Jim Stack says this is no time to sell stocks. Even though we’re more than 5½ years into a bull market, he believes low oil prices and low interest rates, along with rising consumer and business confidence, will power this bull market ahead for many months to come. In fact, he currently recommends that investors keep 83% of their assets in stocks.
DYI Comments: As with all markets they can over or under shoot that can surprise even the most ardent value player. No doubt with oil prices receding there is precedent for higher equity prices.
DYI's
The Oil Indicator
11/1/14
Oil Prices: 11/1/13..... $100.13
10/24/14.......$82.71 DOWN 18%
OIL INDICATOR POSITIVE
OIL INDICATOR POSITIVE
Oil prices are well known for their volatility in the short term, longer term due to dwindling reserves energy prices are in a secular bull market. Technologies such as fracking will extend the life of oil fields but major new discoveries arrive at a snails pace far slower than the world's growth.
As long as prices rise in a slow and orderly pace our economy can adjust to those changes, however if prices spike (international tensions, war etc.) high energy costs behave as a massive deflationary tax. This will send our economy tumbling down and very possibly the U.S. stock market.
If oil prices rise greater than 75% from one year-earlier level, investors at that time should shift their portfolio geared towards deflationary times. This would be oil indicator as negative.
If oil prices rise from one year-earlier less than 10% or drop then the inflationary play is in effect; a positive for economic growth along with possible higher stock prices.
Where to find one year-earlier oil prices? Alaska Department of Revenue
Oil indicator positive Oil indicator negative
REIT's 15% 5%
Energy 25% 10%
P.M.'s 20% 10%
Small Caps 40% 10%
Lt. Gov't Bonds 0% 65%
Are stocks nothing more than commodity driven speculations or are they companies expected to deliver cash flows into the hands of investors? Here is what John Hussman has to say regarding valuations; Do the Lessons of History No Longer Apply?
For example, every long-term security is fundamentally a claim on a very long-duration stream of cash flows that can be expected to be delivered into the hands of investors over time.
For a given stream of expected cash flows and a given current price, we can quickly estimate the long-term rate of return that the security can be expected to achieve (assuming the cash flows are delivered as expected).
Likewise, for a given stream of expected cash flows and a “required” long-term rate of return, we can calculate the current price that would be consistent with that long-term rate of return.
DYI Continues: My dividend model using historical averages and simple algebra has a 90% plus correlation for your future return. For your risk, you are expecting an average annual return of 1.3% for stocks bought or held today for the next 10 years. Go to sleep like Rip Van Winkle and awake 10 years from now and your return (before fee's, trading costs, taxes and inflation) will be very close to 1.3%. Of course you will be awake during those 10 years and you can expect one heck of a roller coaster ride.The failure to understand the inverse relationship between current prices and future returns is why investors frequently argue that rich equity valuations are “justified” by low interest rates, without understanding that they are really saying that dismal future equity returns are perfectly acceptable.
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