The equity rally is a function of the collective acts of monetary authorities pushing investors into stocks. Ambrose Evans-Pritchard

Global equity melt-up in full swing even if investors hate themselves

There is no longer much doubt. We are in the midst of a late-cycle blow-off in global equity markets. 

Bank of America’s monthly survey of world fund-managers shows that investors have their second highest allocation to stock markets in thirteen years at 61pc. It is lead by shares in technology, energy, and even banks, and is stretched to a net 35pc overweight in Europe. “The summer 'melt-up' is likely to be followed by an autumn correction,” it said.

 Investors seem determined to keep dancing until the music actually stops, even though the largest majority since the height of the dotcom bubble think equities are overvalued. They are chasing momentum. It is irresistible to try to eke a little more out of the rally.

 This dovetails with warnings from the Bank for International Settlements that markets are now “euphoric”, with the fear gauge (volatility) almost switched off, and the Tobin's Q measure of the S&P 500 flashing more emphatic overvaluation warnings than in 2007. 

We are not necessary at the end of this surge. Cash holding are still very high at 4.5pc, so funds still have a little more money to throw at stocks. 

High cash levels are theoretically a contrarian buy signal, while anything under 3.5pc is a sell signal, but as you can see it was a counter-indicator in 2007. The proportion in cash peaked at the top of boom. It offered false comfort.

 So in a sense, the equity rally is a function of the collective acts of monetary authorities pushing investors into stocks. This of course is why the BIS is in despair. “Overall, it is hard to avoid the sense of a puzzling disconnect between the markets’ buoyancy and underlying economic developments globally,” it said. 

Just wait until the Fed tightens in earnest.

DYI

UAE’s space programme could inspire innovation

DUBAI // The UAE’s space programme could inspire innovation and spur further diversification of the country’s economy. 

A mission to Mars would promote a focus on making breakthroughs in the development of new technologies, which could be patented and sold to foreign space agencies. 

It could also inspire thousands of Emiratis to pursue careers in the space industry, opening the door to new research bodies and university courses in aerospace engineering. 

Robert Zubrin, the president of the Mars Society, said the government was encouraging Emiratis to “become a pioneer and an explorer of new worlds”.

DYI COMMENT:  Ok....I'm trying not to laugh but when I saw this I just had to pass it on.  A David and Goliath story if there ever was as I wish them well for they have big dreams for such a little country.

DYI

As one economist put it, “they make choices today that their future self would prefer not to have made.” In effect, zero interest rates have made investors willing to accept any risk, no matter how extreme, in order to avoid the discomfort of getting nothing in the moment. John Hussman....."There are no safeguards that can protect the emotional investor from himself." J. Paul Getty

Yes, This Is An Equity Bubble 
John P. Hussman, Ph.D.

At present, the major risk to economic stability is not that the stock market is strenuously overvalued, but that so much low-quality debt has been issued, and so many of the assets that support that debt are based on either equities, or corporate profits that rely on record profit margins to be sustained permanently. In short, equity losses are just losses, even if prices fall in half. But credit strains can produce a chain of bankruptcies when the holders are each highly leveraged. That risk has not been removed from the economy by recent Fed policies. If anything, it is being amplified by the day as the volume of low quality credit issuance has again spun out of control.

 Yes, this is an equity bubble

A few notes on valuation and investment returns. First, as I’ve noted frequently in recent comments, it’s quite reasonable to argue that lower interest rates can “justify” higher valuations, provided that one also recognizes that those higher valuations will still be associated with commensurately lower future equity returns. At present, we estimate zero or negative nominal total returns for the S&P 500 on horizons of 8 years or less, and about 1.9% annual total returns over the next decade. If these prospects seem “fair” given the level of interest rates, that’s fine – one can then say that low interest rates justify current valuations – but that doesn’t change the outcome: the S&P 500 can still be expected to experience zero or negative total returns on horizons shorter than about 8 years (and even that assumes that corporate revenues and nominal GDP grow at their historical norm of about 6% annually in the interim). 

My sense is that investors have indeed abandoned basic arithmetic here, and are instead engaging in a sort of loose thinking called “hyperbolic discounting” – the willingness to impatiently accept very small payoffs today in preference to larger rewards that could otherwise be obtained by being patient. While a number of studies have demonstrated that hyperbolic discounting is often a good description of how human beings behave in many situations, it invariably results in terrible investment decisions, particularly for long-term investors. As one economist put it, “they make choices today that their future self would prefer not to have made.” In effect, zero interest rates have made investors willing to accept any risk, no matter how extreme, in order to avoid the discomfort of getting nothing in the moment.

DYI Comments:  Spot on John Hussman....I realize that many detractors will want to dismiss your warnings for your 2008 -2009 failure to load up on stocks.  Nor is it the time to throw the baby out with the bath water for all of DYI indicators are flashing an over valued market producing poor to possible market losses over the next 7 to 10 years for your dollars invested today (or stock held going forward).

Ben Graham 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] x 1.075] / Bond Rate

1.75 plus: Safe for large lump sums & DCA

1.30 plus: Safe for DCA

1.29 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: 1.01

As of 07-27-14

PE10 as report by Multpl.com

Bond Rate is the rate as reported by

Vanguard Long-Term Investment-Grade Fund Investor Shares (VWESX)

DCA is Dollar Cost Averaging.

PE10  .........26.16
Bond Rate...4.08%

Over a ten-year period the typical excess of stock earnings power over bond interest may aggregate 4/3 of the price paid. This figure is sufficient to provide a very real margin of safety--which, under favorable conditions, will prevent or minimize a loss......If the purchases are made at the average level of the market over a span of years, the prices paid should carry with them assurance of an adequate margin of safety.  The danger to investors lies in concentrating their purchases in the upper levels of the market.....

OR

Harnessing market hubris and timidity (greed and fear).

The value player’s most important weapon in achieving superior long term returns is tactical asset allocation.  This is true during secular bear markets when fixed asset allocation, especially those with high percentage of stocks, returns are dismal at best and losses at worst.

History and math show that when asset prices are below intrinsic value future returns are superior conversely when asset prices are above intrinsic value returns are tepid.

Simply put tactical asset allocation strategy is being more aggressive in undervalued assetS and be less invested in over valued assets.

DYI’s formula is an averaging formula answering the question what percentage without emotion. 

7-27-2014

STOCKS

100 - [100 x ( Curr. PD - Avg. PD / 2 ) ]

________________________________

(Avg. PD x 2 - Avg. PD/2)

Avg. Price to Dividends PD   23

Current Price to Dividends   53

% Allocation  -20%

-20% x 60 (max. allocation) = 12% short

J. Paul Getty Quote!

Stock Market - "For as long as I can remember, veteran businessmen and investors - I among them - have been warning about the dangers of irrational stock speculation and hammering away at the theme that stock certificates are deeds of ownership and not betting slips.

The professional investor has no choice but to sit by quietly while the mob has its day, until enthusiasm or panic of the speculators and non-professionals has been spent. He is not impatient, nor is he even in a very great hurry, for he is an investor, not a gambler or a speculator. "There are no safeguards that can protect the emotional investor from himself."

DYI

THE GREAT WAIT CONTINUES!

Junk bond yields at new and terrifying lows

By: John Waggoner June 24, 2014 1:37 pm

Inflation is about to fall—and fall hard

While recent measures of inflation — from producer prices and consumer prices to the PCE deflator (the Federal Reserve's preferred gauge of inflationary pressures) — have all approached a 2-percent year-over-year gain recently, it would appear that Janet Yellen's recent testimony will prove spot on. Inflationary pressures, particularly in food and energy costs, will likely prove "transitory." 

Agricultural commodity prices, excluding meats, have crashed. Corn, wheat and soybean prices have plummeted on expectations of bumper crops around the world — particularly in the United States. Heavy rains in the growing regions have altered the outlook for drought-stricken areas (except California) and have led to a major decline in prices. 

Power bills are likely to fall this summer — a boon to disposable income. Gasoline prices, on the flip side, remain stubbornly high, but could easily decline if markets sense that geopolitical risks do not escalate beyond current levels. 

Even more telling is the level of interest rate and the slope of the yield curve. As I write, the yield on the 10-year Treasury note is below 2.5%, as the yield curve is flattening.

DYI Comments:  Until Boomers begin leaving the workforce in serious numbers will inflation raise up it's head.  This is due to Boomers continuing to consume creating a labor shortage plus the costs of Medicare and Social Security.  The inflation will mount as we enter the 2020's, until then disinflation/deflation is the higher probable outcome.  This of course will drop interest rates as well.

DYI  

Carbohydrates are also less satiating than fat or protein. So you eat more and the weight creeps up.

Do You Live in the Fattest State?

A state known for blue skies and wide-open spaces is the nation's thinnest for the first time, knocking Colorado, another haven for outdoor lovers, out of the top spot, according to the 2013 Gallup-Healthways Well-Being Index. The least-obese state, Montana, was also the only state to have an obesity rate below 20 percent. Only 19.6 percent of survey participants from the state were obese. 

After three years at the top of the most-obese list, West Virginia finally fell and was replaced by a new state. Across all states, for the fifth year in a row, the obesity rate has increased, going up nearly a full percentage point from 26.2 percent in 2012 to 27.1 percent in 2013. 

 WHY?

The Questionable Link Between Saturated Fat and Heart Disease

Are butter, cheese and steak really bad for you? The dubious science behind the anti-fat crusade

Our distrust of saturated fat can be traced back to the 1950s, to a man named Ancel Benjamin Keys, a scientist at the University of Minnesota. Dr. Keys was formidably persuasive and, through sheer force of will, rose to the top of the nutrition world—even gracing the cover of Time magazine—for relentlessly championing the idea that saturated fats raise cholesterol and, as a result, cause heart attacks. 

Critics have pointed out that Dr. Keys violated several basic scientific norms in his study. For one, he didn't choose countries randomly but instead selected only those likely to prove his beliefs, including Yugoslavia, Finland and Italy. Excluded were France, land of the famously healthy omelet eater, as well as other countries where people consumed a lot of fat yet didn't suffer from high rates of heart disease, such as Switzerland, Sweden and West Germany. The study's star subjects—upon whom much of our current understanding of the Mediterranean diet is based—were peasants from Crete, islanders who tilled their fields well into old age and who appeared to eat very little meat or cheese. 

As it turns out, Dr. Keys visited Crete during an unrepresentative period of extreme hardship after World War II. Furthermore, he made the mistake of measuring the islanders' diet partly during Lent, when they were forgoing meat and cheese. Dr. Keys therefore undercounted their consumption of saturated fat. Also, due to problems with the surveys, he ended up relying on data from just a few dozen men—far from the representative sample of 655 that he had initially selected. These flaws weren't revealed until much later, in a 2002 paper by scientists investigating the work on Crete—but by then, the misimpression left by his erroneous data had become international dogma. 

The problem is that carbohydrates break down into glucose, which causes the body to release insulin—a hormone that is fantastically efficient at storing fat. Meanwhile, fructose, the main sugar in fruit, causes the liver to generate triglycerides and other lipids in the blood that are altogether bad news. Excessive carbohydrates lead not only to obesity but also, over time, to Type 2 diabetes and, very likely, heart disease. 

Indeed, up until 1999, the AHA was still advising Americans to reach for "soft drinks," and in 2001, the group was still recommending snacks of "gum-drops" and "hard candies made primarily with sugar" to avoid fatty foods. 

Our half-century effort to cut back on the consumption of meat, eggs and whole-fat dairy has a tragic quality. More than a billion dollars have been spent trying to prove Ancel Keys's hypothesis, but evidence of its benefits has never been produced. It is time to put the saturated-fat hypothesis to bed and to move on to test other possible culprits for our nation's health woes.

Why I've ditched statins for good

As experts clash over proposals that millions more of us take statins to prevent heart disease and stroke, a vascular surgeon explains why he feels better without them

The only major changes I’d made to my lifestyle since coming off statins were eliminating sugar (including alcohol and starchy foods such as bread) and eating more animal fat. Many experts now believe that sugar is emerging as a true villain in the heart-disease story; while after decades of demonisation, saturated fat has been acquitted of causing heart disease by a recent “meta” analysis of 70 studies by Cambridge University. 

Typically, I was eating red meat three or four times a week and enjoying butter, full-fat milk and plenty of eggs. You would have thought that after three months on a diet so high in saturated fat, my cholesterol would have shot back up to pre-statin levels — but no, it came down and has stayed down seven months on. Not only that, but my levels of LDL (so-called bad cholesterol) were also lower than when I’d been on statins, and my ratio of HDL (so-called good cholesterol) to LDL was under four for the first time, an excellent sign, according to medical wisdom.

I was wrong - we should be feasting on FAT, says The Fast Diet author DR MICHAEL MOSLEY

• Dr Mosley used to believe all saturated fats were bad for us
• So he ditched beef, full fat milk and butter
• They were thought to cause weight gain and heart attacks
• But new studies have revealed this isn't the case
• There's a stronger link between sugar consumption and heart disease
• Eggs are a prime example of how we got it wrong on fats
• People were advised to eat just one a week in the Eighties
• But now regular consumption is encouraged as they are high in protein

Milk, cheese, butter, cream - in fact all saturated fats - are bad for you. Or so I believed ever since my days as a medical student nearly 30 years ago. 

During that time I assured friends and family that saturated fat would clog their arteries as surely as lard down a drain. So, too, would it make them pile on the pounds. 

Recently, however, I have been forced to do a U-turn. It is time to apologise for all that useless advice I've been dishing out about fat. 

In fact, as a renowned British scientist called John Yudkin pointed out, there was actually a much stronger link between sugar consumption and heart disease. 

Professor Yudkin argued that sugar was behind the rise in heart disease ravaging the West. He also pointed to another dangerous trend emerging in Fifties Britain: the close relationship between the number of televisions being bought and fatal heart attacks. 

Carbohydrates are also less satiating than fat or protein. So you eat more and the weight creeps up. 

So, is fat really fattening? It contains far more calories than carbohydrates or protein, and the easiest way to lose weight is obviously to cut it out. Yet low-fat diets rarely succeed because people won't stick to them - they get too hungry.

DYI Comments:  I have cut back to less than 5% of my intake in carbohydrates over the past year and have dropped 35 pounds but more importantly my blood pressure medication Losartan has been lowered from 100 Mg to 25 Mg.  Depending on my blood pressure readings over the next week I may come off medication completely and so far the readings have been better than 120/80....Plus I have energy to burn and for a guy of almost 60 years old is exciting all by itself.  Once I dropped off the carbs significantly the weight just came off (1 to 2 pounds per week) AND IT WAS EASY.  So easy I wish I had known this years ago.  [I also have an extra surprise a 4 pack....will a 6 pack be in my future???]  This has been one hell of an eye opener.

DYI

I'm not a Doctor or Nutritionist just one man's journey!

Your 401(k) Plan May Provide a False Sense of Security

 

By Daniel Solin

On the depressing side, the median participant account balance in 2013 was only $31,396. The average balance was $101,650. If you are a participant in a 401(k) plan with an average balance, and are depending primarily on your defined contribution investment to fund your retirement, you had better be prepared to live on $5,000 a year or less. 

If one thing is obvious from the sordid history of 401(k) plans, it's that most participants are incapable of putting together a globally diversified portfolio in a suitable asset allocation on their own, using low management fee index funds. Of course, this assumes that low management fee index funds are even an option. Although they are available in Vanguard plans, these funds are more the exception than the rule in 401(k) plans "advised" by brokers and insurance companies. 

If you are serious about saving for retirement, you will need to put aside a minimum of 15 percent of your income each year, including the employer match. Realistically, that number should be closer to 20 percent.

DYI Comments:  Dan Solin is quite correct in his number being closer to 20%; this number is based upon NO interruptions in income.  Recessions, technological changes affecting a career negatively, corporate buyouts then being downsized, time off going back for additional training, caring for sick loved one's full time, the list is endless.  Also the average Joe and Jane Doe (not those reading this blog) only have an understanding of the need to save for retirement.  The investment process is either confusing or some will confess totally BORING!  Plus market volatility is NOT their cup of tea, this is why I advocate they use a static asset allocation of 40% Stocks and 60% Bonds.  No changes will be needed not even going into retirement.  With that said let's go back to that 20%; I would venture to say 25% is the more realist number(OUCH!).  A staggering percentage especially those in the lower income range.

  VIX Contracts Signal Bigger U.S. Stock Swings Ahead

“Fear always comes in waves,” Randy Warren, who manages more than $100 million at Exton, Pennsylvania-based Warren Financial Service and Associates Inc., said by phone on July 11. “Over the course of 60 to 90 days, things could get pretty ugly. You could actually see the VIX well into the 20s, 30s, maybe even the 40s.” 

More than $1 trillion has been wiped from the value of global stocks since a peak on July 3 as signs of financial stress at a Portuguese bank and speculation the recent rally is overdone pulled stocks down from record levels. Raymond James & Associates Inc. last week said stocks are vulnerable to losses and Citigroup Inc.’s chief U.S. equity strategist cited concerns for a “severe” pullback.

DYI Comment:  Who knows?  Short term I have no idea when this over blown market is going to break to the downside. No doubt with a VIX being so low and for so long in an elevated market it could begin it descent at anytime.  I'm just not smart enough to know when!

How Many Warnings Can You Give?

July 21st, 2014 by Michael Lombardi, MBA

 How many warnings can you give investors? 

Well, the warnings don’t seem to matter. The Dow Jones Industrial Average has plowed through the 17,000 level, and the stock market, as measured by the Dow Jones, is up three percent this year. 

Dear reader, the higher the stock market goes, the bigger its fall from grace will be. Don’t get suckered into the hype the mainstream media feeds us. Focus on the proven, long-term historical market valuation tools I have listed above and have patience as the case for a crash from these stock market levels builds. And remember: time is foe to the speculator, friend to the investor.

DYI 

Adjusting for that embedded profit margin – which, again, produces a historically more reliable indication of actual subsequent S&P 500 total returns – the Shiller CAPE would presently be over 32. John Hussman Ph.D.

Allocation Stocks/ Bonds

% Allocation Formula

7-3-14

% Allocation = 100 – [100 x (Current PE10 – Avg. PE10 / 2)]  /  (Avg.PE10 x 2 – Avg. PE10 / 2)

Current PE10.....26.63

Avg. PE10.........16.54

% Stock Allocation is 26% 4%

The Delusion of Perpetual Motion 
John P. Hussman, Ph.D.

On a historical basis, the CAPE of over 26 is already quite enough to expect more than a decade of negative real total returns for the S&P 500. Aside from the crashes that followed the 1929, 2000 and 2007 peaks, a very long period of negative real returns also followed the other historical peak in the CAPE near 24 in the mid-1960’s. As noted above, one adjustment to the CAPE that significantly improves its relationship with actual subsequent market returns – as it does for numerous other measures – is to correct for the implied profit margin embedded into the multiple. This is true even though the denominator of the CAPE is based on 10-year averaging. At present, the margin embedded in the Shiller CAPE is more than 20% above the historical average. Adjusting for that embedded profit margin – which, again, produces a historically more reliable indication of actual subsequent S&P 500 total returns – the Shiller CAPE would presently be over 32. That level might make even Professor Shiller question whether stocks should be a material component of portfolios (at least for investors with horizons much shorter than the 50-year average duration of S&P 500 stocks). In any event, even the phrase “lighten up” is problematic for the market if more than a few investors heed that advice.

DYI Comment: Using Shiller PE10 of 32 moves down significantly the stock allocation to 4%!  This is an over blown market that is devoid of value for the long term investor.  The return for stocks is NOT bake in the cake but is a function of the price that you pay and today you are paying through the nose.

Estimated 10yr return on Stocks

Using 5.4% as the historical growth rate of dividends and 4.0% as the ending yield.

Starting Yield*---------return**
1.0%-----------------------(-5.7%)
1.5%-----------------------(-1.7%)

 
2.0%------------------------1.3%---YOU ARE HERE!

2.5%------------------------3.8%

3.0%------------------------5.9%
3.5%------------------------7.8%
4.0%------------------------9.4%
4.5%-----------------------10.9%

5.0%-----------------------12.3%
5.5%-----------------------13.6%
6.0%-----------------------14.8%
6.5%-----------------------15.9%

7.0%-----------------------17.0%
7.5%-----------------------18.0%
8.0%-----------------------19.0%

*Starting dividend yield of the S&P500-**10yr estimated average annual rate of return.

THE GREAT WAIT CONTINUES!
DYI

This Flowchart Could Help You Decide Whether To Buy Or Rent A Home

What should you pay for a house?

Answer: It depends on rents and interest 

rates.

Calculate House Value Via Rents

10 Reasons It's A Terrible Time To Buy An 

Expensive House

Is It Better to Rent or Buy?

New York Times Interactive Calculator....It's Top Notch!

DYI

"Financial markets have now become dangerous casinos in which speculative bubbles are guaranteed to build to dangerous extremes as the central bank driven financial inflation gathers force." David Stockman

The Implosion Is Near: Signs Of The Bubble’s Last Days

by David Stockman • July 16, 2014

The central banks of the world are massively and insouciantly pursuing financial instability. That’s the inherent result of the 68 straight months of zero money market rates that have been forced into the global financial system by the Fed and its confederates at the BOJ, ECB and BOE. ZIRP fuels endless carry trades and the harvesting of every manner of profit spread between negligible “funding” costs and positive yields and returns on a wide spectrum of risk assets. 

This dynamic is evident in the chart of the S&P 500 since the March 2009 bottom. The dips have gotten shallower and shallower as ZIRP and other pro-risk central bank policies have eroded the market’s natural defenses against excessive speculation. As of mid-2014, therefore, it can be fairly said that fear and short interest have been extinguished almost entirely. The Wall Street casino has thus become a one-way market that coils dangerously upward, divorced completely from the fundamentals of earnings and cash flow and real world economic conditions and prospects.

At the end of the day, the Fed and its fellow traveling central banks have systematically dismantled the natural stability mechanisms of financial markets. Accordingly, financial markets have now become dangerous casinos in which speculative bubbles are guaranteed to build to dangerous extremes as the central bank driven financial inflation gathers force.  That’s where we are now. Again.

Eight ways a new global crisis will hit us by 2015

By Arturo Bris Jul 09 2014

A global economic crisis looks imminent and not enough action is being taken to avoid it. Based on statistics, the world could expect a financial crisis as soon as April 2015, ending in March 2016. The cause of the crisis will come from eight possible scenarios:

1.) Stock market bubble2.)  Banking in China3.)  Energy crisis4.)  Another real estate bubble5.)  Ratings & bankruptcy corporate crisis6.)  War & conflict7.)  Increasing poverty8.)  Cash and hyperinflation

Don’t get too comfortable with low bond yields

Leslie Shaffer | Writer for CNBC.com

Sunday, 13 Jul 2014 | 6:37 PM ET

10 things rich people know that you don’t

People don’t become wealthy by accident, here’s how they do it

Millennials: Super savers or dogged by debt

DYI

The professional investor has no choice but to sit by quietly while the mob has its day, until enthusiasm or panic of the speculators and non-professionals has been spent.

J. Paul Getty Quote!

Stock Market - "For as long as I can remember, veteran businessmen and investors - I among them - have been warning about the dangers of irrational stock speculation and hammering away at the theme that stock certificates are deeds of ownership and not betting slips.

The professional investor has no choice but to sit by quietly while the mob has its day, until enthusiasm or panic of the speculators and non-professionals has been spent. He is not impatient, nor is he even in a very great hurry, for he is an investor, not a gambler or a speculator. There are no safeguards that can protect the emotional investor from himself."

Individuals Pile Into Stocks as Pros Say Bull Is Spent

Individual investors are plowing money back into the U.S. stock market just as professional strategists say gains for this year are over. About $100 billion has been added to equity mutual funds and exchange-traded funds in the past year, 10 times more than the previous 12 months, according to data compiled by Bloomberg and the Investment Company Institute. 

The growing optimism contrasts with forecasters from UBS AG to HSBC Holdings Plc, who say the stock market will be stagnant with valuations at a four-year high. While the strategists have a mixed record of being right, history shows the bull market has already lasted longer than average and individuals tend to pile in at the end of the rally.

DYI Comments: NONE

Market capitalization to GDP, Warren Buffett's favorite. 10 year estimated average annual return is NEGATIVE 2.5%!

Quotes on a Screen and Blotches of Ink 

John P. Hussman, Ph.D.

With the fresh high in the S&P 500 Index last week, our estimates of prospective 10-year S&P 500 nominal total returns have fallen below 1.8% annually. At shorter horizons and on historically reliable measures, our estimates of S&P 500 total returns are now negative at every horizon shorter than 8 years. Investors who feel that zero interest rate policy offers them “no choice” but to hold stocks are likely choosing to experience negative returns instead of zero. While millions of investors appear to have the same expectation that they will be able to sell before everyone else, the question “sell to whom?” will probably remain unanswered until it is too late.

Again, on a broad range of historically reliable measures, our estimate of 10-year S&P 500 nominal total returns is now less than 1.8% annually. That said, the most reliable measures actually project negative returns, but then, the most reliable measures are those that adjust most fully for cyclical variations in profit margins, and we are continually reminded that this time is different. The ratio of market capitalization to GDP, which Warren Buffett (correctly) observed in a 2001 Fortune interview is “probably the single best measure of where valuations stand at any given moment” is now about 150% (not just 50%) above its pre-bubble norm, even imputing a rebound in Q2 GDP growth. Of course, Buffett also wrote "A group of lemmings looks like a pack of individualists compared with Wall Street when it gets a concept in its teeth" - which may explain why Wall Street seems so entranced with the concept of QE instead of actually doing the math. The ratio of market capitalization to GDP, presented below on an inverted scale, is beyond every point in history except for the final quarter of 1999 and the first two quarters of 2000.

Hussman: Exit Stocks Now!

A History Of Market Crashes

DYI

"The Federal Reserve’s promise to hold safe interest rates at zero for a very long period of time has not created a perpetual motion machine for stocks." John Hussman

Revealed: The world's cheapest stock markets

Analysis for the Telegraph highlights the cheapest stock markets - and shows how to back them

Cape ratioIt has a daunting title – “cyclically adjusted price to earnings” – but the Cape is growing in popularity. Essentially, it is the p/e ratio with a twist. Instead of using earnings over 12 months, this valuation measure takes the average earnings figure over the previous 10 years. 

In doing so the Cape ratio strips out short-term anomalies. One of the main criticisms aimed at the p/e, the more basic measure, is that a market could be deemed “cheap” because earnings have just reached their peak in the economic cycle and are about to fall. By taking the average for 10 years, the ups and downs of the cycle are evened out. It was first dreamt up a generation ago by investment gurus Benjamin Graham and David Dodd and refined by US academic Robert Shiller in the Nineties.

 The cheap stock markets To be named “cheap”, markets had to be trading below their own historic valuation across all three measures. As the map to the left shows, only a handful of stock markets managed to achieve this feat – Greece, China, Hong Kong, India, Japan, Russia and Turkey.

The expensive stock markets In red are the countries that scored badly on all three metrics. America, Sri Lanka, Pakistan and Indonesia are all trading on valuations that are higher than their historic averages across each of the measures. Investors are buying high.

 Those in the middle ground Those countries in the middle ground, such as Germany and Austria, highlighted in amber, scored well on either one or two of the valuation measures. These countries are considered neither cheap nor expensive relative to their history.

DYI Comments:  The article covers 34 countries and lists all of their cyclically adjusted p/e ratio [Shiller PE10] no surprise that the U.S. comes in as the most expensive or with Greece the cheapest at a 6.08 PE10.  Though not DYI's area an enterprising investor may want to look into mutual funds that specialize in those under valued markets.

The Delusion of Perpetual Motion 

John P. Hussman, Ph.D.

Let me say that again. The Federal Reserve’s promise to hold safe interest rates at zero for a very long period of time has not created a perpetual motion machine for stocks. No – it has simply created an environment where investors have felt forced to speculate, to the point where stocks - despite their dramatically greater risk - are now also priced to deliver zero total returns for a very long period of time. Put simply, we are already here.

Based on valuation measures most reliably associated with actual subsequent market returns, we presently estimate negative total returns for the S&P 500 on every horizon of 7 years and less, with 10-year nominal total returns averaging just 1.9% annually. I should note that in real-time, the same valuation approach allowed us to identify the 2000 and 2007 extremes, provided latitude for us to shift to a constructive stance near the start of the intervening bull market in 2003, and indicated the shift to undervaluation in late-2008 and 2009 (see Setting the Record Straight).

Investment decisions driven primarily by the question “What other choice do I have?” are likely to prove regrettable. What we now have is a market that has been driven to one of the four most extreme points of overvaluation in history. We know how three of them ended.

 Only a Matter of Time Till the Whole Mess Comes Crashing Down

Gold Bugs? Equity Cockroaches?

On June 17th, 2014, Marc Faber, editor/publisher of Gloom, Boom & Doom Report, caused CNBC anchor Jackie DeAngelis some discomfort when he pointed out that gold was being unfairly lambasted by the mainstream media. In the phone interview Faber asked pointedly why it is that investors who favor gold are called bugs, yet investors who favor stocks are not known by a similarly negative term, such as cockroaches. 

Faber, who stated that he is now actively adding gold above his normal investment level of twenty-five percent, explained that gold, as well as gold stocks, are a better buy than the artificially high stocks. He went on to discuss the future problems he foresees for the economy and encouraged investors to choose gold, much to the discomfiture of his host who wanted to direct any blame away from the media, and CNBC, in particular.

DYI Comments:  No doubt about it greater value is in the mining stocks as compared to the overall U.S. stock market.  Please note that the Dow/Gold Ratio is pricey I'm staying at our default position of 25%.

 

AGGRESSIVE PORTFOLIO - ACTIVE ALLOCATION - 07/1/14

Active Allocation Bands 10% to 60%

45% - Cash -Short Term Bond Index - VBIRX

25% -Gold- Precious Metals & Mining - VGPMX

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

10% -Stocks- Equity Income Fund - VEIPX

[See Disclaimer]

The Junk Bomb Ticking Beneath The S&P 500

 Thus, with the Merrill high yield index nearing an all-time low yield of 5%, the implication is astonishing. Namely, that with the CPI having just clocked in at 2.1% y/y, the real yield on junk bonds is barely 3%!  Yet history proves losses can reach double digits when the bubbles crashes. During the 2008-2009 meltdown, for example, yields rose from 7% to 23%, implying devastating losses for speculators on leverage and bond funds managers subject to redemption. Needless to say, those categories encompassed most of the bond holders at the time.

 And that’s the evil of the Fed’s financial repression at work. It creates a frenzied scramble for yield that results in a double deformation. First, debt gets way too cheap, causing companies to borrow wildly in order to fund financial engineering maneuvers such as massive stock buybacks, LBO’s and cash M&A deals. That massive inflow of debt-based share buying, in turn, drives the stock market into its final blow-off phase as is evident in the chart. 

But secondly, the full economic losses on the vastly over-priced junk bonds are never realized by investors and issuers due to the Fed’s post-crash reflation maneuvers. Rather than avoid bubbles or pricking them once they begin inflating uncontrollably, the Fed’s policy every since Greenspan has been to keep its head in the sand until the bubble crashes on its own weight. It then flood the financial markets with liquidity to prevent the resulting wring-out of debt and speculative excess from running its course.

DYI Comments:  Junk bonds trade like small cap stocks but with greater volatility.  The best time to purchase them is during an economic and stock market crash; don't worry there will be one coming soon enough.  Vanguard has their High-Yield Corporate Fund keep it on your watch list.

DYI