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- Saturday, February 11, 10:30 AM Why now? The loud cover of Barron's calls for Dow 15K in 2013. The corresponding article relies on data from Jeremy Siegel, whose Stocks for the Long Run came out while the 1990s run was still a wholesome bull market. His message eventually got twisted into an "all stocks, no matter the price" mantra, with others publishing Dow 36,000 to mark the epic top.
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"If "Ifs" and "Buts" were candies and nuts, it would be Christmas all year round."
That said, the "investable" info or recommendation is Short Short Short!
12 month trailing GAAP Earnings S&P 500 ..88.70...
Use a PE of 16...(actually the 4/29/11 high had a higher PE but we will
use 16).....1575 /16 = 98.40
98.40 - 88.70 = 9.70 9.70/88.70 = 11% over 2 years....doable especially with the Postponable Purchases to GDP ratio at only 17.53% and the 64 year average is 20.5%...plus does anybody realize that the Household Debt Service plus Government Debt service to GDP is at a 30 year low....
Historically, the Dow Jones Industrial Average has had better calendar year performance than the S&P 500 in both categories, greater appreciation and less declines on a percentage basis.
The part about declining less on a percentage basis defies the arguments against the Dow since having only 30 companies, as opposed to 500, means that the Dow should always decline more. For the Dow, larger declines than the S&P 500 have seldom been the case, in defiance of all the "rules" regarding diversification. 2008 is a great example to those who are cynics on the matter.
Additionally, the Dow Jones Industrial Average has the longest unbroken chain of historical data. The S&P 500 was started in 1957. Robert Schiller's backwardation of data on the S&P 500 is based on the flawed assumption that S&P 500 selection committee would have a correlation of 1 with the Dow Jones Industrial Average which is inaccurate, as been proven with the comparison of the Barron's 50 Index in the period of 1929 to 1932. The Barron's 50 Index declined by -77% while the Industrials declined by -89%.
Additionally, the S&P 500 has equally as many flaws as critics find in the Dow Jones Industrial Average. Unfortunately, if your 401k plan offers an S&P 500 index fund or ETF, you're being given an inferior product for your "diversification" which only serves the industry of endless products rather than superior investment opportunies.
For an investor who cares about performance, the S&P isn't all that its cracked up to be. Suffice to say, those unwilling to examine the premise of the rise in popularity of the S&P 500 index (as simply a product to sell) as well as its underperformance, as compared to the Dow Industrials, will continue to be fans of the index.
Regards.
bull market is here
E
I don't know if we have the Japanese "disease" (deflation) yet, but we certainly have some of the same symptoms: ZIRP, housing bust, markets trading below their 2000 highs especially the Nasdaq, huge and growing deficits, weak recovery growth, stimulus that doesn't stimulate, etc.
I don't think the most pessimistic forecaster would have ever have imagined that the Nikkei would be where it is today. Amazingly along the way, the Nikkei had multiple 100% rallies from low points along its path from 10,000 in 1984 to 39,000 in 1990 to its current level of just under 9000. Now that's a scary proposition for a buy and (bag)holder.
We do however have a much better demographic picture by far as well as a can-do culture of entrepreneurship that makes us unique in the world. Hopefully these elements allow us to overcome the current malaise and hit those numbers above, otherwise no one is going to be happy.
Japan is a unique case because its demographics, culture and competitive position (versus Asia) are radically different than the U.S. It is a false model for the U.S. future.
Regarding the Nasdaq, your selection of 2000 as a base-case year is not realistic. We were in a ridiculous orgy of price bidding on equally ridiculous entities that had no current or future economic value. To confirm that the Nasdaq is doing just fine, just take a look at the long-term trend line. It shows that growth is right back to normal expectations.
http://yhoo.it/xnT81S:symbol=^ixic;range=my...
" It is a false model for the U.S. future."
You state an opinion not a fact. Apparently the FED does not agree with you and neither do I. The Japan of 1990 was the world's 2nd largest economy and considered the world's "leading" economy set to take over the world.
http://bit.ly/AEe2V1
"With average growth rates of 10% in the 1960s, 5% in the 1970s, and 4% in the 1980s, Japan was able to establish and maintain itself as the world's second largest economy from 1968 until 2010, when it was supplanted by the People's Republic of China."
"Regarding the Nasdaq, your selection of 2000 as a base-case year is not realistic."
Just happens to be the year that the S&P and Dow also reached their all-time highs especially if you factor in inflation (which I know you don't) so I am just making a consistent analogy that takes into account the peaks and troughs of the Nikkei.
"a ridiculous orgy of price bidding on equally ridiculous entities"
Facebook $100 billion dollar valuation on just over $1 billion of "profit", Zynga, Groupon, LinkedIn, etc.
LNKD has a PE of 1232 after its "record" profit. The NASDAQ is a much better value today than it was 10 years ago on that we agree.
I understand your opinion but you have missed mine which is whether we face a deflationary future or an inflationary future and Japan is a metaphor for the deflationary path as was the period of the 1930's for the US. The answer to that question is what determines the future of the equity markets.
Let's hope it's not deflation.
If you genuinely believe the Japan model is the paradigm for the U.S., then your apprehesions about what to do and your time spent here on SA are wasted. Just go short, and head to he golf course, because market will contract 75%.
Yes, it's my opinion. Did I need to add that redundancy? I have written so many posts over the past couple years about the littany of factual differences that distinguish the U.S. from Japan that I don't have the stamina nor interest to repeat them all here, but there's hardly anything about Japan that mirrors the U.S. (those are facts), and their experiences won't either (my opinion!).
Again, refer to the Nasdaq long-term chart because if you do you'd see that growth in the index is right back on the its long-term track, which was abruptly interrupted by the late-'90's silly buying hysteria. You think, instead, that the dot-com mania was normative? I doubt it.
We face a deflationary or inflationary future? So, pick one and place your bets! Life's never certain. But, certainly, it's an easy choice for me.
P.S. The Dow is 30 stocks, certainly not a good market average, rather more a historical relic. The SPX reached its high in 2007.
I am simply reflecting what the FED thinks our main economic problem is which is the possibility of a deflationary spiral. I am not saying they are correct. I am saying I understand why they are making the case they are making.
The facts are that we have had deflation already in all major hard asset classes - stocks, real estate, commodities with the exception of gold - so it's really more a question of whether it is over or not.
It's simple in the end, your entry point in the markets more than any other variable determines your long term return. If you invest just before a bear market you'll probably never recover, like entering the Nasdaq in 1998/99 because equities had no where to go but up!
"Just go short, and head to he golf course, because market will contract 75%."
That's not my position or opinion. My opinion is that the FED fears deflation and will do whatever it takes to avoid it which means QE3 is coming soon. This means that markets will probably do very well this year with the added "stimulus", whether it works or not they will do it because the market participants will believe it works driving prices higher through PE expansion. I understand this but I can't bring myself to believe that is sustainable long-term which is why I maintain a very high level of cash and yield.
"We face a deflationary or inflationary future? So, pick one and place your bets! Life's never certain. But, certainly, it's an easy choice for me."
I don't have to do either one but if I had to choose one, I would still side with deflation - the non-consensus choice.
Houses still remain the largest individual asset owned by Middle class America and prices are still falling. The average homeowner is beginning to wake up to the fact that this "house price decline" thing actually applies to them as well. Until this is arrested, the FED will remain aggressive on monetary policy.
Two final anecdotes which are reflective of my personal experience on this issue:
Bought Dell in 1997 for $10 and sold in 1999 for $44, now trading at just under $18.
Bought CSCO in Dec 1999 for $50 and saw it go to $82 about 4 months later and I thought I was a genius. It then went all the way down to $7 and I rode that sucker all the way down. Who could imagine that that could happen to Cisco? I ended up getting out in 2002 at around $23 and took my losses.
Both of those companies are still around and still good - they were not fictions, they were real companies.
Return is based upon entry and exit point, not on paper.
I think Doug Kass may have it right this year - 1550 on the S&P - but I can't bring myself to believe it.
Good luck and good investing!
I suspect most of the deflation has already occured, masked by the Fed policy, as you suggest. But, that was exactly their intention.
The risks, now, are gradually cycling to the other direction because employment is picking up, the construction industry is reviving, credit is expanding, not contracting, and the economy is getting generally perkier. At some point, inflationary pressures will build, and how fast or high they build will depend on how fast the fed reverses policies, so that actual money supplies don't get out of control, as monetary velocity increases.
Significant deflation from here requires, almost by necessity, some new paralyzing panic among businessmen and consumers. Otherwise, economic trends have been positive ever since 2009Q2 and have gotten even better recently. I don't recall where you may live, but I know around here (Sarasota, FL) there has been a very decided pick-up in the economy, employment and, in particular, the housing and construction industries, so I don't get the least bit surprised or doubtful when I see similar numbers reflected in macro statistics.
In the end, I can't get away from the fact that we have had hugely lopsided money flows away from equities, toward cash, bonds and gold, even while revenues and profits expand and P/E's shrink. That's a typical table setting for large future gains in share prices.
So is DOW 20,000 & 30,000.
Maybe even 40,000.
That is all good.....for those of us rich enough to reap the rewards of it all.
See the majority of Americans are broke to begin with. 1/3 of all Americans eligible to save for retirement have zero saved towards retirement to begin with.
Us so called "rich" folk that own 90% of this country's net worth are the only ones who are truly going to appreciate the rise in stocks. The average American who considers $10K a whole lot of money will always remain a serf to the lords.
It is a sad truth unfortunately, so at least lets be honest about how much a rise in the DOW or markets in general is going to help average Mom and Pop America.
The 2000 popping and the 2007-2009 bear market took care of most of Cramerica who thought trading and investing were the same thing. We know based on boatloads of published research that Americans buy at the top and sell at the bottom. I would say that most Americans at this point are either to broke to invest anyway or just to fearful now.
Sure..US companies with a global footprint are doing great. So while they are doing great and employing mostly overseas workers, US workers can look forward to improving unemployment though doing jobs for 1/2 the pay and less and less benefits. Hence the number one job that men returning to the workforce after unemployment are doing:... retail!!
That $25K /year job that you can support a family of 4 on...that is if you live your car.
It is no secret that volume is non existent, HFT is running the show on top of the program trading by the biggest firms that make up a good portion of the volume.
DOW to 50,000. Yes. Love it.
Will most Americans get any benefit from it?
No.
Oh and BTW. I may sound negative just because I speak the truth, but that does not mean i am not 100% invested in securities. I just do not invest in the typical "Wall Street" stocks that are at the center of every Wall Street/ CNBC pom pom cheerleading event.
Does that mean we will just play musical chairs all the way up and then ultimately someone will pull the plug and 1/2 of the 10% will be left holding the bag and the other half will have taken all their paper wealth.
Or do the 10% just keep taking from the 90% and investing in the market driving the price up to 50,000. I rather think the latter is not the answer, and I rather think the former is pretty much an impossibility.
Where do we get all the new money to drive the price up? I don't think we are all just 10% invested and have 10x more cash to throw into the market?
Hello? Have you paid any attention to the all-time record amounts in cash, bonds and gold? Forget about what you think you or the guy down the street is doing or can do; the reality is that the world is awash in non-equity investments and cash, most of which are doing very little. That's where future equity inflows will come from.
1. No one is going to sell $9 trillion in gold and invest in equities. First it's contrary to the reason they own it in the first place (both individuals and sovereigns)
2. Corporations sitting on several trillion are not "equity" investors. They first have the problem of repatriating their profits and paying taxes. Secondly, they would likely invest their money in their businesses. Yes there may be some M&A activities driving up prices. And yes, there may be economic benefit that floats all boats.
3. Are you suggesting that holders of US Treasuries are going to all shift from debt to equity investors. Sovereigns - no. Risk averse - no. Sure maybe some....but not enough to 2 or 3 x the value of the markets.
I am open to considering alternatives. But for every one that buys a share someone sells a share. And if I elected to go all in today, someone would be electing to sell. What are they gonna do? Buy the same shares back from me 2 years from now when the price has doubled. This is primarily a zero sum game. Money to drive the market up has to come from somewhere?
No. The market rises and falls at the margin. One percent of the traders decide to buy at a higher price and the rest of the 99% of the owners participate in the rise even though the money on the sidelines remains the same. A concept difficult to understand at first, but then it suddenly dawns you.
One percent decide to buy again, and the other 99% participate again. No change in the money on the sidelines.
Only when new shares are issued or shares are bought back does the money on the sidelines change.
The reverse is true.
I see that you're old enough that you should recall 1980 acutely. Remember when everybody said that you had to be totally nuts to own a Treasury note yielding 15%? That all the "smart money" was in realty or gold or equities, anywhere but Treasury bonds?
Now, everybody who owns a Treasury bond at 1-2% interest is a "genius." I mean where else would you put that money, certainly not equities. They're only for fools and gamblers.
Only it wasn't so in 1980, and it won't be true in 2012.
Davy J. Based on volumn, I don't believe your 1% number. You may be right. Let's assume you are. How many times do the 1% have to trade before the market doubles. Once? Twice? 100 times? A hundred times is 100% turnover. It means every share traded and all along the way, the price kept going up. So each new buyer (perhaps an old buyer too) had to come up with more money to effect the trade. Where did they get that money?
And just suppose that everyone was on the sidelines but you and me, and somehow you could convince me to buy 1 share of your stock in every company tomorrow at double the price. Say I had enough money to do that and at the close of the market all shares were double the price. What would happen the next day if I was no longer in the market? The price would fall back to the price the day before. There has to be demand of sufficient size to drive price up. And.....there has to be some reason for the price to go up. 1.5% GDP growth and $1 trillion deficits won't do it. You want to double the PE's of all stocks? Will investors think that makes sense. At what rate do earnings have to go up to double in 10 years. I think that rate is about 5 times the GDP growth?
Do you realize that the bond market is immensely greater in size than the equities market? That even more money than usual has flowed there makes the question of available money to drive equities a non-issue.
Your discussion of the need for a reason for equities to rise is answered in two-fold fashion, from my perspective:
1) global increases in money supplies will drive the price of everything higher in nominal terms. This drags along equities too, as the historical inflation of indices demonstrates
2) it's not important whether the stimulus for higher prices happens immediately or not. When monetary flows are overloaded in one direction, as now, and the returns on that overloaded sector are stretched to near nothing, it's not so difficult to position oneself with much better yields in equities and just sit and wait.
'In his 2001 Fortune magazine article, Warren Buffett used the ratio of the market value of all US publically traded securities to Gross National Product (GNP) as a yardstick to measure the stock market valuation.
He stated,
"The ratio has certain limitations in telling you what you need to know. Still, it is probably the best single measure of where valuations stand at any given moment.
If the percentage relationship falls to the 70% or 80% area, buying stocks is likely to work very well for you. If the ratio approaches 200%--as it did in 1999 and a part of 2000--you are playing with fire."
The current ratio is at 84%, which is in the fair market range."
http://seekingalpha.co...
84% of $15.5 ish Trillion = $13 Trillion back in November 2010.
Thank you for that. I had heard this before and completely forgot about it.
I found the most up to date measure at this website gurufocus.com (I have no financial interest in it):
http://bit.ly/yXvIhT
Feb 12, 2012
"As of today, the Total Market Index is at $ 14120 billion, which is about 94.1% of the last reported GDP. The US stock market is positioned for an average annualized return of 4.6%, estimated from the historical valuations of the stock market. This includes the returns from the dividends, currently yielding at 2.3%."
They consider this modestly overvalued based upon the interpretation of this metric. Generally speaking to me that sounds pretty supportive of today's valuations.
Great link to the current updated information. Had not seen this for awhile, but it certainly is worth following and considering.
One percent is an approximation, but BAC has been on top or near the top of the most active list for quite a while and trades about 2.7% of its float daily. AAPL 1.3%, IBM 0.5%. Insurance companies, pension funds, smart investors, and others may not buy or sell their shares for years, so its the traders turning over the same 10 or 20 percent of the float day after day. Those trades set the price for all the rest of the shareholders. Gaps up and down before the open happen with even less volume.
But that's all beside the point. You ask: Where did they get that money? (When the market goes up) I ask: Where does the money go when the market goes down? Seven or eight trillion dollars in 2008 and 2009.
Therefore, the idea of investing in the market anticipating a run-up in the Dow or S&P only makes sense if you are smart enough to know when to sell, and if there is someone who is not smart enough who will buy from you. That being said, I have no problem trading every day.
Would agree with your concept. The unrealized gains don't really mean much until they are captured by selling and realizing the gain.
As is Fox News.
Full Disclosure: Author has been known to use sarcasm to state a contrarian position and to use a facetious comment in an effort to mask cynicism.
3-5% downward correction in the next month.
Specialists bid up prices, trying to attract fewer dollars into the market( - greatly dominated by high speed speculators.) Look at this stuff! How much it's gone up!
After the cycle ends, we go down and the bidding up to attract money starts again, after somebody starts the 'it's changed now' consensus.
The reality is earnings are incredibly more volatile. It is not a matter of whether they grow by 10% or 5%. It is a matter of do they go up 20% or down 70%. Take a look at S&P earnings since 2007 - you will see that earnings are far from a nice stable growing trendline.
Was faster than the speed of Light
He embarked one Day
In a Relative Way
And returned the previous Night
Coming to a US neighborhood near you.
This is what a depression looks like...
http://bit.ly/zPFRBS