Down goes the Dow

spent some time with this piece. thanks for posting it. It is reassuring - Meb Faber addresses the accounting difference but says even after adjusting for it...the US is still expensive. Well yes, but a lot less expensive. Regular is 25, adjusted is 17. Regular is at a near bubble high, adjusted is just a little expensive. Which is what most valuation measurements indicate.

So I will keep buying cheap countries, but I am not as worried about the US as I was before reading the piece Gente posted.

Gracias, gente.

More on the CAPE ratio and the current market...

http://kiplinger.com/printstory.php?pid=12196

agip wrote:

these are absolute #s - not relative to the historical level of valuations.

I think your point has been addressed by Faber but I'm not sure where - If I come across it I'll post.

I would say that if the US is at 25 and you can get cheap euro countries for 10 or lower (greece = 4, Ireland 7!) then that is a large enough difference that historical differences prob don't matter much.

in other words, greece, ireland, italy and others are cheap enough that you have a big enough margin for error that historical valuations don't matter much.

Thanks. Would appreciate seeing something by Faber... if it exists... and if you find it.

Do you have any historical data on these countries' ranges at all, or are you just swagging it?

I mean, your last two paragraphs make pretty big conclusions couched with statments like "prob don't matter much". That seems crazy if you haven't looked at the historical data for each of those countries.

You could launch an entire fleet of hot air balloons with the hot air coming from agip alone.

The guy goes on and on and it is all nonsense.

K55 wrote:

You could launch an entire fleet of hot air balloons with the hot air coming from agip alone.

The guy goes on and on and it is all nonsense.

This is hilarious coming from the guy who uses up so much bandwidth with nutjob conspiracy theories and hate messages.

Pointing Out the Obvious wrote:

K55 wrote:

You could launch an entire fleet of hot air balloons with the hot air coming from agip alone.

The guy goes on and on and it is all nonsense.

This is hilarious coming from the guy who uses up so much bandwidth with nutjob conspiracy theories and hate messages.

You, on the other hand, are just dumb, dumb, dumb.

At least agip can provide entertainment, not matter how unintentional.

You basically repeat the same boring and unimaginative and delusional lies over and over again.

K55 wrote:

You, on the other hand, are just dumb, dumb, dumb.

You basically repeat the same boring and unimaginative and delusional lies over and over again.

Apparently we are very much alike.

I pity the fool that bets against Grantham...

"Fabled money manager, Jeremy Grantham did a recent, rather sharp-edge interview with Fortune. He was very critical of Fed policies, claiming they were ineffective and/or counterproductive. At the end, he seems to be looking for an imminent roller coaster ride in the stock market.

Here's a bit:

Okay, but then I guess that means you think stocks are going higher? I thought I had read your prediction that the market would disappoint investors.

We do think the market is going to go higher because the Fed hasn't ended its game, and it won't stop playing until we are in old-fashioned bubble territory and it bursts, which usually happens at two standard deviations from the market's mean. That would take us to 2,350 on the S&P 500, or roughly 25% from where we are now.

So are you putting your client's money into the market?

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."

Came across this this evening and immediately thought of this thread. ( H/t Cullen Roche at Pragmatic Capitalist )

http://pragcap.com/can-we-all-agree-to-stop-citing-the-dow-jones-industrial-average

The Dow Jones Industrial Average is a terrible index of “corporate America”. I don’t know why anyone still cites it. I know, it’s a relic of an era long past. But can we all just agree to let it die? Can we all just agree to stop citing it? We have much broader indices that are much better and more accurate representations of the health of corporate America. So why do we continue to cite this index of 30 random companies when we have indices that span such a broad swath of corporate America?

The reason I bring this up is because I was reading this piece on Business Insider citing Warren Buffett and how you shouldn’t assume that the stock market will grow just because the economy grows. And the piece cites a period from 1964-1981 when the Dow didn’t budge, but the economy expanded by 3X. It’s true:

But the same thing isn’t true for the S&P 500 which expanded by 47% during this period:

Yes, I agree with the broader point – the stock market is not the economy. The stock market tries to front-run the economy. So there’s a difference in the cyclicality at work there and we should never assume that future economic growth means future stock market growth. But the next time someone cites the Dow please sit them down and tell them that the Dow Jones Industrial Average is an index that our grandfathers used because there was nothing better. And then let them know that there are much better indices that represent the state of corporate America. They’ll thank you when they realize how deceptive a 30 company slice of corporate American can make things appear….

And from Kid Dynamite in the comments:

http://kiddynamitesworld.com/dow-jones-industrial-average-is-a-horribly-constructed-index/

I hate the Dow. There’s a reason: it’s an idiot’s index. I don’t mean to insult anyone, it’s just that you have to understand how the Dow index is actually constructed – and once you understand it, you should agree “wow, that’s asinine.”

The New York Times’ Adam Davidson gets into it a little bit in his piece “Why do we still care about the Dow?“ But it’s really simple: the Dow is a price weighted index. That means that the index “holds” the same number of shares of each stock, and that the index components with higher prices have higher weights. Since stock price is essentially a random number – in the sense that companies can change their stock price without changing the value of their company by splitting or reverse-splitting their shares – this is an utterly absurd way to create an index.

Who would ever create a portfolio like that? When you trade/invest/whatever, you don’t buy the same number of shares of each stock. You might weight your portfolio by dollar value, by volatility risk, by some sort of risk-weighted metric, by market cap, by earnings multiples, by geographical location, by sector – anything but equal share counts.

The Dow is such a ludicrous index that when one of the Dow components splits, indexers must sell shares of that component and buy shares of all of the other components with the proceeds. Moronic.

Why, then, is The Dow the favorite of the retail market? Well, tradition first and foremost – that’s the way it was back in the day, and the status quo is a driving force. Secondly, stocks are correlated, especially the type of large cap stocks that make up the Dow and account for much of the weight of the S&P 500. Even with the insane price weighting methodology, the Dow’s performance has been highly correlated to the S&P 500. ( R squared of 91.4 )

esp. it's an idiots index, that says it all.

Lol. Are you going to sit Buffett down and tell him? You should... it will be nice when he thanks you.

Maybe everybody getting trying to hard to insult anybody that references the Dow index should chill just a little. If it is so "STUPID, IDIOTIC and WORTHLESS", it amazes me that it matches up so well over long time periods with things like the Vanguard Large-Cap Index, and the S&P 500 index.

Yep, quite amazing that the Blue line in this graph is IDIOTIC and WORTHLESS, but the orange one is so superior. I'm so pedestrian. And so is Buffett.

So,...when is this correction happening? Right now the market seems overvalued and behaving irrationally.

I am officially retiring my use of this handle. Any future uses may be reasonably assumed to be trolling.

Thank you.

pine bark wrote:

So,...when is this correction happening? Right now the market seems overvalued and behaving irrationally.

Next week. And it will be far more than a correction

Next week? You sure about that?

On CNBC yesterday they reported that some big-time investor is advocating a withdrawal from the markets in May, so presumably he's thinking it will be in June.

Let me be clear about an opinion that I hold: the markets are complete bull, and have a life of their own that is predicated mostly on the psychology of large investors and institutional traders--that such psychology responds to external stimuli such as world events, earnings reports, central bank policy announcements, etc., is to be expected, but the driving forces are essentially internal to a limited number of individuals.

That said, I can't help but believe that there is a hugely cavalier attitude out there right now, a devil-may-care, can't fail mentality, that will offset any countervailing tendency to panic and sell off. To what extent that mentality is satisfied by shorts I do not know, but I do know that spring and summer bring hope, and that when everybody feels good, the markets continue to rise.

Maybe June is a good prediction, as many people seem to agree that a correction is due before the November US elections. I might wait longer, until the doldrums of summer creep in, and the electrical grid is stressed--let's say mid-late July. I think it really depends on how early summer arrives this year and how hot it will be, that determines how long it takes people to get sick of it, and to get irritable and negativistic.

But next week, that is ballsy. I hope it happens, and massively--I'm looking for good buying opportunities.

Maser -

Have you read much history of wall street? Cause everything you are saying...people have always said, at virtually every normal time. And this is a pretty normal time. There are always great reasons why not to own stocks. Always. I think today's reasons to not own stocks are pretty weak.

except for your out of consensus worries about the grid and infrastructure - that is yours and yours alone.

1) The comment, "it's an idiots index" was a dig at OP.

2) " Are you going to sit Buffett down and tell him?" Don't have to he already knows. "My money, I should add, is where my mouth is," Buffett adds in his letter to shareholders. "What I advise here is essentially identical to certain instructions I've laid out in my will. One bequest provides that cash will be delivered to a trustee for my wife's benefit …. My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund."

Buffett even goes as far as to recommend one: Vanguard's S&P 500 index fund (VOO). For about $170 (market price as of March 26, 2014) investors can own a slice of the entire S&P 500. Moreover, the fund has an expense ratio of just 0.05%, pretty much the lowest fee you can find.

http://www.usatoday.com/story/money/markets/2014/03/29/warren-buffetts-good-advice-applied-to-3-etfs/7032087/

FORTUNE -- Results are in for the sixth year of the competition sometimes called the $1 million bet, and Warren Buffett -- once a piteous straggler in this 10-year wager on stock market performance -- has opened up a sizable lead over his opponent, New York asset manager Protégé Partners. Buffett's horse in the bet is a low-cost S&P index fund, and Protégé's is the averaged returns to investors (after all fees) of five hedge funds of funds that the firm carefully picked for the contest.

3) "Yep, quite amazing that the Blue line in this graph is IDIOTIC and WORTHLESS, but the orange one is so superior". Type in .INX to your chart. What's a better match to VV; .INX or .DJI ? From 1/1/1972 to now the R-squared for the SP500 to the WIL5000 is 97.7; the DJIA to the WIL5000 is 86.3. (SP500-DJIA is 91.1) Cullen Roche ( pragcap.com ) was responding to Henry Blodget's recent article in BI

http://www.businessinsider.com/buffett-stock-market-and-economy-2014-3

which referenced a Warren Buffett piece in Fortune magazine on Nov. 22,1999.

http://money.cnn.com/magazines/fortune/fortune_archive/1999/11/22/269071/

While he agreed with the analysis "Yes, I agree with the broader point – the stock market is not the economy... we should never assume that future economic growth means future stock market growth" He did find fault with using the DJIA as a bellwether which was flat during the period 12/1964 to 12/1981 while the SP500 was up 47%.

http://pragcap.com/wp-content/uploads/2014/03/Dow1.png

and

http://pragcap.com/wp-content/uploads/2014/03/SP500.png

The S&P 500 Return (Dividends Reinvested) was 184% for an Annualized S&P 500 Return (Dividends Reinvested) of 6.34%; DJIA was 115% and 4.6% for this time frame. (Unfortunately, inflation was about 6.75%). Buffett was well aware of this but that 17 year chart showing the DJIA back at 875 was a great prop for his argument.

4)Finally, still believe that the DJIA is the best and most accurate representation of the health of corporate America?

I don't dispute the fact the DJIA tracks the total stock market well but the SP500 and other indices like Russell3000 and Wilshire5000 are more appropriate for that task. It's like having the choice of hammering a nail with a rock or a hammer. I know Wall Street's preference; 30-35 billion indexed to DJIA, 1.6 TRILLION indexed to the SP500.

la gente está muy loca wrote:

4)Finally, still believe that the DJIA is the best and most accurate representation of the health of corporate America?

I don't dispute the fact the DJIA tracks the total stock market well but the SP500 and other indices like Russell3000 and Wilshire5000 are more appropriate for that task. It's like having the choice of hammering a nail with a rock or a hammer. I know Wall Street's preference; 30-35 billion indexed to DJIA, 1.6 TRILLION indexed to the SP500.

No offense, but nobody has claimed that "the DJIA is the best and most accurate representation of the health of corporate America."

All you have pointed out is painfully obvious. But of no real significance.

Pointing Out the Obvious wrote:

No offense, but nobody has claimed that "the DJIA is the best and most accurate representation of the health of corporate America."

All you have pointed out is painfully obvious. But of no real significance.

Exactly. And, none of it is news to me (I read the Bershire report as well, lol). My point still stands.

His #2 misses the point completely. His article, which I quoted and underlined said "But the next time someone cites the Dow please sit them down... "

Clearly, Buffett cited the DJIA.

Others cite the DJIA as well. Nowhere does that mean that the person citing it thinks it is the best index, or is not flawed. But it is "good enough" for many purposes.

It certainly is not an "idiot's index" as was overstated. It tracks large-cap US stocks pretty well, and, in most cases the overall market as well.

In other related news... the p/e ratio of the Russell 2000 now sits at 74.8.

Gobble up those tasty, tasty stocks everybody! It's always a good time to buy!