idea that in both the market and the casino, the participant is putting up money, on a proposition, to make more money back. Whether you call that a bet, a trade, or an investment is just semantics.

People who say the market is a "rigged casino" are, first, being redundant (every casino is "rigged" in that all odds favor the casino), but also they are ignoring the very real differences between a market and a casino. In markets, you can actually find--through analysis--plays that are in your favor. That is impossible in a casino.

KD's important point is that professional money managers, who should know better, apparently did no analysis on risky bets/trades/investments, and then chose to "play" against the best player in Dodge, Goldman Sachs. Not only that, several comments to his articles suggest that the players practically begged for these opportunities.That leads inexorably to the conclusion that at least some of the responsibility for what then happened belongs with the players.

In law, most or all states have adopted the concept of apportioned responsibility, which is derived from an older concept of assuming risk. Both concepts apply here: The players assumed the risk--whether they recognized it or not--that they could get hosed. If I'm on a jury apportioning responsibilty, I'd put it at about 20% GS, 80% to the "investors." They--far more than GS in this instance--give investing a bad name. Whatever happened to the concept of fiduciary duty to their clients?