Down goes the Dow

agip,

I was speaking figuratively. I will meet your hamburger and raise you a microbrew that over the next twelve months your gain will evaporate.

Igy

Ghost of Igloi wrote:

agip,

I was speaking figuratively. I will meet your hamburger and raise you a microbrew that over the next twelve months your gain will evaporate.

Igy

I'm looking for a donut bet actually - that's where sh-t gets real.

Honestly tho, there is next to zero chance I have the patience to hold this thing for a year - in my fun account I have around a 1000% turnover rate. Schwab really loves me.

agip,

I do wish you the best on the trade. You will have to excuse me since I have a hard time reconciling stocks with no earnings and their high valuations. Must be age.

Igy

This was an uneventful week for economic announcements in the US. However, overseas news was largely positive. European trade data was strong, with German exports and imports growing more than expected to reach record highs. In Japan, stocks reacted positively to the Prime Minister’s pledge that he expects to lower Japan’s corporate tax rates next year. In fact, Japanese stocks had their biggest one day gain since 2008 this past Wednesday. In China, the Ministry of Finance is expected to take further steps to stimulate the economy and this lifted Chinese stocks. This a good reminder on the importance of holding a diversified portfolio. Having exposure to foreign developed and emerging markets in your portfolio positions you to capture growth wherever it occurs globally.

One thing that is important to remember in light of weak months for asset returns, such as we’ve seen this August, is that the long term returns for stocks, which are historically robust, do include many bad months. Despite this, looking back over history, stocks have still offered attractive returns.

For example, on average, looking back to 1950, the S&P 500 experienced monthly declines for about 5 months out of 12 in a typical year. That may seem like a lot of down months. As a result, it might feel like your opportunity to achieve positive returns as an investor is pretty meager. Yet, actually small positive differences really have added up over time for investors. This has caused the S&P 500 to deliver an average return of 7.7% since 1950.

Remember that average annual 7.7% return going back to 1950 includes all of the months when stocks have declined (317 months in fact). So a negative month for stocks is regular event. However, despite all these negative months in the past, long-term returns to stocks have been positive, and better than many other mainstream asset classes in our view. This is one reason why we view diversified stock exposure as important for asset growth, but also employ other assets and rebalancing to keep portfolios on track.

Future,

I was born in 1950 and the United States as well as the rest of the world is a much different place today. America experienced unprecedented growth in this period that fueled stock market returns for decades. Today our economy as well as Japan and much of Europe is mature and cannot support the growth you are suggesting. The growth in the United States economy since the late 1990s has been accompanied by rising debt levels of consumers, corporations and governments. Yet even with this stimulus and near a market high the fifteen year compounded return of the S&P 500 is a little over 4%. Stocks are at times a good investment, but like all investments, when they are attractively valued. Based upon highly reliable valuation metrics (Shiller CAPE 10, Tobin's Q, Buffett Indicator and Market Cap/GVA) the S&P 500 is trading at two standard deviations above the norm. At such a valuation a buyer of the SPY today is likely to underperform an investor who purchases a 10 Year Treasury Bond.

Igy

Hey igy - explain to me how the Shiller pe is a reliable predictor, and include the last 25 years if you may.

Ghost,

You might be the only person here older than me. Do you remember Mary Meeker and the 2000 top? Do you remember CMGI? At Home? Do you remember early 2000 when the market "bellweather" on CNBC was not GE, IBM, or Exxon, but Yahoo (that's when I sold out the last 25% I started selling in Oct/98 because I know that something was seriously wrong with the market)? And, yes, I had these things in the last 12 months I was in the market back then (but I was 75% out at the start of 2000).

I'm seeing more data and comments that market breadth is getting more and more narrow, and that means more to me than market PE levels (it IS a market of stocks, not a stock market). But we had that in 1998-2000. I can remember back in 1999 when using the same stock screen that I still use, my universe of stocks numbered 13. That's right, 13 stocks out of ~6,000.

But the thing is that those stocks that were still growing were growing A LOT. CMGI no longer exists, but I believe in the last 12 months. it was up ~250%. There ARE stocks that are up a lot AND have growth/eps that are up a lot:

NFLX

MANH

ILMN

NFLX has negative eps this year, but everyone knows what they've done the past 5 years. There are other companies like ILMN that have 50 PE's because they have very high growth rates: In the last 3 years, ILMN has gone from 40 to 206.

You take what the defense gives you, and if the defense isn't guarding the 3 point line, that's what you take--high risk, high reward. You just understand that the party isn't going to last too long and you have to get out before the cops raid the party. That's the Soros/Quantum strategy, and that's the game I'm playing now, because once again, you take what the defense gives you.

Having only 13 stocks in your portfolio is not a bad idea, coach. You don't really decrease your risk much by adding a bunch more. It's better to stick with what you know well. Good for you.

agip wrote:

[quote]Ghost of Igloi wrote:

agip,

Don't count your chickens until you sell. At -$1.00 a share in EPS it is a lottery ticket.

Igy

ah no

with a lottery, your odds of winning are one in at least a few thousand, probably worse depending.

I figure odds of winning here are around 60%

What calculations did you perform to come up with that 60% figure?

What constitutes winning -- any positive return upon sale or something a bit better?

Hi, K5!

with a lottery, your odds of winning are one in at least a few thousand, probably worse depending.

I figure odds of winning here are around 60%

What calculations did you perform to come up with that 60% figure?

agip,

Ted Berg in the Office of Financial Research report "Quicksilver Markets" gives a balance view of predictive ability of Forward PE, Shiller CAPE 10, Tobin's Q, and the Buffett Indicator (see link below). Berg's piece provides citations in support of his analysis.

http://financialresearch.gov/briefs/files/OFRbr-2015-02-quicksilver-markets.pdf

Igy

agip,

John Hussman does an equally good job on valuation models and their predictive ability in his "Margins, Multiples and the Iron Law of Valuation" (see the link below).

http://www.hussmanfunds.com/wmc/wmc140414.htm

Igy

Try again wrote:

with a lottery, your odds of winning are one in at least a few thousand, probably worse depending.

I figure odds of winning here are around 60%

What calculations did you perform to come up with that 60% figure?

I bent my left leg, straightened my right, did a sort of twisting maneuver which actually hurt a little, reached back, and pulled it out of my rear end.

Solid enough for you?

coach d,

I do remember Mary Meeker the "Queen of the Intetnet." I also recall several prominent value managers retired or were forced to change their portfolios to be more growth oriented. Today in many ways is more similar than not. For example IPO issuance at near record levels of companies with dubious long term prospects, like agip's ShakeShack. Biotech companies were the rage at that time with their growing genetic sequencing businesses. Crowd funding and venture capital schemes exist outside the public markets but illustrates the same excesses. Look at mergers and acquisitions made at premiums for companies with negative earnings. Of course the "synergies" will make the transaction "accretive."

I can see the market moving higher on more ridiculous and dangerous investments in and out of the public markets. If so, it will be driven by the propensity of investors to be sucked into such foolish schemes. As always it is different this time.

Igy

"it's unlikely China will be in recession any time soon."

Maybe but maybe not:

http://www.cnbc.com/2015/09/13/china-august-industrial-output-up-61-on-year-vs-64-expected.html

Igy

Maybe but maybe not? That's awesome analysis. Way to be bold.

POTO,

OK, China recession in next 12 months and coincides with Dow 13,000. Stick that in your bong and smoke it.

Igy

Dow 13,000 within the next 12 months? Are you confident enough to adjust our bet to that time frame, or are you still just talking out of your ass?