How Shiller is signaling 'significant upside' for S&P

On August 19, Shiller told CNBC that his CAPE ratio stood at 25, a level that has been surpassed only three times since 1881 - the years surrounding 1929, 1999 and 2008. The ratio averaged 15.21 in the 20th century and stood at 23 last year. He warned on the valuation of U.S. stocks, bonds and housing and sent ripples through global markets. 

"You should be very, very careful in being tactical," he told CNBC Friday, but added that he was convinced that markets will see significantly higher equity prices over the next three to five years. 

Despite questions surrounding the calculations, Shiller could hardly be described as a contrarian. A growing chorus of naysayers has warned of a potential correction - or something even worse - in the S&P 500. Societe Generale's uber-bearish strategist Albert Edwards said on Thursday that a bubble in stock markets is on the verge of bursting with the S&P 500 now "running on fumes." Meanwhile, David Tice, president of Tice Capital and founder of the Prudent Bear Fund, told CNBC on Wednesday that markets could soon face a fall of up to 60 percent with the most likely cause being disillusionment with the Federal Reserve 's policy guidance.

DYI 

Philadelphia Earns Millions By Seizing Cash And Homes From People Never Charged With A Crime

In other words, thanks to civil forfeiture, the government punishes innocent people for the crimes other people might have committed. Sadly, the Sourovelis family is not alone. Doila Welch faces civil forfeiture of her home, which has been in her family for 17 years, because her estranged husband, unbeknownst to her, was dealing small amounts of marijuana. Norys Hernandez and her sister co-own a row house, but her sister is still barred from living there because Hernandez’s nephew was arrested for selling drugs outside her row house. Welch and Hernandez have not been charged with any crime and both have joined Sourovelis as named plaintiffs in IJ’s class action against the Philadelphia forfeiture machine.

 Philadelphia law enforcement has transformed a once obscure legal process into a racket that treats Americans as little more than ATMs. Every year, the city collects almost $6 million in revenue from forfeiture. According to data collected by the Institute for Justice, between 2002 and 2012, the Philadelphia District Attorney’s Office seized and forfeited over 3,000 vehicles, nearly 1,200 homes and other real estate properties and $44 million in cash. Altogether, Philadelphia has generated a staggering $64 million in forfeiture proceeds, which equals one-fifth of the DA Office’s entire budget. Forty percent of those funds—$25 million—pay law enforcement salaries, including the salaries for the prosecutors who have used civil forfeiture against families like the Sourovelises.

Cops In Texas Seize Millions By 'Policing 

for Profit'

Texas law enforcement are continuing to enrich themselves using a little-known legal doctrine known as civil forfeiture, according to a new series of investigative reports. Under civil forfeiture, property can be forfeited even if its owner has never been charged with a crime. In these proceedings, accused criminals have more rights than innocent owners and the government sues the property, not its owner. These cases can be so baffling, one Texas Supreme Court Justice recently compared civil forfeiture to Alice in Wonderland and the works of Franz Kafka. But civil forfeiture isn’t just a quirky curiosity—it’s a powerful incentive for law enforcement to take millions.

Taken

Under civil forfeiture, Americans who haven’t been charged with wrongdoing can be stripped of their cash, cars, and even homes. Is that all we’re losing?

Minnesota Now Requires A Criminal Conviction Before People Can Lose Their Property To Forfeiture

In a big win for property rights and due process, Minnesota Gov. Mark Dayton signed a bill yesterday to curb an abusive—and little known—police practice called civil forfeiture. Unlike criminal forfeiture, under civil forfeiture someone does not have to be convicted of a crime, or even charged with one, to permanently lose his or her cash, car or home.

DYI 

Why the Big Mac’s Rising Prices Are More Alarming Than Its Fat Content

The rise in the price of a Big Mac has risen faster than the official rise in consumer prices and has been doing so since the late ’90s. In 1998, the average price of a Big Mac was about $2.50. As of July 24, 2014, The Economist reports that the price of a Big Mac is $4.80. If we were using the Consumer Price Index (CPI), the price of a Big Mac today should be about $3.67. 

Believe it or not, the price hikes represented by the Big Mac will impact you more than the saturated fats in popular burger. By understanding the price disparities, you can make better decisions for you and your clients. The rise in the price of the Big Mac foreshadows how the printing of money is eroding the financial system’s arterial walls. The impact is broad based: 

1. Each dollar we own is buying less.

1. For individuals relying on Social Security, the compensation for inflation is not keeping up with the prices people actually pay.

1. The price of bonds should be much lower if interest rates fully accounted for the rise of inflation based on the Big Mac.

1. The official economic growth rate would be lower now if prices were based on the Big Mac index.

 And what about bond prices and inflation? In a normal market, the price of bonds should reflect the rate of inflation. Ed Easterling, founder of Crestmont Research, links inflation to the rate of interest rates. By printing money to buy bonds, the government has pushed the interest rate of a 10-year government bond down to about 2.3%. However, Ed Easterling shows that the 10-year government bond rate should be about 1% above inflation. The current rate of inflation reported by CPI is 2%. Adding 1% for the increased risk of holding a bond for 10 years gives you a rate of at least 3%, and that’s using official inflation estimates. However, if we base our calculation on the Big Mac Index, inflation is 9.6% and adding 1% to that for the risk of holding a bond for 10 years gets a rate of 10.6%. The current interest rate of a government bond is 2.3%, but if we were to account for inflation as seen by the rise in the price of a Big Mac, the interest rate would be 10.6%. Consequently, if 10-year government bonds were to increase from 2.3% to 10.6%, bond indices would decline by about 64%. In other words, long duration, 10-year government bonds are overvalued by about 64% mainly due to persistent intervention (manipulation) by the Federal Reserve.

DYI Comments:  DYI's sentiment indicator one notch from the very top at Delusional for long term bonds.

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

When the next recession arrives and pushes down interest rates will rates for the 10 year Treasury fall below the low set in July of 2012 at 1.53%?  Who knows?  Whether it does or not I'll move up the sentiment indicator to Max-Optimism at that time.  The bond rally of a lifetime is over especially for capital appreciation.  Currently we have more deflationary conditions than inflationary.  However, as the Baby Boomer's begin to retire placing massive strains on Social Security and Medicare governments will resort to the printing press and monetize a portion of these costs. This will begin in earnest towards the end of this decade as prices will move up sharply and not just the Big Macs.

***************

Think you’re better off with a lump sum over a monthly pension? Think again.

The lump sum has some appeal, not the least of which is the lottery effect of getting your hands on a wad of money. There is also the reality that many pensions come without cost-of-living increases, which means they lose buying power to inflation every year. Still financial planners are nearly unanimous in saying that the choice, tempting as it may be, should be rejected by most people. Not only do retirees run the real risk of outliving lump sums, but also most of them are ill-equipped to manage investments effectively. So many retirees are more likely than not to blow at least some of the cash.

People who have the option for taking lumps sums often do. But that does not mean it is the wisest course. Generally, the cash option works best for people who do not expect to live long and have no spouse who will need the lifetime income. It also works for those who are financially set for retirement and would enjoy the freedom that comes with a substantial pot of money. The rest of us -- save for the investment sharpies -- are probably best off with that slow but steady monthly check.

***************

The 35.4 Percent: 109,631,000 on Welfare

109,631,000 Americans lived in households that received benefits from one or more federally funded "means-tested programs" — also known as welfare — as of the fourth quarter of 2012, according to data released Tuesday by the Census Bureau. 

The 153,323,000 total benefit-takers at the end of 2012, said the Census Bureau, equaled 49.5 percent of the population. The 150,026,000 taking benefits other than veterans' benefits equaled about 48.5 percent of the population. 

When America re-elected President Barack Obama in 2012, we had not quite reached the point where more than half the country was taking benefits from the federal government. 

It is a reasonable bet, however, that with the implementation of Obamacare — with its provisions expanding Medicaid and providing health-insurance subsidies to people earning up to 400 percent of poverty — that if we have not already surpassed that point (not counting those getting veterans benefits) we soon will.

DYI 

108-year-old investor: 'I doubled my money in 1929 crash – and I'm still winning'

Investment veteran Irving Kahn, who has weathered every financial storm since the 1920s, reveals everything he has learned

The catalyst for the change was his collaboration with Benjamin Graham, the inventor of “value investing”. 

Graham was a lecturer at Columbia University in New York, where his pupils included Warren Buffett, and Mr Kahn was his teaching assistant. “They’d take the subway to Columbia together,” said Tom Kahn, Irving Kahn’s son, who also works for the family investment firm.

Irving Kahn said: “During the Great Depression, I could find stocks trading at tremendous discounts. I learnt from Ben Graham that one could study financial statements to find stocks that were a 'dollar selling for 50 cents’. He called this the 'margin of safety’ and it’s still the most important concept related to risk.” 

Indeed, he uses the same approach today. “During the recent crash and in other sell-offs, Tom and I looked for good companies selling at a discount, which do surface if you’re patient. If the market is overpriced, an investor must be willing to wait.” 

The market today 

Mr Kahn said he was finding few bargains in today’s markets, in which America’s benchmark S&P 500 index has hit repeated record highs. 

“I try not to pontificate about the market, but I can say that my son and I find very few instances of value when we look at the market today. That is usually a sign of widespread speculation,” he said.

DYI Comment:  THE GREAT WAIT CONTINUES! 

Don’t create a budget — and 12 other financial tips to live by

I’m in a crabby mood. Why not spread the joy around? Welcome to today’s deliberately inflammatory column. Here are 13 of my firmly held financial beliefs: 

1. You have no clue where stocks and interest rates are headed—and neither does anybody else. Instead of forecasting returns, investors should devote their efforts to cutting investment costs, trimming taxes and managing their portfolio’s risk level.

 DYI Comments:  The author Jonathan Clements is correct over the short term it is impossible to determine the direction of interest rates or stock prices.  What we do know is the level above or below the average interest rate or dividend yield (or Shiller PE10) to determine the risk level.  Anyone who has been reading this blog even for a short period of time knows that the market for interest rates or stock yields is in the sub atomic low range. This makes for a overvalued market for stocks and bonds.  Can stocks go higher from here?  Absolutely they can; but higher and higher we go, driving down the dividend yield, future returns will fade.  Bonds yields as exampled the 10 year Treasury are very low at 2.40% with future returns approximating 90% of the beginning yield (90% x 2.40% = 2.16%).  Caution is the key word for stocks and bonds at these nose bleed levels for when the turn comes it will be ugly.

  2. Buying actively managed mutual funds is an act of faith in the face of daunting odds. S&P Dow Jones Indices, part of McGraw Hill Financial, analyzed the performance of U.S. stock funds in 13 categories. Depending on the category, just 14% to 39% of funds managed to beat their benchmark index over the five years through year-end 2013.

DYI:  As a general rule DYI sticks to index funds whenever possible. Our favorite is Vanguard.

 5. You are highly unlikely to make money from your home’s price appreciation once you figure in inflation, homeowners insurance, maintenance and property taxes. What if you have a mortgage? The loan may leverage any home-price gains—but the interest costs will likely offset the benefits. 

6. Paying down a mortgage is a great low-risk investment. It may not give you the highest possible return. But the interest saved is probably greater than the yield you could earn by buying bonds—and the result can be substantial financial freedom. Everybody should strive to be mortgage-free by retirement.

****************

Why It's Still Only A Cyclical Bull Market Within The Long-Term Secular Bear.

In 1999 Warren Buffett famously warned that “The next 17 years will be quite unlike the last 17 years. It might not look much better than the dismal 1965-1982 period.”

He was referring to the market’s history of cycling between long-term ‘secular’ bull and ‘secular’ bear markets, as it has done for at least 113 years.

Then there is investor sentiment. Retail investors have fallen back in love with the stock market to a significant degree. According to the Investment Company Institute, as is typical in the cycles, public investors, devastated by the 2007-2009 bear market, pulled money out of the market through the first three years of the new bull market that began in 2009. But they have been pouring money back into equity funds at an increasing pace since mid-2012, reaching a near record $92 billion in the first half of this year, (even as data shows institutional investors have been cutting back their exposure).

The last time retail investors became as enthusiastic and confident was in 2007, when they moved $85 billion into equity mutual funds in the first seven months of the year. So by that measure anyway, greed has replaced fear to an even greater extent than near the serious market top in October, 2007.

DYI Comment:  The chart below says it all; the secular bear market that began in 2000 is still with us.

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

Why The Casino Is Dangerous: There Is Nothing Below

The algos and chart traders are making another run at 2000 on the S&P 500, attempting to convince the wary investor one more time that buying on the dips is a no brainer. And in that proposition they are, ironically, correct.  To buy this utterly manipulated market at these nosebleed valuation levels is about as brainless of an undertaking as is imaginable.

Now that is non-sensical Wall Street drivel. Honestly measured earnings have been growing only at a tepid rate, and have no prospects for acceleration given the sharp slowdown in both the global and domestic economy. And, please, how can we discount a distant stream of corporate earnings based on utterly artificial and unsustainably low interest rates that simply can’t be sustained over time without destroying the monetary system. That is, to keep the money market at zero and the ten-year at today’s 2.40% on a permanent basis in a world where inflation plus taxes turn these rates into deeply negative returns is virtually impossible. So sooner or later, and probably the former, there will be a normalization of interest rates, and that will cause a sharp downward re-pricing of equities. 

But when it comes to real investors there is really no one home in the casino. Accordingly, when confidence in the central bank con game breaks, markets will gap down drastically, suddenly and violently.  And this time there will be no Bernanke style rescue. Were the Fed to attempt to go back to massive QE and thereby substitute its own liqudity for the crisis-driven collapse of corporate stock-buying, it would actually exacerbate the panic and compound the selling.

DYI Comment:  "But when it comes to real investors there is really no one home in the casino."  That is correct!  Here at DYI our two model portfolio (excluding gold mining shares) has left the casino and gone short.  This market is completely devoid of value.  Any future gains this market obtains will be completely speculative and will be transitory.  A 45% to 60% decline is in play. 

 

AGGRESSIVE PORTFOLIO - ACTIVE ALLOCATION - 08/1/14

Active Allocation Bands 0% to 60%

68% - Cash -Short Term Bond Index - VBIRX

13% -Gold- Precious Metals & Mining - VGPMX

 9% -Lt. Bonds- Long Term Bond Index - VBLTX

10% -Stocks- Federated Prudent Bear Fund - BEARX
  0%-REIT's- REIT Index Fund - VGSLX

[See Disclaimer]

Federal Reserve Policies Cause Booms and Busts

Why the Trade-Up Housing Market Is Gone

The Delinquency Problem Just Will Not Go Away

I have also been writing about the serious delinquency problem for four years. Wall Street continues to disregard the issue. 

There are two key points which are absolutely crucial for you to understand. 

First, the delinquency figures put out by the Mortgage Bankers Association and others are misleading and quite useless. Why? More than 22 million homeowners have had their mortgages modified since 2008. Most of them had been delinquent in their payments. Once the modifications become permanent, the loan is considered current and no longer delinquent. So of course, this pushes the delinquency rate way down. What do you think the delinquency rate would have been without these modifications? 

As I have emphasized in article after article, between 40% and 80% of homeowners with modified mortgages have re-defaulted. Take a look at the latest re-default figures through July 2014 from TCW for mortgages held in private, non-guaranteed mortgage-backed securities (RMBS).

5 signs Americans are flat-out broke

Why The Fed Desperately Props-Up The Stock Market

DYI

Man who broke Bank of England increases bet against US stock market

George Soros, the billionaire investor, increases his short position against the S&P 500 in America

The man dubbed "the man who broke the Bank of England" for his $10bn bet against sterling in the 1990s, has now taken out a $2.2bn bet that the S&P 500 will fall, according to a filing with the Securities and Exchange Commission. 

This takes Soros Fund Management's short position on the index from 3pc of his portfolio to 17pc. Mr Soros's net position on the index remains long.

DYI 

Ben Graham Corner

CITI: The Economy Has Entered Its Scary 'Phase 3' Where Bubbles Form Prior To A Crash

Phase 1: This begins at the end of a recession, when interest rates have fallen, money is cheap, but stocks are still battered. 

Phase 2: A bull market sets in during phase 2, when stocks start to rise as easy credit lubricates the economy. 

Phase 3: This is the tricky part. Stocks are still flying high, but credits spreads are widening as investors become increasingly unwilling to finance further risk. Corporate CEOs have now experienced a lengthy period of gains and become risk-happy. (And we'd note that central banks are already talking about tightening credit by raising interest rates.) Bubbles can form in Phase 3, Buckland says, as the high-flying stock market ignores the early warning signs of the deteriorating credit market. Hello, tech startup IPOs! 

Phase 4: Stocks react to the lack of available credit by collapsing, and we see the kinds of things you get in a recession: "This is the classic bear market, when equity and credit prices fall together. It is usually associated with collapsing profits and worsening balance sheets," Buckland says.

***************

 Dimes on Black and Dynamite on Red 

John P. Hussman, Ph.D.

Our perspective is straightforward: on the basis of measures that have been reliably correlated with actual subsequent market returns in market cycles across a century of data, we estimate that the S&P 500 Index will be no higher a decade from now than it is today. On the basis of nominal total returns (including dividends), we estimate zero or negative returns for the S&P 500 on every horizon shorter than about 8 years. SeeOckham's Razor and the Market Cycle for a review of the total return arithmetic behind these estimates, and Yes, This is An Equity Bubble for additional background on our present concerns. 

At the same time, we don’t have strong views about immediate market prospects. Still, even a run-of-the-mill completion to the present market cycle would wipe out more than half of the market’s gains since the 2009 low, so whatever gains the market experiences in the interim are likely to be transitory, and few investors will retain them by exiting anywhere near the top. Frankly, we doubt that the present cycle will be completed with the S&P 500 even above 1000 (a level that we would associate with historically normal subsequent total returns of roughly 10% annually). We readily accept that 3-4 more years of zero interest rate policy would justify market valuations 12-16% above what would otherwise be “fair value” (see Optimism vs. Arithmetic to see why) but we also recognize that the vast majority of bear markets have overshot to the downside. In short, an informed view of market history easily admits the likelihood that the S&P 500 will lose half of its value over the completion of the present cycle.

DYI Comments:  DYI has stated many times in the past that at these market levels a 45% to 60% decline is very much in play.  The price to dividend ratio is now 117% above average; please note that in the classic macro definition a bargain would be 25% (or more) BELOW the average.  That's a long way to go before stocks bottom out on a secular basis.

  8-1-2014

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  -17%

-17% x 60 (max. allocation) = 10% short

AGGRESSIVE PORTFOLIO - ACTIVE ALLOCATION

Active Allocation Bands 0% to 60%

68% - Cash -Short Term Bond Index - VBIRX

13% -Gold- Precious Metals & Mining - VGPMX

 9% -Lt. Bonds- Long Term Bond Index - VBLTX

10% -Stocks- Federated Prudent Bear Fund - BEARX
  0%-REIT's- REIT Index Fund - VGSLX

[See Disclaimer]

*********  

30 Years Ago Warren Buffett Gave Away The Secret To Good Investing And Correctly Predicted No One Would Listen

Isn't he just giving away the secret? 

"I can only tell you that the secret has been out for 50 years," Buffett writes, "...yet I have seen no trend toward value investing in the 35 years I've practiced it. There seems to be some perverse human characteristic that likes to make easy things difficult. The academic world, if anything, has actually backed away from the teaching of value investing over the last 30 years. It's likely to stay that way. Ships will sail around the world but the Flat Earth Society will flourish. There will continue to be wide discrepancies between price and value in the marketplace, and those who read their Graham & Dodd will continue to prosper." 

Indeed, all of the research continues to show that the vast majority of professional and retail investors are underperforming.

DYI Comments: Straight from the book Intelligent Investor chapter on Margin of Safety required reading for serious value players.

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: 1.04

As of 08-1-14

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  .........25.53
Bond Rate...4.03%

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.....

Common Sense Investing:
The Papers of Benjamin Graham
Benjamin Graham

********

The Worst Investment You Can Make: Buying a Home

Mathematically, it doesn't make sense

When you do the math on home ownership, it's plain that it is one of the worst investments you can make. Consider the purchase of a $350,000 house, which is slightly over the current average U.S. sales price. 

In most cases, you will be required to have a 20 percent down payment, or $70,000. This leaves you with a loan balance of $280,000, which at the current interest rate of 4.5 percent for a 30-year fixed mortgage will give you a monthly payment of $1,853.10. 

At the end of that mortgage, you will have paid $667,166 in principal and interest –- or $387,116 more than the original loan amount. During that same period, assuming a 1.5 percent rate, you will also have to pay another $126,000 in property taxes. (And there are plenty of places where the tax rate is higher.) 

But wait, there's more. Using a 1 percent maintenance rate -- for upkeep, maintenance, and repairs -- you can add another $3,500 per year in costs, bringing the total out-of-pocket costs over 30-years to $898,166. 

Since you have to live somewhere, let's assume you could find a similar rental home for 75 percent of your monthly mortgage payment, or roughly $1,400 per month. Then say that you invested that $70,000 down payment in the stock market, which has averaged a 9.4 percent return over the last 100 years. 

Then, each year, you add to your investment the difference between your rent payment and potential mortgage payment, as well as the money you save by not paying for property taxes, maintenance and other costs of home ownership. 

After 30 years, you would have nearly $3 million in your portfolio.

Don't believe me? Check out this super cool interactive calculator that the New York Times created. It allows you to input over 20 variables to try and justify owning vs. renting. See if you can make the math work out in favor of home ownership.

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How to Fund Your Retirement With Passive Income

An alternative to the established retirement planning model is to fund your retirement with passive income. Instead of focusing on saving a huge amount, you can focus on generating income outside your day job. It will take a lot of time and effort, but hopefully the passive income will be able to cover your monthly expenses at some point. 

Here are some sources of passive income: 

Rental properties. Many investors have been able to retire from their full-time jobs with rental income. It can be difficult to get started because you'll need a substantial amount of money for a down payment. One way to start in the rental property business is to rent out your old home when you move. You're familiar with the home and can probably manage it yourself. 

Dividend stocks. Many companies in the stock market will send their investors a regular dividend payment. For example, AT&T will pay $1.84 dividend for every share. The good thing about investing in dividend stocks is that you can start small. If you have $1,000 to invest, you can buy AT&T and receive a steady 5 percent dividend every year. Fifty dollars might not sound like much, but the dividend income will increase as you add more to your dividend portfolio.

DYI Comments:  Use can use our model portfolio (exclude the short position) to build passive income.  This overvalued stock, bond, REIT market will NOT be forever.  Better dividend and interest rates will prevail in the long run as markets regress back to the mean and overshoot.

The problem with 401k's or other retirement programs is that you do not build up spendable dollars between now and retirement.  Also in a taxable account there is no limit to how much you can save as your spendable dividends and interest increase.  Of course this method is reserved for the true hard core saver and you start at a young age.  Most folks simply find it difficult to save even when they have those extra, extra dollars.  Human nature just gets in the way.  But if you are young (20's or 30's) a hard core saver, forget buying the house, buy for passive income.  You will be surprised what you can accomplish in ten years!

DYI  

 

The seven drivers of the gold price

Comment: 'No one understands gold,' said NM Rothschild. But here are the seven key lessons for bullion investors

DYI Comments:  This excellent article explains volatility.  To understand value use the Dow/Gold ratio.

  

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.

Chart o’ the Day: S&P 500 current vs historical valuation

DYI Comment:  Click on the link above it shows that the S&P 500 is overvalued in 9 of the 16 widely used historical measurements.  With 3 out of the remaining 7 valuation assessments are very close to overvaluation.  So all in all, looks like 12 out of 16.  This is a very pricey stock market.

Why Global Turmoil Hasn’t Sunk US Markets, Yet

By Associated Press | August 16, 2014 

Why The U.S. Economy’s Bubble Of False Prosperity Is About To Burst

DYI

1 chart shows just how badly average investor lags — even cash

The chronic underperformance “suggests investors’ timing of asset allocation decisions must have been particularly poor, i.e., investors consistently bought assets that were overvalued and sold assets that were undervalued. They bought high and sold low,” he said. 

As for the beaten-down average investor, Bernstein thinks persistently poor timing is the result of volatility – or more specifically, investors’ reaction to increased volatility. Simply put, they tend to run away when things start getting chaotic. 

“History suggests that the best investment  opportunities are in asset classes that investors shun. We strongly feel investors’ ongoing fear of U.S. equities continues to offer substantial opportunity,” Bernstein says.

DYI Comments:  I agree with the general thrust of the article that average Joe saver/investor is a performance chaser just as dogs chase cars and to make matters worse they are despondent sellers especially at market bottoms.  Of course without these folks (including the so called professional investor who reacts the same way)  the market would never have its great rises and falls. The intelligent investor is one who shuns market timing and replaces it with market pricing.  Currently today based on dividends, the market's price to dividend ratio is now 117% greater than the average (23 or 4.42%) creating a very expensive market.  Poor returns will follow is the neighborhood of 0% to 2% over the next ten years. Whether there will be additional speculative returns going forward is always possible even if it is substantial as Bernstein mentions.  However value in the long run will play it self out by regressing back to the mean and as market always do - over shoot.

DYI    

Fund Managers' Current Asset Allocation - August

Low and Expanding Risk Premiums are the Root of Abrupt Market Losses 
John P. Hussman, Ph.D.

Through the recurrent bubbles and collapses of recent decades, I’ve often discussed what I call the Iron Law of Finance: Every long-term security is nothing more than a claim on some expected future stream of cash that will be delivered into the hands of investors over time. For a given stream of expected future cash payments, the higher the price investors pay today for that stream of cash, the lower the long-term return they will achieve on their investment over time. 

The past several years of quantitative easing and zero interest rate policy have not bent that Iron Law at all. As prices have advanced, prospective future returns have declined, and the “risk premiums” priced into risky securities have become compressed. Based on the valuation measures most strongly correlated with actual subsequent total returns (and those correlations are near or above 90%), we continue to estimate that the S&P 500 will achieve zero or negative nominal total returns over horizons of 8 years or less, and only about 2% annually over the coming decade. See Ockham’s Razor and The Market Cycle to review some of these measures and the associated arithmetic.

Fund Managers' Current Asset Allocation - August

Every month, we review the latest BAML survey of global fund managers. Among the various ways of measuring investor sentiment, this is one of the better ones as the results reflect how managers are allocated in various asset classes. These managers oversee a combined $700b in assets. 

You can see from the data that it should mostly be looked at from a contrarian perspective. Fund managers were underweight EEM more than any other market at the start of 2013, and it was the worst performer in the following year. In comparison, they were 20% underweight Japan in December 2012 and it was the best equity market in 2013.  Now, the underweights are the US, defensive sectors and bonds.

 

DYI Comment:  Excellent article along with impressive charts, well worth your time.

DYI

Inflation is worse than the Fed recognizes

BY MATTHEW SCHOENFELD

Bloomberg NewsAugust 11, 2014 

The Federal Reserve has repeatedly pointed to subdued inflation as a justification for carrying on with its extraordinary efforts to stimulate the U.S. economy. It should be paying much more attention to a trend that its inflationary gauge is missing: the tremendous run-up in the prices of all kinds of assets. 

One need look no further than the stock market to see that something is awry. In 2013, U.S. equity prices rose 28.3 percent in inflation-adjusted terms, while the comparable pace of growth in the broader economy was only 2.2 percent. In other words, in real terms, equity prices grew almost 13 times faster than the economic activity required to justify them – the highest ratio since the abandonment of the gold standard in 1971. In 2014, the ratio is on track to exceed 5 for the third year in a row.

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DYI Comments:  Despite this slow recovering economy many areas have picked up steam.  Auto sales are doing well, in fact, it could be called vigorous; unfortunately the latest push in sales is due to sub prime loans. Corporate profits, along with profit margins, are robust.  Consumer confidence has improved along with confidence for increased hiring unfortunately hourly wage growth is lagging.  Housing starts are still lagging but that is to be expected as it will take time to work off the excess inventory during the boom years.

All in all it sounds great.  The downturn ended in June of 2009 this economic recovery is long in the tooth, setting the stage  for an economic downturn along with a market blow off.  When you are on top of the mountain (more like a large hill) no matter what direction you go, its downhill.

DYI's averaging formula for dividends (Price to Dividends) is 117% greater than the average.  This market is devoid of any reasonable value for the long term investor.  As I stated more than I can count; The Great Wait Continues.  

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Retail Investors About to Get Fleeced Again

Facebook worth 128 times its profits? That's beyond optimistic – it's euphoric

The social network was valued at $192bn, more than Disney or Toyota, but you'll risk a lot trying to make a buck on Facebook

So you think you can flip? Proliferation of house flipping and rehab shows highlight a resurgence for big bucks in real estate and a general amnesia of recent financial history.

DYI