John P. Hussman, Ph.D.
After little more than a year of legitimate revaluation of equities following the 2007-2009 credit crisis, and more than three years of what will likely turn out to be wholly impermanent – if dazzling – Fed-induced speculation, investors have again pushed the stone to the top of the mountain. Despite the devastating losses of half the market’s value in 2000-2002 and 2007-2009, investors experience no fear – no suffering as a result of present market extremes. There is no suffering because at every step, as Camus might have observed, “the hope of succeeding” upholds them.
As we discussed several months ago, that hope of succeeding rests on what economist J.K. Galbraith called “the extreme brevity of the financial memory.” Part of that brevity rests on ignoring the forest for the trees, and failing to consider movements further up the mountain in the context of how far the stone typically falls once it gets loose. It bears repeating that the average, run-of-the-mill bear market decline wipes out more than half of the preceding bull market advance, making the April 2010 S&P 500 level in the 1200’s a fairly pedestrian expectation for the index over the completion of the current market cycle. A decline of that extent wouldn’t bring valuations close to historical norms, and certainly not to levels that would historically represent “undervaluation.” But consider that a baseline expectation, and don’t be particularly surprised if the market loses closer to 38% - which is the average cyclical bear market loss during a secular bear market period. A market loss of about 50% would put historically reliable valuation metrics at their historical norms, though short-term rates near zero would seem inconsistent with a move to historically normal valuations with typical (~10% annual) expected total returns, absent other disruptions.
DYI Comments: Whatever the decline whether it is 40% or 50% (or possible more) it is NOT the time to be buying U.S. stocks. DYI's Earning Yield Coverage Ratio is below 1.00 letting investor know that despite the Fed's sub atomic low interest rates long term investment grade corporate bonds over the next ten years will out perform stocks.
Ben Graham's Corner
Margin of Safety!
Central Concept of Investment for the purchase of Common Stocks.
"The danger to investors lies in concentrating their purchases in the upper levels of the market..."
Stocks compared to bonds:
Earnings Yield Coverage Ratio - [EYC Ratio]
EYC Ratio = [ (1/PE10) x 100] / Bond Rate
2.0 plus: Safe for large lump sums & DCA
1.5 plus: Safe for DCA
1.49 or less: Mid-Point - Hold stocks and purchase bonds.
1.00 or less: Sell stocks - rebalance portfolio - Re-think stock/bond allocation.
Current EYC Ratio: 0.90
As of 05-1-14
PE10 as report by Multpl.com
Bond Rate is the Moody's Seasoned Aaa Corporate bond rate as reported by the St. Louis Federal Reserve.
DCA is Dollar Cost Averaging.
Cash [short term bonds], long term bonds, gold are currently a buy. Stocks are a sell and for those with the temperament a modest short position of 5% or 10% is warranted.
No comments:
Post a Comment