Market Valuation Overview: The Drift Higher Continues
Here is the same chart, this time with the geometric mean and deviations. The latest value of 89% is also above the two standard deviation and the highest level outside 46 months during the Tech Bubble from September 1997 to July 2001.
As I've frequently pointed out, these indicators aren't useful as short-term signals of market direction. Periods of over- and under-valuation can last for many years. But they can play a role in framing longer-term expectations of investment returns. At present market overvaluation continues to suggest a cautious long-term outlook and guarded expectations. However, at today's low annualized inflation rate and the extremely poor return on fixed income investments (Treasuries, CDs, etc.) the appeal of equities, despite overvaluation risk, is not surprising.
Pimco moves to expand equity push with new stock strategies
(Reuters) - Pimco, the bond fund manager, is expanding its presence in equity management with seven new stock strategies in partnership with asset manager Research Affiliates LLC.DYI Comment: Bond managers moving into stocks. This is not fund managers with a fiduciary mentality but money marketers. Stock mutual funds are hot as a pistol and they are raising money for funds under management to expand their revenue base. Normally I have no problem with business expansion (I applaud all those who do) but at these market levels these funds will end in a trail of tears. I wonder how many will be merged or closed in the years ahead to hide their poor performance? Closing or merging funds is the oldest trick in the fund business to hide poor performance and enhance their future returns for sales and marketing purposes.
All that is missing is a hot IPO market that signifies a market top. The Great Wait Continues.
Deflation hits eurozone as energy prices fall
Inflation in the eurozone has turned negative, official figures have shown, with prices in December 0.2% lower than the same month a year earlier.
The tip into deflation adds pressure on the European Central Bank (ECB) to take further action to stimulate the bloc's economy.
Euro area annual inflation down to -0.2%
Euro area annual inflation is expected to be -0.2% in December 2014, down from 0.3% in November, according to a flash estimate from Eurostat, the statistical office of the European Union.
DYI Comment: It appears that deflation is heading to North America imported from Europe. The global economy slowing down and the growing possibility of debt defaults deflationary forces will prevail. Yields are rising on low rated (junk bonds) paper as Treasury securities rally thereby lowering their rates. This is a symptom of an economy under stress as a market blow off in junk is a high probable event. There is simply too much debt in the system to be supported by these companies. Another recession will be needed to clean out the dead wood. While that is happening look for mild deflation (-1% to -2%) to prevail during the teen years of this decade.
Buffett writes:"The common intellectual theme of the investors from Graham-and-Doddsville is this: they search for discrepancies between the value of a business and the price of small pieces of that business in that market."
And that's pretty much it. Buffett doesn't think about buying a stock; he thinks about buying a business.
The Late Benjamin Graham
AP Benjamin Graham. The name "Graham-and-Doddsville" comes from Benjamin Graham — whom Buffett studied under at Columbia — and Dave Dodd, with whom Graham literally wrote the book on security analysis.
"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."DYI Comments: Here at DYI all I do is apply historical long term valuation measures to the current market based upon our formula to determine your asset allocation. Currently today the stock market as measured by dividends (our favorite!) is now 130% above its average since 1871. This average (4.42% or 23 times dividends) has seen it all. Growth, depressions, war, peace, inflation, disinflation, deflation, high, medium, low taxes, balanced budgets, out of balanced budgets and anything else I can't think of. This is a sky high market to where future returns will be poor at best and market losses at worst over the next ten years. As a value player those purchasing stocks at these levels are way over paying. Yes, there is a wide discrepancy today between price and value; its overvalued!
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Canada's Housing Bubble
All-time high: Price of Vancouver detached home hits $1 million
The City of Glass has hit a new all-time high for home prices.
The benchmark home price index hit $1,002,200 last month for detached single-family properties in Greater Vancouver, according to new figures released by the Real Estate Board of Greater Vancouver.
The benchmark price for all residential properties in the region reached $638,500 in Dec. 2013, a 5.8 per cent increase from the year before.
The benchmark price of an apartment in Greater Vancouver now sits at $380,700, according to the index.
Last summer, a global credit ratings agency said Canada’s housing prices are overvalued by a whopping 20 per cent.
Fitch Ratings blames record-low interest rates for contributing to soaring levels of household debt-to-income levels: The average Canadian owes $1.63 for every dollar earned.
DYI Comments: I suppose almost everyone enjoys watching a train wreck. Canada is going to experience a deflationary smash as this commodity driven country experiences a massive debt blowoff in the private sector. Low commodity prices will only arrive faster to their deflationary smash (especially oil) as the average Canadian is 163% (U.S. topped at 130%) in debt to income. The above headline is linked to the article and they have a short video (1:49) showing houses at the one million mark; these homes are anything close to a McMansion. The typical house shown is around 2300 square feet. Canadian's in Vancouver is over paying to the tune of 600,000 to 700,000 in my judgment.
DYI
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