The Market Is Significantally Overvalued

In sum, the use of forward-looking operating earnings to determine the current value of the market and to estimate future market levels can be highly misleading.  Currently, the market is selling at 20.8 times our calculation of cyclically-smoothed reported earnings of $89, about 39% higher than the historical average of 15.  This is higher than at any point in the post-war period until 1996, and about at the same level reached at the top in  1929.  At present levels the market is discounting a highly optimistic outlook that leaves it increasingly vulnerable to the serious U.S. and global economic and political risks that can come to the fore at any time.

DYI Comments: NONE

Euro zone lending contraction compounds ECB headache

The ECB has cut interest rates to a record low, pumped extra liquidity into the banking system and announced a fresh government bond purchase program, but the measures have so far not managed to unclog lending to the real economy. 

Euro zone inflation is also running at only 0.8 percent - far below the ECB's target of just under 2 percent. 

Loans to the private sector fell by 2.2 percent in January from the same month a year earlier, ECB data released on Thursday showed. That compared to a contraction of 2.3 percent in December.

DYI Comments:  No doubt deflation is on its way for Central Europe and after that the U.S. as well.  U.S. Interest rates will remain low until the early 2020's arrive with our huge government liabilities [Social Security & Medicare] that will need to be paid.  At that time the inflation genie will come out of the bottle but until that time "the terrible teens" will be marked by mild deflation of -1.0% to -2.0%.  Making it very likely that the yield on 30yr Treasuries and 10yr Treasuries will be under 2% and 1% respectfully.

DYI

Retirement -- The New American Luxury

That luxury is Retirement. 

And only a select few will be able to enjoy the reality of a life-ending decade or two, spent relaxing and pursuing hobbies. Retirement is truly the last exclusive luxury, increasingly available to only a limited group of people - a true status symbol. 

The Impact of Demographics 

It's partly because of demographics. The huge baby boom generation is the first modern cohort to retire without pensions. The conversion from defined benefit plans to 40l(k) plans started in earnest in the early 1980s. Those retiring today have spent the past 30 years working and investing for their own retirement -- if they understood the importance of setting the money aside, and if they had the skills to make smart investment decisions

 Social Security benefits represent more than 90 percent of total income for 34.2 percent of Americans over age 65. And for about 64 percent of those over age 65, that monthly Social Security check -- roughly $2200 after deductions for Medicare -- represents at least 50 percent of their income.

 You owe it to yourself to take an independent look at where you are heading. This coming week is America Saves Week, so this is a perfect time to start. The place to start is a website created by the non-profit Employee Benefit Research Institute:www.ChoosetoSave.org. Once there, click on the green box for the "Ballpark Estimate" tool. (There is now an app that you can download to your iPad or smartphone.)

DYI comments: NONE 

Vanguard Fund Fee Cuts: Same Old Good News for Investors

But the trend is still out there. Vanguard Group this morning reported five ETFs and nearly two dozen mutual funds have cut their expense ratios. The cuts are small. When they’re a regular occurrence, though, as they are at Vanguard, the benefits to investors add up over time.

DYI Comments: LOVE IT....LOVE IT....LOVE IT....This is why I recommend Vanguard they continue to be the good guys.....

DYI 

More Gains Ahead For Gold

Major bottoms in any market or sector usually produce big rebounds and big gains for those who are correctly positioned. For some, the initial strong gains create trepidation that the market will experience a big correction or revert back to the previous bear market (which created the foundation for the big rebound). I’ve noticed this trepidation over the past few days from subscribers and other advisors preaching caution or hedging their recent gains. This is all well and fine but the evidence as well as history suggest not to worry because the gains will continue unabated over the intermediate term.

DYI Comments:  Gold and the mining companies stock prices have taken a severe market correction.  For those who need to rebalance this continues to be a good time to take those out sized gains from the general stock market and reinvest into gold mining shares.  Gold is pricey but still has more to run in DYI's judgment and the Dow/Gold Ratio historically will back that up.  Not until sentiment is so overwhelming gold and the miners will continue to have room to the upside.  Of course it will be volatile to say the least.

Market Sentiment

Smart Money buys aggressively!
Capitulation
Despondency--Short Term Bonds
Max-Pessimism *Market Bottoms*MMF
Depression
Hope
Relief *Market returns to Mean* 

Smart Money buys the Dips!
Optimism
Media Attention--Gold----You Are Here.
Enthusiasm

Smart Money - Sells the Rallies!
Thrill
Greed
Delusional---Long Term Bonds
Max-Optimism *Market Tops*--REITs
Denial of Problem--U.S. Stocks
Anxiety
Fear
Desperation

Smart Money Buys Aggressively!

Capitulation 


Fred's Intelligent Bear Site brought to you by Fred Filskov. Public, private, and commercial distribution of this material is permitted as long as a link to this site is attached.

DYI 

10 reasons you'll never be rich

Eliminate these bad habits and you'll be on the road to financial prosperity.

But how do you get ahead if you’re living paycheck to paycheck? The fact is, no matter how much you earn you could be creating your own barriers to financial success without even knowing it. Here are 10 things you might be doing that are preventing you from achieving prosperity. Change your ways and you could find yourself well on the way down the road to riches.

DYI Comments:  All good old fashioned tried and true advice.  For those who already know this info it is great read to keep you motivated.  For those who are new to basic budgeting skills this short 10 ideas is a good place to start.

DYI  

Why Drug Lords and Criminals Are So Risk-Averse

DYI Comments: An interesting read.

Student debt may hurt housing recovery by hampering first-time buyers

First-time buyers, the bedrock of the housing market, are not stepping up to fill the void. They have accounted for nearly a third of home purchases over the past year, well below the historical norm, industry figures show. The trend has alarmed some housing experts, who suspect that student loan debt is partly to blame. That debt has tripled from a decade earlier, to more than $1 trillion, while wages for young college graduates have dropped. 

The fear is that many young adults can no longer save for a down payment or qualify for a mortgage, impeding the housing market and the overall economy, which relies heavily on the housing sector for growth, regulators and mortgage industry experts said. 

“This is a huge issue for us,” said David H. Stevens, chief executive of the Mortgage Bankers Association. “Student debt trumps all other consumer debt. It’s going to have an extraordinary dampening effect on young peoples’ ability to borrow for a home, and that’s going to impact the housing market and the economy at large.”

DYI Comments:  It is no doubt that a portion of household formation is being hampered by the escalating cost of Universities.  The student loan program that was started with the best of intentions has now driven the increases in educational costs at a rate far faster than health care.  This of course is due to an ever increasing amount of educational loans pushing up all costs for a college degree.  When the piper has to be paid for most young people the student loan IS the house payment.  Until that is paid purchasing a house is out of the question.

DYI

Senior, 64: 'I'm never going to be able to retire.'

DYI Comments:  If you are the younger generation please take heed to this video.  You must start now so that in your later years "YOU" have the control over your options as to retiring or to continue working.  The "CONTROL" will be in your hands.

DYI

France deflation fears as prices fall

French prices fell 0.6pc in January from a month earlier

French core inflation fell sharply last month, heightening concerns of a deflation trap and putting more pressure on the European Central Bank to respond with monetary stimulus.

French prices fell 0.6pc in January from a month earlier, according to French statistics office INSEE.

DYI Comments:  Price rises are slowing up world wide and it would be of no surprise if the U.S. experiences mild deflation in the -1% or -2% range.  This would drop interest rates further especially for U.S. Treasury debt.  Not until early into the next decade will the inflation genie come out of the bottle due to all of the liabilities for Social Security and Medicare.  So until then low interest rates will prevail.

DYI

Soros doubles a bearish bet on the S&P 500, to the tune of $1.3 billion

Within Friday’s 13F filings news was the revelation that the firm, founded by legendary investor George Soros, increased a put position on the S&P 500 ETF   SPY  by a whopping 154% in the fourth quarter, compared with the third. (A put or short position basically gives the owner the right to sell a security at a set price for a limited time, and in making such a bet, an investor generally believes the security is going to decline.)

DYI Comments:  NONE

If this market continues to ride its bullish high expect to see more and more articles such as this one.

3 Reasons To Be 100 Percent Invested in Stocks

If I get a bad 20 years, I think I'll still earn more than zero. If I get a good 20 years, I'd expect it would average 12 percent or more a year. An average annual return of somewhere between zero and 12 percent is what I expect. 

Why so broad a range? Because I have no control over what market conditions the next 20 years will deliver. All I have control over is how I invest. And I know if I kept all of my money in safe choices, it wouldn't have a chance of earning 12 percent a year, although it would earn more than zero. 

I also expect that around every eight to 12 months, my accounts will drop about 10 to 15 percent in value. Why do I expect that? That's about how often market corrections occur. In addition, I expect that a few times over the next 20 years, I might watch my account values drop by 30 to 50 percent. Like market corrections, bear markets are not rare.

DYI Comments:  When markets become overvalued expect to see more and more articles such as these with 100% invested bullish positions.  This article of course is written for mass consumption which glosses over the ups and more importantly the downs of the market.  The average saver/investor can tolerate no more than a 20% decline from peak to trough (studies have shown).  Average Joe ends up buying high and selling low by altering his asset allocation to larger amounts of stock when the market is riding high and lessens his exposure to stocks after the decline.  Average Joe becomes wrong way Charlie and ends up with sub par returns.

If this market continues to ride its bullish high expect to see more and more articles such as this one.

DYI  

Watch for companies to claim 'Jack Frost ate our profits'

Indeed, if history is any guide, CEOs will still be moaning about the recent cold snap well into spring, when they report first-quarter earnings. Why? Because the coldest winter in a quarter century provides them with a handy -- and reasonably plausible -- excuse for any results that fall short of expectations. 

For some companies, such as those in transport-dependent businesses, the explanations may be valid. For others, it may well be a case of the (chilly) dog ate their homework.

DYI Comments:  NONE 

Chart of the Day: Stocks vs Bonds

Either way, the risk/reward here seems to be in favor of the bond bulls (stock market bears) by a long shot. And at the end of the day isn’t that all that matters? Finding the best risk/reward opportunities?

DYI Comments:  Go to the above link for his web site his chart spells out to be bullish on bonds and bearish on stocks.  DYI agree's.

DYI 

Charts O’ the Day: Emerging Markets on Sale?

DYI Comments: Excellent chart but you are on your own.

DYI

Will China shake the world again?

Here is the thing: when a big economy is investing at that pace to generate wealth and jobs, it is a racing certainty that much of it will never generate an economic return, that the investment is way beyond what rational decision-making would have produced.

That is why in China, there are vast residential developments and even a whole city where the lights are never on and why there are gleaming motorways barely tickled by traffic. 

But what makes much of the spending and investment toxic is the way it was financed: there has been an explosion of lending. China's debts as a share of GDP have been rising at a very rapid rate of around 15% of GDP, or national output, annually and have increased since 2008 from around 125% of GDP to 200%.

DYI Comments:  Expect a depression for Australia when China goes bust as they will no longer be sending major amounts of commodities to China.  This will also put a crimp into Canada as well which will burst their residential real estate bubble dropping prices 40% to 60% along with a major recession.  The U.S. as well will be affected with a recession as world trade will dry up for at least the next 5 to 7 years.  Deflation will reign supreme along with very low interest rates pushing down the yield of the 30yr and 10yr bond yields under 2% and 1% respectfully.

There are no exceptions to the lessons of financial history: lending at that rate leads to debtors unable to meet their obligations, and to large losses for creditors; the question is not whether this will happen but when, and on what scale. 

Which is why we've seen a couple of episodes of stress and tension in China's banking markets over the past nine months, as a possible augury of worse to come.

DYI Comments:  When looking for a pin to burst America's stock and junk bond market China is moving up to the head of the class.  DYI will be looking at this closely.

DYI

An Expanding Economy Doesn’t Guarantee a Bear-Free Market $DJIA
By Christopher Mistal

Using either bear market definition, more than half of all bear markets over the past 114 years have occurred without a recession or began more than a year before a recession.

DYI Comments:  Christopher Mistal of Stock Traders Almanac has two very great graphs showing market declines and the economy.  It really does bear out (sorry for the pun) a little more than half of bear markets have occurred without a recession.  Of course a nasty recession on top of a bear market makes everything worse especially if you are out of work.

DYI 

The Crushingly Expensive Mistake Killing Your Retirement

401(k) fees are costing you hundreds of thousands of dollars over your lifetime.

The sad fact is that returns aren't certain, but fees are. Now, maybe everything will go according to plan, and your 401(k) will be partying like it's 1999. Maybe the 1 percent—or more—that you're paying in fees will actually buy you market-beating returns. But probably not. You can see this in the chart to the left fromVanguard. It shows the percentage of actively managed funds that have underperformed index funds over the short and longer hauls, net of fees. Which is to say, most of them. It's hard enough for funds to beat their benchmarks over just one to three-year periods. But that gets damn near impossible the longer you go. Once you account for survivorship bias—that bad funds go bust, and disappear from the sample—almost 80 percent of actively managed funds don't beat simple index funds over 10 to 15-year periods.

DYI Comments:  It is no accident that this blog uses Vanguard as its proxy for our aggressive investment model.  Costs are a real killer for returns over the long haul and I advocate using index funds whenever possible as the first choice as most managers under perform these indexes. "The only way to "Beat an Index" is to invest in a different and significantly greater - undervalued index." 

DYI 

Generation X And The New Frugality

Pundits keep offering theories about when America will return to pre-recession spending, GDP growth, and employment rates. But if Xers continue to work and spend according to a New Frugality ethos, these milestones will remain elusive. LFP could easily remain plateaued at today’s low rate until late-wave Xers begin to retire and a new generation—the Millennials—energize the workforce with confidence, optimism, and fresh ambition.

DYI Comments:  The prime spending age is from 35 to 54 years.  Leading edge Millennial's are now 32 years old and the youngest are 10 making a case for a long spending wave once they attain prime spending age in sufficient numbers.  If Neil Howe is correct we would expect the economy to improve marginally in the next 3 years(2017) and markedly by the early 2020's as greater numbers of Millennial's arrive at their prime spending age.  Interesting to say the least.

DYI  

Beware of a Hot IPO Schedule Especially Large Offerings they are associated with Market Tops

Alibaba’s Average Valuation Reaches $153 Billion on Earnings

Analysts expect Alibaba to hold the biggest IPO since Facebook Inc. (FB), now valued at $159.4 billion, as it taps into the nation’s 618 million Internet users and pushes into mobile games and instant messaging. Goldman Sachs Group Inc. valued Alibaba at $150 billion in a Jan. 29 report, while Macquarie Group Ltd. said the Hangzhou-based company may be worth as much as $200 billion.

DYI Comments:  IPO's of this size are analogous with market tops.  In order to get a deal done of this size a giddy over optimistic market is needed to open institutional investors wallets world wide.

DYI

Japan's quarterly growth disappoints ahead of sales tax hike

The latest figures highlight questions about the sustainability of Japan's economic recovery, and whether the government's policy of 'Abenomics' is working. 

"The disappointing GDP result is a reflection of the limit of Abenomics," Takuji Okubo, chief economist at Japan Macro Advisors in Tokyo said.

DYI Comments:  Japan and the world's economy is slowing down.  The question is is it enough to cause a world wide recession?  Normally I would say yes but with today's central bankers who are willing to print unlimited amounts of money they may be able to postpone (kick the can down the road) an upcoming recession.  Eventually the central banks will hit the wall with the old adage of diminishing returns to the point of no amount money printing will stop the collapse.

DYI   

Topping Patterns and the Proper Cause for Optimism 

John P. Hussman, Ph.D.

The Proper Cause for Optimism

To the extent that we are concerned and defensive about the prospect for steep equity market losses over the completion of this market cycle, we are also encouraged and optimistic about the prospect for strong investment opportunities that we expect to emerge as a result. Similar optimism for improved investment opportunities was certainly vindicated following periods that shared features like the present – 1929, 1972-73, 1987, 2000 and 2007, not to mention many less extreme instances of overvalued, overbought, overbullish conditions.

We currently estimate prospective nominal total returns for the S&P 500 of just 2.4% annually over the coming decade. With the 10-year Treasury yield at 2.8% and short-term yields expected to remain depressed for years, we expect the 10-year return from an equally-weighted portfolio of stocks, bonds, and cash to average only about 2% annually from current prices. Our optimism that better opportunities will emerge over the completion of the present market cycle is unbowed. That optimism demands that investors refuse to lock-in the prospect of dismal long-term returns, or surrender in the face of a deafening speculative refrain that has lured others into the abyss throughout history.

Meanwhile, we remain encouraged. Those who follow a historically-informed, value-conscious, and risk-managed investment discipline should be among the most optimistic investors in the financial markets. It’s just that this optimism is about future opportunities rather than present ones.

DYI Comments:  The Great Wait continues with optimism that future values will present themselves delivering higher returns.  For the real [not closet speculator] long term investor this is a "blink of eye" in time.  When the market corrects DYI's sentiment indicators will improve as the crowd losses its optimistic tone and is replaced by a pessimistic one.  In other words a bear market has arrived for the value players to scoop up excellent values along with higher future returns.

Market Sentiment

Smart Money buys aggressively!
Capitulation
Despondency--Short Term Bonds
Max-Pessimism *Market Bottoms*MMF
Depression
Hope
Relief *Market returns to Mean* 

Smart Money buys the Dips!
Optimism
Media Attention--Gold
Enthusiasm

Smart Money - Sells the Rallies!
Thrill
Greed
Delusional---Long Term Bonds
Max-Optimism *Market Tops*--REITs
Denial of Problem--U.S. Stocks
Anxiety
Fear
Desperation

Smart Money Buys Aggressively!
Capitulation

The only reason that stocks are one notch below max-optimism for this is a secular chart not cyclical.  The top spot of max-optimism was reserved for the year 2000 the secular top for stocks.  When will stocks bottom out on a secular basis?  I have no idea time wise but DYI will know when we have arrived for the crowd will be so pessimistic stocks will no longer be held in disdain as they will simply be ignored as an asset category.  When that day arrives don't be surprised that the estimated 10yr average annual returns are north of 15% and possible 20%.

DYI

AGGRESSIVE PORTFOLIO - ACTIVE ALLOCATION - 02/1/14

Active Allocation Bands 10% to 60%

45% - Cash -Short Term Bond Index - VGPMX

25% -Gold- Precious Metals & Mining - VBIRX

20% -Lt. Bonds- Long Term Bond Index - VBLTX

10% -Stocks- Equity Income Fund - VEIPX

[See Disclaimer]  

Richard Russell - Why The Collapse In The US Will Be Terrifying

With continued chaos and uncertainty in global markets, today KWN is publishing an incredibly powerful piece that was written by a 60-year market veteran.  The Godfather of newsletter writers, Richard Russell, is warning that what is left of the middle class in America is imploding as the world remains mired in a depression and the US government continues to lie to its people.  He also warned that the once massive U.S. gold hoard is now gone.

DYI Comments:  Richard Russell is always interesting to read and the article is of no exception.  What he is saying that gold and the mining companies are buy.  DYI agree's.

DYI 

ECRI Recession Watch: Weekly Update

The referenced chart (at right) shows a conspicuous drop-off since the end of November. The trend reversal is essentially confirmed by my own work with the Big Four Economic Indicators. Optimists will point out that severe weather has impacted the economy over the past two months and that the upward trend will soon return. It will indeed be important to see improvement in key economic indicators in the next few months: Nonfarm Employment, Retail Sales and Industrial Production.

DYI Comments:  Once again ECRI indicators are showing a slowing economy on the verge of recession. Will the Federal Reserve pull another rabbit out of the hat when the indicators were all poised for a recession that was thwarted by operation twist?  There will come a time when the law of diminishing returns will come into play when  no amount of money printing takes place the economy will fall into recession.

The U.S. stock and junk bond markets are in a bubble poised for poor returns going forward with a market correction baked into the cake.  Add on a recession we will see major fireworks to the downside.

DYI

David Stockman - This Financial Collapse Will Be Catastrophic

DYI Comments:  Well worth the read Stockman tell's it like it is...DYI's forecast of 45% to 60% decline for the S&P 500 from peak to trough still stands.

DYI

Fred's Intelligent Bear Site

Fred's Intelligent Bear Site brought to you by Fred Filskov. Public, private, and commercial distribution of this material is permitted as long as a link to this site is attached

The inflation adjusted chart shows the true nature of the U.S. stock market.

Note the following about this chart: 

- Dividends are excluded, so the chart only shows capital gains. The dividend yield of the S&P is running near 2%. (IndexArb.com) 

- The inflation rate used on the chart is the government CPI number until 1993. Beginning 1994, I have added 2.7% per year to the government CPI number. This should better reflect the true inflation rate since the government number has not been accurate since around 1993. The added 2.7% corrects the geometric weighting formula used by the government to calculate CPI. The government does other adjustments that constitute another 4% reduction in the inflation figure, but I will assume those adjustments are valid. For more information on inflation, see the following articles: http://www.shadowstats.com/article/56 , http://www.safehaven.com/article-8848.htm 

On the chart, the long term trend line in green shows an average return of 1.9% per year. If you factor in the long term 15% capital gains tax, the return is even worse. Since capital gains tax is not adjusted for inflation, the average tax must be based on the 5.4% trend of the non inflation adjusted chart, so 15% of 5.4% is 0.8% tax. Therefore, your 1.9% return is reduced to 1.1% after taxes. The Wall Street shills do not want you to know that this meager amount of capital gains is all you should logically expect from a long term general stock market investment. 

The Dow has historically moved within well defined channel. The boundaries of the channel have been touched only 4 times since 1910. The top of the channel was last touched in 2000. 

They say "the market always goes up in the long term," but at an average return of 1.9% per year, it can take many years to recover from a large decline. The peak in 1929 was not ultimately exceeded until 1992. When the market touched the bottom of the channel in 1982, its value was about equal to the value at the beginning of the chart in 1910. 

Most bubbles eventually correct back to where they began. The bubble that began in 1922 gave back all its gains by 1933, and the bull market that started in 1949 gave back almost everything by 1982. The bubble that ended in 2000 has already corrected back to the 1995 level. The correction could easily continue to the 1988 level of 6000. If the Dow hits the bottom of the channel, it would go to about 5000. Keep in mind that these are values in today's Dollars, so the future values after inflation will be higher. 

DYI Comments:  Another reason why our model portfolio has stocks at it's lowest level of 10%.  Once again the Fed's have blown a bubble that is in the process of bursting.

DYI

Mining Stocks, Chinese Demand, and a Potential Golden Surprise

Over the past couple of days, the performance of the gold and silver mining stocks deserves more attention than it is getting. As many of us argued, the collapse in mining stocks into late 2013 was nothing more than professional liquidation-- meaning players who should have known better simply giving up and moving on to some other, hotter, investment. I'm sure many of these managers talked themselves into believing that gold and silver were heading far lower than in they in fact were, and I know that other asset managers had had enough of cost overruns and waste on the part of mining CEOs. Couple this with how loathed the mining shares were among gold and silver bullion investors (and I have the emails to prove it), and I felt you had all the ingredients for a great contrarian trade.

DYI Comments:  I completely agree now is the time to dollar cost average into your favorite gold mining mutual fund.  Prices are way off and still have further to run on the upside despite the Dow/Gold ratio being a bit pricey at 12.30 to 1.  Historically as the money printing gets into high gear to pay for Social Security and Medicare gold the mining shares will once again take off to the upside. Dollar cost average in and hang on for a wild ride.

Market Sentiment

Smart Money buys aggressively!
Capitulation
Despondency--Short Term Bonds
Max-Pessimism *Market Bottoms*MMF
Depression
Hope
Relief *Market returns to Mean* 

Smart Money buys the Dips!
Optimism
Media Attention--Gold----YOU ARE HERE!
Enthusiasm

Smart Money - Sells the Rallies!
Thrill
Greed
Delusional---Long Term Bonds
Max-Optimism *Market Tops*--REITs
Denial of Problem--U.S. Stocks
Anxiety
Fear
Desperation

Smart Money Buys Aggressively!
Capitulation

AGGRESSIVE PORTFOLIO - ACTIVE ALLOCATION - 02/1/14

Active Allocation Bands 10% to 60%

45% - Cash -Short Term Bond Index - VGPMX

25% -Gold- Precious Metals & Mining - VBIRX

20% -Lt. Bonds- Long Term Bond Index - VBLTX

10% -Stocks- Equity Income Fund - VEIPX

[See Disclaimer]

DYI

Price Slowdown for Cars, Baby Clothes Raises Fed Concerns

“Pricing is being driven by something other than weakness” in demand, said Sam Coffin, a UBS economist in Stamford, Connecticut. Influences on the supply side, such as automakers discounting to gain market share or overseas apparel makers cutting costs, were responsible for about 75 percent of the slowdown in inflation in four categories -- financial services, motor vehicles, clothing and health care, he said in a study published in May. 

The case for tame inflation ahead is buttressed by stabilizing housing costs, one of the few forces that was underpinning price increases in recent years. Not counting housing, inflation would have decelerated another 0.4 percentage point in the two years ended in December, according to data compiled by Bloomberg. 

Slowing prices in the U.S. may give the Fed room to maintain historically low borrowing costs even as the jobless rate races down to a 6.5 percent threshold that policy makers have said must be reached before they will consider raising the target interest rate. 

The Federal Open Market Committee said Jan. 29 it will cut monthly bond-buying by $10 billion to $65 billion, citing labor market improvement and a pickup in growth. The trimming keeps the Fed on pace to end its unprecedented asset purchase program by the end of the year.

DYI Comments:  With looming deflation on the horizon interest rates will drop add on a stock market that is poised for a smash this will have a double effect of lowering rates.  My forecast is for the 10yr and 30yr bond yields to drop below 1% and 2% respectfully.  Deflation and a flight to quality as this market heads south will drive rates lower.

DYI    

Numbers Don't Lie But Statistics Do...Be Careful When Looking at Yearly Returns....

Don't be fooled by a trick of the calendar

When you're making investment decisions, it's easy to place too much importance on past performance. Anything that happened on Wall Street yesterday—or last year, or a decade ago—needs to be taken with a grain of salt, because returns from any particular period are an unreliable tool for gauging the future. 

For example, the 2008 global financial crisis may seem like it just happened yesterday (and, granted, we're still living with the repercussions today), but it's more than half a decade in the past. As a result, the five-year average annual return for the broad U.S. stock market, as measured by the Russell 3000 Index, just made a startling bounce: from 2.04% for the period ended December 31, 2012, to 18.71% for the period ended December 31, 2013. 

In other words, at the stroke of midnight this past New Year's Eve, five-year average annual performance for U.S. stocks jumped almost 17%. So, if you're only looking at what happened on Wall Street over the previous five years, the fact that those grim numbers from 2008—when U.S. equities plunged more than 37%—have dropped out of the equation makes things look much better than they would with a slightly longer-term perspective.

DYI Comments:  The best way to measure past performance is from peak to peak or trough to trough returns over market cycles.  This can be exampled by the 1987 crash. As time passed beyond 1987 for each 3, 5, and 10 year reporting period many mutual fund companies had parties celebrating the falling off of those numbers.  This was/is especially true among their sales force.

DYI

Boomers Turn On, Tune In, Drop Out of U.S. Labor Force

In the two years ended 2013, 80 percent of the decrease in labor force participation was due to retirement, according to calculations by Shigeru Fujita, a senior economist at the Federal Reserve Bank of Philadelphia. And while the number of discouraged workers rose sharply during and after the recession, the group’s ranks have been roughly unchanged since 2011.

 





DYI Comments:

If Boomer's are leaving the workforce in such mass I would expect the 25 to 54 year old participation rate to have some lift to it.  It appears from the last graph of only one year in length that unemployment is bouncing off the bottom.  This economy [and stock market] is very long in the tooth over the next year or two I would expect a recession. With the Boomer's exiting the work force yearly [around 3.5 million] this should mitigate any upcoming recession.

 

As boomers exit work force, who will take over?

Knell Lee, 24, is a math and actuarial science graduate of the University of Minnesota who was hired as a policy auditor at SFM Mutual Insurance early this year. 

He joined the ranks of thousands of Minnesotans who have started or returned to work this year as the state’s unemployment rate dropped to 4.6 percent and the state recovered all the jobs lost during the Great Recession. 

The 78 million baby boomers born in the United States between 1946 and 1964 dwarf Generation X, born 1965-1981, and Generation Y, the 18- to 30- year-old crowd.

DYI Comments: Within six years from now almost [close enough] half of the Boomer's will be out of the work force this will create the roaring 20's that will be marked by high taxes, high inflation, and a LABOR SHORTAGE.  The high taxes and high inflation will be due to the cost of  Medicare & Social Security.  The labor shortage will happen for the Boomer's will continue to consume products and services [at a lesser rate] but do to their massive size creating an employment boom.  Once the 2030's arrive Boomer's will begin to pass away in large numbers that will reduce inflation and ending the labor shortage.

DYI  

  

Jim Rogers: Serious problems in emerging markets ‘going to get worse’

Corruption costs the EU roughly $120 billion a year, around 1 percent of economic output. Where is the corruption and where is it squeaky clean? Erin Ade reports. Famed investor and author Jim Rogers is a bull on China and Asia. But right now the emerging markets are a big concern. Jim also gives his view on the US, European, Japanese and Chinese economies – and the Gold Standard. In the Big Deal, Erin and Edward Harrison discuss money. What exactly does the pyramid on the back of a dollar bill symbolize? And where does a pound or a dollar really derive its value?

DYI Comments:  This is a link to the video of Jim Rogers who is always very informative and entertaining at the same time.  

A Cyclical Market Downtrend Is Underway

According to the Fed’s long-term plan, quantitative easing (QE) was to remain in effect until the economy was strong enough to grow on its own.  This was the so-called anticipated “handoff” whereby a strengthening economy would take over from QE as the catalyst for growth.  The problem is that it is not quite happening that way.  With QE encountering diminishing results along with increasing unwanted side effects, it is gradually being withdrawn at a time when it appears that the economy has still not broken out of its approximate 2% growth trend.  In addition, the stock market is facing numerous other headwinds including high valuations, excessively bullish sentiment, stagnant economies in Europe, a slowdown in China, and currency problems in many emerging markets.  All in all, this does not bode well for the stock market in the year ahead. 

DYI Comments: If this market is now in a downtrend then the Great Wait is over.  However, the Federal Reserve may attempt to negate this from happening by more QE but it would only hold off the inevitable.

DYI

Sir John Templeton: The Last Yankee

It wasn’t long before Templeton Growth really started to pay dividends. Galbraith’s skillful management and Templeton’s own vision made their funds top performers: $10,000 invested with them in 1954 would have grown to $2 million in 1992, when Templeton sold his stake to the Franklin Group—an annualized average return of 14.5%. Money magazine called Templeton “arguably the greatest global stock picker of the century.”

DYI Comments:  Sir John Templeton is no longer with us but his memory lives on in this heart warming article about a truly wonderful man who was more than a successful money manager.

John Templeton's idea of buying during the point of maximum pessimism [gold mining shares] and selling when maximum optimism [stocks complacency is the new speculation] prevails.  My attempt is that of a contrarian to imitate the great master.

DYI 

Financial pointers for the 99%

Firms hire experts to teach workers financial planning

When Liz Davidson told friends 15 years ago that she was quitting her job running a hedge fund, they thought she was misguided. 

Then Davidson revealed her new career plan, and they thought she was really nuts. 

She launched a company that gives financial guidance to average Americans through their jobs. Employers hire Financial Finesse Inc. to provide group workshops and one-on-one counseling to workers on topics such as debt management, college savings and elder care.

DYI Comments:  For those of you who don't have the services of a  financial planning firm Dave Ramsey's SEVEN BABY STEPS when completed will put you miles ahead in the money game.  They are simple to understand but requires only discipline [a real desire to improve] but technical knowledge is only minimal. Hence 90% of our adult population if they so desired [big if ] could achieve financial independence.

Don't blame everything on this economic downturn most of the time it is our overspending and the use of credit cards that get us into trouble [along with student loans].

I'll give a plug for old Dave, check out his SEVEN BABY STEPS.

DYI   

China's gold demand tops 1,000 tonnes for first time

BEIJING/SINGAPORE (Reuters) - China's gold consumption jumped 41 percent in 2013 to exceed 1,000 tonnes for the first time, an industry body said on Monday, as a sharp slide in prices attracted buyers for jewellery and bullion. 

The demand surge has helped China become the No. 1 gold consumer and should support prices, which took a hit last year from expectations of a tapering of commodities-friendly economic stimulus by the U.S. Federal Reserve and a drop in demand in the other major buyer India.

DYI Comment: NONE 

Double Trouble 

John P. Hussman, Ph.D.

On the basis of a broad range of valuation measures that are tightly (nearly 90%) correlated with actual subsequent S&P 500 total returns over the following decade, we estimate that stock prices are about double the level that would generate historically adequate long-term returns. The chart below presents estimated versus actual 10-year S&P 500 total returns using a variety of methods that I’ve detailed in prior weekly comments, and including a few additional ones for good measure. We presently estimate 10-year S&P 500 nominal total returns of only about 2.7% annually over the coming decade, with negative returns on all horizons shorter than about 7 years. 

Needless to say, Wall Street wishes investors to believe that valuations are just fine, and one can hardly watch CNBC for 10 minutes without some reference to stocks being “cheap on forward earnings.” There are clearly useful ways to use forward operating earnings to obtain useful estimates of prospective equity returns (as shown above). But investors should be aware of the profound inaccuracy of valuation estimates based on unadjusted price/forward operating earnings and the “Fed Model” (which largely underlie the “equity risk premium” claims of Greenspan, Bernanke, and Yellen). The fact is that the errors of those models can be predicted in advance from the level of profit margins at the time of the forecast. The higher the level of profit margins, the more these models tend to overestimate future returns, compared with how stocks actually perform in the following years. The glib confidence placed in these models in 2000 and 2007 is enjoying a full – and likely tragic – revival at present.

DYI Comments:  John Hussman should have renamed his article "Don't Get Sucked In!" Watching CNBC along with Fox or Bloomberg one would think that stocks are so low that the U.S. market is at a secular bottom.  Nothing could be further from the truth.  When it comes to John's 10 year nominal return of 2.7% annually he is the optimist.  DYI's estimation is 1.3%.  That cuts his estimated return by 50%. Needless to say future returns will be poor at best and they will be one heck of a roller coaster ride.  With a Shiller PE10 at 25 times earnings downside risk is huge with a potential decline from peak to trough of 45% to 60%.

DYI's portfolio still stands with only 10% in stocks [smallest amount by model] this will not change until improved valuation avail themselves.

Also I would like to remind you that Gold mining stocks have been severely beaten down in price.  This is an excellent time to dollar cost average into your favorite mutual fund bringing your asset allocation up to our model of no higher than 25%.

AGGRESSIVE PORTFOLIO - ACTIVE ALLOCATION - 02/1/14

Active Allocation Bands 10% to 60%

45% - Cash -Short Term Bond Index - VGPMX

25% -Gold- Precious Metals & Mining - VBIRX

20% -Lt. Bonds- Long Term Bond Index - VBLTX

10% -Stocks- Equity Income Fund - VEIPX

[See Disclaimer]

DYI

BAML: The Taper Continues

This morning’s job number was not bad enough to forestall the taper, and the weakness of January was likely transitory according to the Bank of America Merrill Lynch US Economics team (emphasis mine)…

 On balance, this does not change our view for Fed policy or our optimistic outlook for the economy this year. We are penciling in a slowdown in growth in 1Q to 2.0%, in part due to poor weather conditions, but expect a rebound in 2Q to 3.3%. We think the Fed will look past the recent soft jobs data, especially in the context of strength elsewhere in the economy. Other indicators which are less sensitive to weather, such as consumer and business surveys, have continued to improve. We expect Fed Chair Yellen to stay the course at her testimony next week, reiterating her view that the economy is healing, allowing for a measured pace of tapering.

DYI Comments: NONE

Warning: Stocks Will Collapse by 50% in 2014

“We are in a gigantic financial asset bubble,” warns Swiss adviser and fund manager Marc Faber. “It could burst any day.”  

Faber doesn’t hesitate to put the blame squarely on President Obama’s big government policies and the Federal Reserve’s risky low-rate policies, which, he says, “penalize the income earners, the savers who save, your parents — why should your parents be forced to speculate in stocks and in real estate and everything under the sun?” 

Billion-dollar investor Warren Buffett is rumored to be preparing for a crash as well. The “Warren Buffett Indicator,” also known as the “Total-Market-Cap to GDP Ratio,” is breaching sell-alert status and a collapse may happen at any moment.

 DYI Comments: NONE