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 (PD) 52
Formula's range:
PD less than 12(8.3%) equals 100% invested
PD greater than 46(2.2%) equals 0% invested
DYI Comments: What our averaging formula provides is a non emotional asset allocator based upon how far away the market is from its average. DYI is a big believer in regressing to the mean and then over shooting (high or low).
Currently our formula is telling us that U.S. stocks have left any reasonable value behind with a dividend yield of 1.94% (PD of 52). This signals that stocks are horribly overvalued and poor returns if not losses will be the result's going forward. This is a huge overshoot by the market as measured by our formula and by many other methods that have been discussed on this blog.
Unless you believe that "it's different this time" or we are in "a new era" phrases that have destroyed more portfolios net worth.
Our model portfolio remains:
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 (short fund)
0%-REIT's- REIT Index Fund - VGSLX
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PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
Historically-informed investors are being given a hint of advance warning here, in the form of a strenuously overvalued market that now demonstrates a clear breakdown in internals. We observe these breakdowns in the form of surging credit spreads (junk bond yields versus Treasury yields of similar maturity), weakness in small capitalization stocks, and other measures. These divergences have actually been building for months, but rather quietly. Note, for example, that as the S&P 500 pushed to new highs in recent weeks, cumulative advances less declines among NYSE stocks failed to confirm those highs, while junk bond prices were already deteriorating. We don’t take any single divergence as serious in itself, but the accumulation of divergences in recent weeks should not be ignored. Notably, the majority of NYSE stocks are now below their respective 200-day moving averages (which again, isn’t serious in itself, but feeds into a larger syndrome of internal breakdowns in a market that remains strenuously overvalued).
An awareness of divergence and uniformity is the bread-and-butter of signal extraction – inferring true information signals from the sea of random noise. We take the present breakdown of market internals seriously. Whatever the crowd wishes to do about it, historically-minded investors should think carefully about whether a strenuously overvalued market with deteriorating market internals is a desirable environment for risk taking. For our part, the answer is a resounding “No.”
Cash at his Omaha, Nebraska-based Berkshire Hathaway Inc. (BRK/A) rose past $50 billion at the end of June, the first time it finished a quarter above that level since he became chairman and chief executive officer more than four decades ago.
Loose monetary and housing policies may soon pop the economy
Looking at the long-term economic indicators, more and more analysts see an asset bubble about to pop. When that happens, bad federal policies will take the blame.
That’s not what we’re seeing now. Instead, the Federal Reserve is taking extraordinary measures to keep interest rates artificially low, masking the effects of massive government borrowing. Combine this policy with America’s corporate-income tax, the highest effective rates in the developed world, and companies borrow “cheap” money and keep profits overseas.
That produces highly indebted corporations flush with cash. When interest rates increase, as they invariably will when the Fed tightens monetary policy, this debt will suddenly be much more expensive to service. Balance sheets will be ugly.
The increasing dissonance between the stagnation in productivity and the bullish stock market suggests that an asset bubble is in the making, inflated by the Fed’s running the printing presses and the Federal Housing Administration’s goosing of the housing sector. The tax man’s greed and the bureaucrat’s hostile rules are likely to prick that bubble.
DYI
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