Posted by Don Martin on Fri, Mar 30, 2012 @ 01:51 PM
Is the stock market like a rigged lottery for the rich?
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Is buying a lottery ticket a good investment? Can it beat the stock market? The record $640 million Mega Millions jackpot seems exciting, but based on statistics, people who gamble lose money. Further, gambling losses are not tax deductible, but winnings are taxable.
Of course some people would say that the stock market is a gamble. The market has not made an inflation-adjusted high since 1998 but investors were subject to excessive volatility, sio investors did not obtain a reward for taking on the risk of investing.
During the 1990’s stocks had a total return of 17% annually but the average investor made far less than that because they panicked and sold inappropriately at the bottom and bought at the top. The higher income investors often use professional investment managers and professional investment advice may have helped to transfer wealth from middle class investors to rich investors.
Trading commodity futures with high leverage or writing naked options is almost a form of gambling. With the failure of MFGlobal and loss of some of the customers’ funds that turned out to be a gamble for futures traders.
An old cliché is “The fastest way to a small fortune in investing is with a large one” (which implies fast reckless trading leads to loss of net worth).
I have written an article about stocks “Market getting riskier” and “MF Global lesson: avoid margin trading”.
Investors should seek independent financial advice. 
Posted by Don Martin on Fri, Mar 30, 2012 @ 01:18 PM
Stock market reminds me of the Tech stock bubble of 2000
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The stock market is getting weaker and looks like it is topping out. It reminds me of the Tech stock bubble of 2000 when a handful of glamorous tech companies rose dramatically in price causing the indexes to go up. When the few stars were stripped out of the data the result was a weak, sickly and overpriced market. Half of the SP’s 4th quarter profit was due to Apple according to Factset. In the first quarter profits for the SP were expected to decline slightly without Apple, but with Apple the SP profits will breakeven. And 15% of the stock market’s gains this year were due to Apple.
I think the best investments are investment grade bonds, despite low yields, because the (anticipation of the 2013 tax increase that will cause) recession and stock crash. I think it will start in late in 2012 and early 2013 and will make bonds go up in value.
The economy has a GDP growth of 2.0% which is at “stall speed”. Next year new taxes will create 3.5% reduction in GDP which will mean a recession with -1.5% growth. The reports of growth were caused by unseasonably warm weather. BCA said that there is little evidence of improving economic growth in recent quarters.
I have written an article “Will T-Bond bubble burst?”
Investors should seek independent financial advice.
Posted by Don Martin on Thu, Mar 29, 2012 @ 02:36 PM
Year end killer tax increases to kill stocks
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In today’s Wall Street Journal an article by Establishment economist David Wessel “Clock Ticks on U.S.'s Fiscal Time Bomb” he discusses the huge tax increases scheduled at year end and three possible outcomes. The most interesting part of the story was the Bernanke quote saying that this would be "a massive fiscal cliff." It is a 3.5% fiscal drag on the economy at the time when the economy is very weak. I have been discussing this topic many times this year.
My opinion is that the economy will be in a Soft Depression until 2016 or 2018 and then get much better, however, in several decades the growing Federal deficit will explode out of control. Let’s hope that politicians will find a long term structural solution for the deficit. Since the deficit is caused by rapidly increasing medical costs then perhaps the health care provider’s profits will be an unexpected source of tax revenue and so some of the problem will be reduced by income taxes. Perhaps the solution would be to require all health care providers to work long hours so that they would be in a high tax bracket and then the government would get more revenue. Incorporated businesses should not be allowed to shelter income in a foreign subsidiary. By outlawing that the after-tax profits of publicly traded companies would go down and this would make stock prices go down.
I have written an article “Will T-Bond bubble burst?”
Investors should seek independent financial advice.
Posted by Don Martin on Wed, Mar 28, 2012 @ 02:33 PM
Is there a bubble in T-Bonds that will burst in 2013?
As a financial planner in Silicon Valley people who seek advice from a bearish broker* ask me “is there a bubble in U.S. Treasuries that will burst in 2013?” My answer is that Treasuries are not in a bubble; there are special reasons that justify the high price.
My advice is that the economy is weak and the recent alleged job market improvement is bogus, so that means the economy is not recovering. 40% of recent job growth was due to ultra-warm winter weather. If statistics were adjusted for this then job growth would be roughly at the 125,000 monthly needed to keep up with population growth which means there has been no net job growth this winter. This is confirmed when looking at the employment-to-population ratio at 58.5 it has barely budged after the crash and is at the lowest level in decades. Further, people are suffering from an inflation-adjusted cut in “real” pay, which is disinflationary since people who have a reduction in income respond by cutting purchases.
Typically after presidential elections stimulus programs end and taxes go up, resulting in the worst performance in the four year economic cycle tied to elections. That certainly will happen in 2013 based on existing legislation, unless the new Congress and whoever is president in 2013 agree to stop the automatic budget cuts, automatic expiration of stimulus programs and automatic expiration of Bush tax cuts. These fiscal shocks, when implemented, will be a 3.5% drag on a very weak economy which will tip things over into recession. This will result in a retest of the March, 2009 stock market lows. The bull market for bonds will remain intact in 2013.
A huge amount of Treasuries have been issued.
As things get worse for the Japanese government and for the Eurozone (see the FT.com article about Euro problems) then capital will flee to the U.S. and into investment grade bonds, despite low rates. As China moves towards financial freedom to invest offshore then its wealthy people will invest in U.S. based capital markets, some of which will go into bonds. When Chinese funds are invested in American stocks and real estate the American sellers of assets will park some of their money in bonds, especially if the stock market is crashing.
Since the Shiller PE10 now at 22 implies the market is 50% overpriced then it may come down 33% next year to reach equilibrium. When stocks crash people flee into bonds. However, when investing in long term bonds one must be aware of the risk of a sudden surprise increase in inflation and reduction of unemployment. One must consult with an independent financial advisor to determine their own unique risk tolerance and their exit strategy. Despite the attractiveness of Treasuries they are a “trade” (hopefully lasting three more years) and not an investment, since the risk of inflation and full employment returning in a few years is great one must be aware of this risk and not hold on to long term bonds forever. Investors should seek advice about this and not be a do-it-yourself investor;
I have written an article “Contrarian ideas on T-Bond crash”
Investors should seek independent financial advice.
*I’m not a “broker”, I’m actually a fee-only investment advisor.
Posted by Don Martin on Tue, Mar 27, 2012 @ 05:23 PM
The Core Logic HPI NSA inflation adjusted real estate index went from 82 in 1979 to 100 today, an increase of 0.6% a year. The index showed a significant increase during the inflationary 1970’s but that was due to the availability of 30 year fixed loans at artificially low interest rates during a time of raging inflation, which is unlikely to occur again since lenders would insist on higher rates during inflationary times.
Thus most of the benefit from owning real estate in the past 33 years came from the rent rather than capital gains and the benefit from rent was only if the property was owned free of debt. The rents are often roughly the same as a BBB rated bond yield so real estate investors are not really getting the protection from inflation that they seek. On a risk adjusted basis real estate is a less attractive investment than liquid assets because of the difficulty and cost of selling, or getting a cash-out refinance. For a person who can only afford one property it is too hard to have a diversified portfolio of real estate, but with a modest amount of funds one could get a lot of diversification in stocks and bonds including stocks in international REIT’s.
There have been some busted real estate bubbles where the property values never recovered to their old highs even 100 years later.
I have written an article “Which is better real estate or stocks?”
Investors should seek independent financial advice.
Posted by Don Martin on Mon, Mar 26, 2012 @ 05:35 PM
Why stocks are very dangerous
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The traditional investment theories advocate that investors diversify into uncorrelated assets. Traditional investment theory also was never designed to handle the current situation where the developed world’s Central Banks have done an unprecedented amount of intervention far beyond their original charters.
Today the Shiller PE 10 is at 22, about 50% higher than a fair value of 15, which implies a need for the market to drop 33%. Profits are at an all-time high, in part due to corporations’ increased use of offshore tax shelters which could be wiped out by legislation.
The textbooks for investing need to be re-written to show that excessive correlation between risk assets means that prudent investing requires a larger percentage allocation of investment grade bonds than what is commonly believed. In the modern era correlations of risk assets rise to very high levels during a crash, which ruins the traditional theory of diversification. As time goes on people will become aware of this, especially as aging Baby Boomers realize they can’t afford to gamble with their retirement assets. This will push more people into investment grade bonds.
Don't let your assets shrink due to a crash
The bears’ reasons for a stock crash were temporarily thwarted by unprecedented massive and possibly illegal Central Bank loans to financial companies that in often were not creditworthy. There is only so much that a Central Bank can do to stimulate the economy or to prop up failed banks. At some point the truth will come out and the market will panic and Central Banks will not be able to prop up the economy. This has happened in Japan with the 10 year JGB going to 1.0% and the stock market dropping 75%.
When the stock market revisits the lows of March, 2009, after the 2013 tax increases, then there will be a migration into bonds.
I have written an article “High correlations ruin investing” and “Protection from stock crashes”.
Investors should seek independent financial advice.
Posted by Don Martin on Fri, Mar 23, 2012 @ 04:04 PM
Are Treasuries a Good Trade?
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Should investors own Treasuries as a short term or intermediate term “trade” (not a long term investment)? The employment report for February was warped by incorrect robotic use of seasonal weather adjustments even though the warm winter was a three standard deviation event. The report said 225,000 new jobs but a good guess is the six month average will show roughly 100,00 monthly which is about the amount needed to offset population growth. Thus we are stuck in a no growth, wage cutting economy with huge “job killing” tax increases scheduled in nine months. Economist Joseph Stiglitz wrote in FT.com on March 12 that the unemployment rate would not return to normal until 13 years from now. Since he’s an academic instead of a Wall Street promoter I’m inclined to trust him.
With shrinking wages, no improvement in unemployment and a huge tax increase in 2013 the economy will tip over into recession, unemployment will increase and consumption will decrease and stocks will go down. All this is bullish for Treasuries. The chart formations for Treasury bonds for the period after the crash of March 14 show the market on a short term basis is bottoming and firming a base, so perhaps the risk of a new crash is now past.
I have written an article “Protection from Treasury bond crash”.
Investors should seek independent financial advice.
Posted by Don Martin on Thu, Mar 22, 2012 @ 05:21 PM
More Macroeconomic Thoughts on T-Bond Rates
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The key variables of long term Treasuries are Fed policy, unemployment rate and inflation. These in turn are influenced by the world economy’s growth rate. Recently growth in the world economy came from a devaluation (the Yen went from 75.6 to 84 in six weeks) in Japan which enabled Japanese companies to export more, while companies in other nations assumed their reduction in sales because of this competition, was temporary. There is no net gain in the world economy if Japan’s devaluation takes sales away from other countries because that means less growth in those countries. The recent stimulus by the European Central Bank LTRO bank financing operation was a massive stimulus that acted as a surprise because the ECB used to have a strict policy of not inflating the money supply. However, this is a bogus type of stimulus and is unsustainable.
The world has gotten used to the idea that China can magically keep growing at super-human levels. However, the driving forces of China’s economy are slowing down. An article in FT.com by Edward Chancellor shows that growing problems with a drop in real estate values, a reduction in financing, a reduction in China’s savings means that it will be harder for China to use ever increasing amounts of low cost debt to maintain its rapid growth.
Eventually the world will realize the following: 1. that the Eurozone problems were not fixed; 2. that China’s economy will go the way of Japan’s 1980’s boom that ended in a Soft Depression; 3. The U.S. labor boom of the past few months was a temporary and bogus event after adjusting for population increases and warm weather. 4. The U.S. tax increase in 9 months will be a 3 to 4% drag on GDP, with the hidden sleeper problem of a 300% higher tax on dividend paying stocks a catalyst for a stock market crash. When the investing public wakes up to these matters they will flee into Treasuries. Therefore today’s bond prices are a good entry point to buy long term Treasuries.
Open the door to new contrarian ideas.
David Rosenberg said that 11 indicators have missed the market’s estimate of their performance and two beat their estimate, so it is wrong to say the economy is in a growth spurt.
Investors should be careful not to own more long term debt than their risk allocation can handle, since a sudden increase in rates can make long term bonds go way down in value. These bonds sometimes have almost the same standard deviation as equities so they should be viewed as too risky for some investors to own more than a small quantity. Further, there is no smooth, well traveled path on the road through a Soft Depression, as the sudden surprise development of a new government or Central Bank stimulus program could temporarily delay a bond market rally and even make bond prices go down more.
I have written an article “Protection from Treasury bond crash” and “Contrarian ideas on T-Bond crash”.
Investors should seek independent financial advice.
Posted by Don Martin on Wed, Mar 21, 2012 @ 02:38 PM
What Will Happen to Treasury Bond Rates?
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The New York Fed president Dudley said recently that the unemployment rate would be 10%, not the official rate of 8.3%, had it not been for the drop in the labor force participation rate from 66% to 64% in the past three years. This means that discouraged unemployed who dropped off the radar are not being properly counted so the unemployment report is wrong. The unemployment rate is the key driver in the market’s setting of interest rates and also motivated the Fed to determine what they will set short term rates at. As long as the Fed has set short term rates near zero then investors can play the “carry trade” borrowing at close to zero cost and buying long term Treasuries and making a profit on the spread. If a hedge fund levers up 4 to 1 at almost no cost and buys the 30 year Treasury at 3.3% they will make a gross profit of 3% times 4 = 12%. Of course they might spend money on Put options or the cost of being “stopped out” of the market with a sudden margin call, so the 12% is not the true profit, but where else can an investor make 12%? I don’t recommend using leverage for anything. I’m simply saying the greed factor will make institutional investors continue to buy long term Treasuries as long as the Fed offers near zero cost loans.
Bernanke does like the household employment report, instead he favors the payroll report, which implies a jobless rate of 9.0%. The household rate is a survey that asks households if they have a job. Unfortunately if someone is embarrassed they might exaggerate their well-being to the survey taker. Some people may be tempted to claim they have a job even though it is merely a commissioned sales position with no salary. By contrast, the payroll report uses actual hard dollars spent by real employers to determine if someone has a job, so it is more reliable.
I suspect the recent run up in the Ten year Treasury will be limited to 2.7% (where it would be at the 50% Fibonacci retracement from the 12 month high) and will end by next week. It seems every year in early Spring that interest rates rise temporarily. Once the 2nd quarter shows an employment rate of roughly 100,000 monthly new jobs (which is not enough to overcome the population increase and thus a zero growth economy) then bond investors will realize it is time to be bullish on bonds.
In the FT.com Albert Edwards was quoted as saying that bond yields will move to new lows and the stock market rally will end. My own forecast is that in the 4th quarter stocks will crash and in 2013 stocks will retest the lows of 2009. This will be bullish for bonds.
With most recent core inflation at 0.1% and the three month average at 0.6% inflation is not a problem for the bond market.
A huge bond payment was needed during high interest rate periods of the 1970's.
Compare the inflationary 1970’s when bonds might yield 14%, a 40% tax rate might mean an 8.4% after-tax return and an inflation rate of 11% would mean a negative real after tax rate of -2.6%. Now today a 30 year Treasuries yield might be 3.38%, which is 2.03% after a 40% combined state and Federal tax rate, less an inflation rate of 1.5% and you still get a positive after-tax, after-inflation return of 0.53, so you are much better off than the days when long bonds yielded 14%.
I have written an article “Protection from Treasury bond crash”.
Investors should seek independent financial advice.
Posted by Don Martin on Tue, Mar 20, 2012 @ 04:36 PM
What mutual funds can an independent financial advisor sell?
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An independent financial advisor is someone who is independent of Broker-Dealers and who does not get a commission for the sale of investment products. He is paid solely by his client and works solely for his client. An independent financial advisor who offers mutual funds selection advice can in most cases “sell”* just about any type of mutual fund because the advisor can simply tell the client to go into the market and purchase the mutual fund on his own. Further, the advisor should have access to the Institutional brokerage account platform that allows the client to buy low cost no load “Institutional” class mutual funds in small quantities.
One significant difference between a Broker versus an independent financial advisor (who is a fee only advisor) is that the independent, in most cases, can’t offer “A” class or “B” or “C” class mutual fund shares and thus he will either offer low cost Institutional class (“I” class) shares or the advisor will tell the client to buy a no load fund direct from the fund company. In a few cases the “I” class shares are not available through the Institutional platform but the client can obtain “A” class shares with the load fee waived.
Don't pay huge pile of mutual fund load fees
The independent advisor can attempt to determine what asset classes a client should own. If the client tried to ask the mutual fund company then the fund company would be biased and would not recommend changing asset allocations when it was time to get out of a certain asset class. Mutual funds are usually biased in favor of one particular asset class. Because they are obsessed with studying their favorite asset class they lack objectivity to recommend getting out of that class. To get objectivity it is necessary to have an independent investment advisor.
I have written an article “Mutual fund selection by advisors”.
Investors should seek independent financial advice.
(* the word “sell” may be inappropriate since a fee only independent advisor does not get paid for recommending a fund and does not produce the investment product).
Posted by Don Martin on Mon, Mar 19, 2012 @ 02:48 PM
Low core inflation rate justifies low interest rates
Recently bond yields have been rising and the employment market has been improving. It might appear to be the end of the bond bull market but a closer inspection reveals that the bond bull market is intact.
On March 16 the CPI figures show that consumer goods core inflation was 0.1% and the six month rate was 0.6%.
The recent employment reports were badly skewed by ultra-warm weather and in the next quarter should show only 100,000 new monthly jobs, roughly enough to keep up with population and thus in real terms a zero net increase in jobs. This is disinflationary.
The world economy has been stimulated by the European Central Bank’s massive LTRO financing where the bank lent funds to European banks in a manner that normally would not have been allowed. This helped to make the economy less deflationary but ultimately this stimulus is unsustainable and will backfire. The absence of new and ever rising stimulus of this type means that eventually the heroin junkie will get sick from withdrawal symptoms and the world economy will get weaker.
ECB's stimulus can't last forever
The FT.com had an excellent article “What is the real rate of interest telling us?” showing that the marketplace is justified in making interest rates low due to a savings glut.
I have written an article “employment report misleading” showing that the job market is not that good, which implies the economy is weaker than expected, which is bullish for bonds.
Investors should seek independent financial advice.
Posted by Don Martin on Fri, Mar 16, 2012 @ 06:16 PM
Why stock investing does not work
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Investors have asked what is the best way to protect their 401k from a crash. They ask why stock investing does not work.
The best way to protect oneself from a stock market crash is be armed with a clear, calm understanding of economic subtleties so as to avoid panic selling.
Stock market investing does not work if you buy at the top of the market. Stock market investing does not work if you do lots of short term trades with no respect for long term market fundamentals. Stock investing does not work if you overpay for stocks. It does not work if you panic sell during a minor dip and then panic buy when it has already begun to go back up.
Stock investing can work because over the past 75 years stock investors had made about 9.5% annually, which is more than bonds. The problem is that one must determine the correct entry point to buy (at a low price) instead of simply trying a buy and hold strategy using overpriced stocks.
Open the doors to new investment ideas
The most important solution to these problems is to buy only when the market price is below fair value and to only sell when it above fair value. This means to be fearful when others are optimistic and to be bold when others are afraid. To gauge fair value the best metric is the ten year inflation adjusted average PE ratio, which is roughly 15 when at fair value. This is important because income statement items, not balance sheet items are the key to estimating fair value. Balance sheet items such as cash or land owned by a company are subject to either being squandered or in the case of land the value may have been overestimated and is illiquid and not usable during a crash. Income capitalization is the most reliable valuation tool because it is hard for a company to suddenly change its earnings so along term average can be the best benchmark.
The key is to only buy an investment below fair value and then hold for a long time until it has exceeded its fair value.
There are other reasons who stock investing doesn't work. During the 1990's the market returned 18% annually but small investors made only 3% because they panic bought at the top and panic sold at the bottom. In this situation the small investors would have benefited from paying a professional investment advisor.
I have written an article “Does buy and hold investing work?”
Investors should seek independent financial advice.
Posted by Don Martin on Thu, Mar 15, 2012 @ 02:54 PM
Treasury Bond Market Crash May be Scary but it is OK
The Treasury bond market crash may be a temporary phenomenon. Today the ten year Treasury traded at a 2.28% yield in a relatively narrow range today. The previous two days had seen sharp increases in yields. At 2.28%, the yield is just barely above the 200 day moving average. There is the possibility that yields could rise to 2.4% or 2.8%, however I expect if that does happen it will be temporary.
The key driver of bond prices is unemployment. The typical investor only cares about equities and is thus unmotivated to research bonds or macroeconomics. So the typical investor only scans the headlines and sees that the new jobs created last month are roughly 225,000 and then he concludes that the job market and the economy have reached the bottom and so he decides to become bullish on stocks and bearish on bond prices.
Investing in bonds requires a willingness to dig deep into “boring” economic data and avoid headline news. The fact is that after adjusting for warm weather the recent job gains are roughly around the 100,000 to 125,000 monthly amount needed to merely keep up with population growth and thus there is no “real” (population adjusted) net gain in job creation. This is very non-inflationary or even deflationary. A job is the key to an individual qualifying for a loan and new credit growth is the key to creating inflation through an increase in the money supply. The economy suffers from a situation where people who need to borrow don’t have enough income to qualify and many people are trying to reduce consumption and use the savings to pay down debt which is deflationary. See the Wall Street Journal article “An Economy Poised Between Flight and Fright”.
Open the secrets of the market
To heal the economy consumers need to pay down debt which will take many years. Also the huge tax increases scheduled for 2013 are only 9 months away and investors will sell stocks a few months before the end of the year because of this. When opinion polls show Obama winning 30 days before the election that will trigger a mass sell-off. Typically October and the fourth quarter are bad for markets and the post-presidential election period is also bad for stocks. When the October, 2012 stock crash occurs, to be followed by the January, 2013 tax increase and expiration of stimulus programs this will make the economy go into a recession and the unemployment rate will increase. In addition the Eurozone’s problems have not been solved and will continue to slowdown the world’s economy and provide source of funds to flee into Treasuries during the next crisis. Based on PE10 ratios the stock market is significantly overpriced and thus one should get into bonds and out of stocks. I expect this to be proven in October. I expect stocks to retest the March, 2009 lows in 2013. A lot of people will “get religion” and become converted to the church of bond investing when they realize they were hurt by the dotcom bubble, the 2008 bubble and the 2013 stock crash. This has happened in Japan since 1989 where they had a lot of phony bear market stock rallies which eventually resulted in their stock market going to new lows.
The best way to protect oneself from a Treasury bond market crash is be armed with a clear, calm understanding of economic subtleties so as to avoid panic selling.
I have written an article “Treasury Bond Prices Crash”.
Investors should seek independent financial advice.
Posted by Don Martin on Wed, Mar 14, 2012 @ 12:15 PM
Today's Treasury Bond Prices Crash – is this the end of the Bond Bull Market?
Today interest rates went up and bond prices went down. It maybe tempting to think the economy is returning to normal and thus interest rates will rise to “normal” levels.
The key is to understanding interest rates is not merely what Federal Reserve does, it is the invisible hand of the economy, and the key to understanding that is employment data.
An article in Barron’s today it is estimated that there is zero growth in first quarter in real domestic final demand which is similar to GDP, so this means jobs growth data is wrong for either of two reasons citied in the article.
Several economists have estimated that GDP will be 1.5% growth in the first quarter. This below the stall speed of 2.0%. When the economy is at this low rate of speed the economic airplane looses lift and crashes.
The economy is stalling out and may crash
A better article is that by Joseph Stiglitz in FT.com on March 12 “The U.S. labor market is still in shambles” where he estimates it will take 13 years until 2025 to fix unemployment. It takes a consistent annual rate of 4% growth for many years to solve the unemployment problem.
This growth rate rarely occurred for long periods of time, which implies the country could be stuck in a Japan-style prolonged period of low growth and high unemployment.
So a very low rate of interest is a correct judgment by the marketplace and thus the bond bull market is legitimate. However investors could irrationally chase after and expand the stock market bubble to irrational heights causing a temporary sell off of bonds as investors seek to buy stocks. The ten year Treasury could retest the 2.4% level. There is no way anyone can do a short term market timing regarding the movement from 2.0% to 2.4% yield for the ten year Treasury. But eventually the truth will come out and stocks will go down and then investors will pile into bonds. I feel confident that the Shiller PE10 is evidence that stocks are overpriced and will go down by 30%.
I have written an article “Employment report misleading”.
Investors should seek independent financial advice.
Posted by Don Martin on Mon, Mar 12, 2012 @ 07:06 PM
Is it time to buy stocks in Japan?
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Japan’s economy runs the risk of imploding with a huge, growing government deficit, bad demographics, a deflationary no growth economy. What is truly significant about investing in Japanese stocks is that publicly traded companies are run for the purpose of creating jobs and exports rather than creating corporate profits that justify higher stock prices. Corporations in Japan are run in a completely different way from the American way of profit maximization and transparent reliable accounting. This is something that U.S. investors don’t understand, so the usual financial benchmarks like PE ratios are often of little use in Japan. Because Japan’s stocks have a low PE ratio it may be tempting to buy stocks in Japan. People inquire about using the Shiller PE10 for Japan. The PE10 is a ten year inflation adjusted average of the PE ratio. Unfortunately simply to have a low PE ratio is not a reason to buy because of the risk of a “value trap”. This trap occurs when a weak company has a drop in stock price that makes its dividend look large in proportion to the stock price, but the drop in the stock price is because the company is going downhill, so it is unwise to buy the stock.
A lot of Yen have been printed in Japan but stocks did not go up
I have written an article “Japan’s Monetary Policy” which discusses the book “Princes of the Yen”. The book explains the weaknesses of Japanese stocks.
Investors should seek independent financial advice.
Posted by Don Martin on Fri, Mar 09, 2012 @ 01:29 PM
Today’s Employment Report is Misleading: What is the difference between “average” versus “actual”?
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Today’s unemployment report had a 225,000 increase in jobs. It appears to be bullish for stocks and inflation and bearish for bonds, but if we dig beneath the surface we see that if one adjusts for unusually warm winter (not the same adjustment made by the government that uses the average winter weather instead of actual weather) that the gain would have been only 90,000, which is less than the 125,000 needed to keep up with population growth. If we subtract 125,000 from 90,000 that is a negative 35,000 job change. The employment to population ratio increases by 0.1% without adjusting for the weather factor. If my theory is correct that means sales that occurred in January were “stolen” from purchases that would have occurred when weather was traditionally warmer in April and thus in April less sales may occur and thus less employment.
In addition on a real, inflation adjusted basis personal income has declined. The decline of “real” income means that workers have less to spend and thus will get a smaller amount of credit from the banking system which implies a lesser degree of an increase in the money supply. And a lesser increase or a decrease in the money supply means a lower than expected rate of inflation which is bullish for bonds.
Even if I’m wrong about inflation and employment the stock market and other risk assets such as REITs are still significantly overvalued and should be avoided. The Shiller PE10 is at 22 (a PE of roughly 15 is an indication of fair value, implying stocks are overpriced by 50%) and profit margins are likely to shrink, making the PE ratio even higher. Also looming tax increases in 10 months will result in a selloff this year to take advantage of the 15% tax rate. Presumably investors will not wait until the last moment to sell. Also Obama will win reelection and the Republicans will not obtain any net gain in Congress and this will trigger a selloff, which will begin shortly before the election as the opinion polls show him winning.
A lot more money needs to be "printed" to create inflation
A third of the quarterly increase in profits in the SP500 were due to Apple, which I believe is in an unsustainable period of excess profits that will eventually return to normal. When the market is propped up by a few outliers then the risk is great the market will decline once the outlier has burned out and returned to earth. JP Morgan economist Michael Feroli said in the Wall Street Journal today that the contrast between slowing GDP of 1.5% and rising employment of 3.5% is striking. A GDP of 1.5% means the economy is at stall speed and is in danger of stalling, especially once people wake up to the reality of huge 2013 tax increases that will weaken the economy. The increases will act as drag of 3 to 4% on the economy. The economy is going through a deleveraging phase where many people need to reduce purchases in order to pay off debt. When a drag of 3% is placed onto a weak economy then there will be a recession and increase in unemployment, leading to a new bull market in bonds. Remember what happened in Japan where interest rates went to very low rates? It may happen here, but in a moderate way.
I have written an article yesterday “Employment report to be bearish” where I estimated 175,000 net new jobs. But the special weather adjustment needed was not used in the report, so actually my estimate for new jobs was too high, on an adjusted basis and in reality employment was worse than I anticipated.
Investors should seek independent financial advice.
Posted by Don Martin on Thu, Mar 08, 2012 @ 04:08 PM
| Employment report to be confirmation of bear market |
Tomorrow’s employment report will show 175,000 net new jobs, which is really 50,000 after adjusting for population growth.
At that rate the unemployment rate will be reduced by an annualized rate of 0.5% a year, which implies only nine more years would be needed to reach “full employment” levels of 4.0%. So relax, be patient, by 2021 (only 13 years after the crash of 2008) the economy will be at full employment.
The most important monthly economic statistic in the world is the U.S.employment report and the most important component of that is the employment-to-population ratio which has not budged from 58.5% in a year and is way below the pre-2008 crash levels.
A huge amount of stimuus is needed to return to full employment
The economy has had extra sales during the unusually warm winter thus creating an artificial boom that will soon fade away.
The continued high rate of unemployment implies that bonds are fairly valued and not in a bubble. Stocks are overpriced. Since consumers lack adequate income to buy things sold by corporations and consumers have been trying to pay down debt they need to reduce their purchases even more than usual then coprorate earnings will decline.
Consumer credit increased by $19 Billion last month but after subtracting student loans it really decreased by $13 Billion. This was the biggest shrinkage in almost a year. This is important because inflation is caused by an increase in the money supply, particularly when the banking system increases loans to consumers and businesses who then use the new debt to put the new money into circulation. If consumer and business debts are shrinking then a deflation or lack of inflation will result and bond prices will go up and stocks will go down.
I wrote an article “Jobs report confirms bond bull market” and"Jobless report no threat to bears".
Investors should seek independent financial advice.
Posted by Don Martin on Fri, Mar 02, 2012 @ 02:16 PM
China is selling its dollars and investing elsewhere. Will the dollar collapse?
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The Chinese government has reduced its holding of dollars from 75% of reserves in 2006 to 65% in 2010 and it is now at 54% as of June, 2011, according to the Wall Street Journal.
It may be tempting to think that China will sell off all of its dollars and this will cause U.S. interest rates to rise. But as I have said before, the U.S. is the only deep, liquid, reliable market big enough to accommodate China’s $3 trillion reserves. The only possible exception to that is the Yen or Euro which has lost credibility and become very risky with a significant probability of a breakup. Japan’s economy is reaching a dangerous stage of ever increasing government debt and permanent stagnation so it would be risky to invest in Yen. Buying gold bullion or Swiss Francs is not possible because those markets are too small for China to invest in without disrupting the market. The Chinese government won’t buy U.S. stocks to diversify because Central Banks have a tradition of only owning foreign currency and precious metals, and there is the risk that a stock crash could occur. The dollar, in the form of U.S. Treasuries, is the only game in town, for gigantic investors like China. It is in China’s best interest to put its holdings into the dollar (in Treasuries) while camouflaging its intention by pretending to diversify elsewhere.
A lot of money is stake
The big picture is that China’s economy is very similar to the U.S. during the real estate and mortgage bubble of 1997-2007 and eventually it will end in a similar manner. When it does then China will sell foreign currency reserves to raise funds to rebuild the economy. This could hurt the dollar but a way for the U.S. Federal Reserve to reduce this problem would be for the Fed to give China a margin loan against China’s US. Treasury holdings and thus the Treasuries would not have to be sold. During a world recession the dollar usually goes up in value because it is a safe haven. Assuming we will soon go into a world recession because of the 2013 tax increases and because of China’s problems then the dollar will go up and the world’s Central Banks will send their reserve funds into the dollar.
I have written an article “Will the Dollar Collapse” and “Albert Edwards Warns of China’s Bubble Bursting”.
Investors should seek independent financial advice.
Posted by Don Martin on Thu, Mar 01, 2012 @ 03:02 PM
Best Performing Asset Class of 2011 was Long Term U.S. Treasuries
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Using Morningstar data for 2011 sorted by annual return the best performing asset class was Long Term Treasuries with a 32.9% return.
The median performing asset was long-short equity ranked 36 with a return of -2.8%. Of the 36 at or above median only seven were equities. They were: utilities, consumer cyclical, real estate, health, consumer defensive, large blend, large value.
Bonds clearly beat equities. For example the Barclays Aggregate had a 7.7% return beating all equity categories except for utilities. (Utilities have a bond-like nature due to regulatory constraints).
On a Sharpe ratio basis the highest equity category was consumer defensive ranked at # 19 (25th percentile below the top).
The worst asset class was China region equities with a -25% return.
My analysis excludes allocation funds and target maturity funds that have high bond allocations since they are not truly equity funds.
I combined all Morningstar Muni classes into “Nat Muni Long” to avoid using many micro asset classes of Munis. The Morningstar data uses mutual funds, so the actual asset classes with no management fees would have performed better because they had no fees.
Normally stocks are supposed to beat bonds but during a bear market bonds beat stocks. The risk is that stocks maybe overpriced by roughly 50% using the Shiller PE10 ratio, which means they need to drop 33% to roughly 900 points for the SP500 to reach fair value.
If this need for a bear market happens then bonds will continue to go up in value and beat stocks. If taxes on dividends rise 300% as scheduled in ten months then that is another reason to be bearish about stocks. Think about it. A 300% tax increase!!! Won't some investors sell their dividend paying stocks?
Investors will need a huge pile of money to pay new taxes.
I have written an article “Don’t lose money with investment valuation tools” and “Four investment tools you must know” and "tax increase can damage your 401k".
Investors should seek independent financial advice.