Bull Markets Since 1871: Duration and Magnitude

DYI Comments:  The above chart was completed in April of 2013 or 24 months ago. Without double counting the month of April this pushes out this cycle to 72.  The median is 50 months which has now been long since surpassed.  Now were in the process of pushing past the average of 67 months. The moral of this story is this market is now long in the tooth which is added to the elevated valuations as measured by sales, earnings or dividends.

 Read What the Bull Giveth, the Bear Taketh Away for the bear market equivalents of the preceding bull table and chart. Butler|Philbrick|Gordillo and Associates demonstrate that, if it follows the median bear market, it will wipe out 38 percent of all prior gains.

All other markets that ran longer in duration except the 1988 to 2000 started at much lower valuations.  Anything is possible when it comes to markets, but dealing with the probable it is hard to imagine launching a continuation of this bull market to the outer stretches of duration.  The U.S., as we all know so well, has sub atomic low interest rates unless there is negative rates and/or another bout of QE it is difficult to fathom a continuation of some length for this bull cycle.

DYI's weighted averaging formula has pushed us out of the market.  For those of you who want a position in stocks to some degree DYI's  stock to bond allocation  is based upon the Shiller PE10. Currently, based on its weighted averaging formula has an investor at 28% in stocks.  Anyway you look at it, this is a very expensive market with future estimated 10 year average annual returns being sub par at best and slightly negative at it's worst.  In my 40 year plus years of experience in observing or participating in markets, this is not the time to be 100% invested or God forbid being on margin! 

DYI

A Warning to New York City – How Singapore’s Luxury Boom in Sentosa Cove Went Bust

My hometown of New York City is currently ground zero for a luxury apartment building boom driven primarily by oligarchs using the units as savings accounts, and foreign criminals looking to launder wealth accumulated via corruption, fraud or worse. This isn’t a new story, I’ve been writing about it for several years (links at the end), but a recent New York Times piece titled, Stream of Foreign Wealth Flows to Elite New York Real Estate, has put the issue front and center. 

Naturally, New York City isn’t the first, and certainly won’t be the last place to encourage hot foreign money to flow into its real estate sector in a haphazard and harmful manner that could have severe long-term repercussions once the boom turns to bust — which it invariably always does.

 I believe the cycle described above will play out similarly in NYC. I can’t tell you when exactly the political outrage will become sufficient to pass laws to cool down oligarch investment, but it will happen. What is so shocking to me is how many people seem to think such a thing can’t happen in Manhattan.

DYI Comments:  Overpay for any asset future returns will be dismal or negative for years (may you live so long).  NYC and especially Manhattan is for the big boys who are going to lose big money due to their leverage positions.  The cash buyers will not go bust but will have many years of sub par returns or modest losses.  In the investment world that is called "dead money!"  A go no
where returns only to be chewed up by inflation.  The age old dripping water torture.  Many will sell out, take their lumps and move to the next hot market hoping to get in early enough and out before that market crashes to make up for their losses.

If I was younger and had family money behind me I'd look to Detroit.  That right Detroit!  In my judgment this city has turned the corner and is doing what it takes to revive the motor city.  This is similar to the investment phase of security markets as exampled by the 1975 to 1982 stock market. Stocks did not improve all that much but they didn't go down further(great time to DCA).  An excellent time to troll at the bottom, for Detroit properties with potential.  IMHO those who have the money, the guts, and staying power will reaped high rewards over the next 20 years in Detroit RE.  If Detroit becomes a hot market (I have no idea one way or another) that would only be icing on the cake and a great time to sell out.

 Rank Nation Metropolitan Market Median Multiple

1 U.S. Detroit, MI 2.1
2 U.S. Rochester, NY 2.4

3 U.S. Buffalo, NY 2.6
3 U.S. Cleveland, OH 2.6

5 U.S. Cincinnati, OH-KY-IN 2.7
5 U.S. Grand Rapids, MI 2.7
5 U.S. Pittsburgh, PA 2.7
5 U.S. Saint Louis, MO-IL 2.7

9 U.S. Atlanta, GA 2.9
9 U.S. Indianapolis, IN 2.9
9 U.S. Kansas City, MO-KS 2.9
9 U.S. Louisville, KY-IN 2.9

13 U.S. Columbus, OH 3.0
13 U.S. Oklahoma City, OK 3.0

Above chart is for residential real estate, commercial properties is where your bang for the buck is located. Low cost residential follows low cost commercial properties.

For my Canadian followers (those who are young and family money) I'd sell out your high flying real estate mania(all of it) move to Windsor Canada jump in the car cross the Freedom Bridge and have boots on the ground in Detroit.
   

DYI

Federal Reserve may keep interest rates at zero for longer as officials fear dampening recovery

The FOMC said after its last meeting it “can be patient” as it considers when to raise the benchmark interest rate, even as it described the labour market as “strong.” A report the following week showed payrolls rose more than forecast in January to cap the strongest three-month gain in 17 years. 

Policy makers also discussed risks to the global economy. In their last statement they added “international developments” to the list of issues they will take into account when determining when to raise rates, in addition to employment, inflation and financial markets.

DYI comments:  The very possible and becoming more probable of world wide recession, it is no wonder the Fed's are discussing the global economy.

Wall Street’s Calling The Sheep: Buy The Dip Now, Join The Slaughter Later

Instead, we are in the crack-up phase of the two decades long central bank driven credit boom that has literally engulfed the planet. The resulting tidal wave of deflation owing to massive overinvestment and malinvestment in the worlds’ resource, manufacturing, transportation and distribution sectors will drive worldwide prices, profits and wages in a southward direction as excess supply slams up against inadequate demand. 

The chart below on the Baltic dry index is not a one-off oddity in the “incoming data.” It is, in fact, the incoming alert that the Wall Street recovery and decoupling stories are completely bogus and that the sheep are once more fixing to join the slaughter.

 

DYI Continues:  Don't be surprised when Treasury yields are below 2% for 30 year and below 1% for ten year paper as the world wide recession unfolds.  A very real possibility. How long the U.S. can be the lone wolf of growth (as good as it is) is anyone's guess.  I'm not in the camp that the U.S. will decouple over time the U.S. will catch up.  Currently it appears our neighbors to the north Canada are in recession, I don't think the U.S. is long behind.

DYI 

1 in 3 Americans on verge of financial ruin

According to a survey released Monday by Bankrate.com of more than 1,000 adults, 37% of Americans have credit card debt that equals or exceeds their emergency savings. “These numbers mean that three out of every eight Americans are teetering on the edge of financial disaster” — thanks to the fact that many of these folks might be hard-pressed to pay for an emergency should one arise, says Greg McBride, Bankrate.com’s chief financial analyst. “Not only do most of them not have enough savings, they’ve all used up some portion of their available credit — they are running out of options.” 

That’s particularly problematic considering that emergencies happen more often than you might think. A 2014 survey by American Express found that half of all Americans had experienced an unforeseen expense in the past year — some of which could be considered an emergency. Indeed, 44% of those who had an unforeseen expense(s) had one for health care and 46% for car trouble — two items that for many Americans are must-pay items, as you need a car to get to work and your health expenses are usually not optional.

DYI Comments:  I've never understood what runs though the minds of those who go paycheck to paycheck.  As credit becomes their substitute for savings when that unforeseen car repair or God forbid a medical bill that is impossible to postpone.  Running balances constantly on credit cards is a quick way to the poor house, your middle of the road billionaire are generally bankers; need I say more?

The solution is to live below your means.  I mean substantially below as an aspiring future millionaires.  They will not purchase a house (or rent equivalent) greater than 1.5 times income. Many will push it down to one times their income so that can pay off the house in fast order. Small house?  You bet it is!  Along with that as well millionaires are the biggest purchasers of used cars or trucks, keeping their purchase below the 30% threshold of one's yearly income for transportation. The reason they do this is to free up money to purchase income producing assets: stocks, bonds, and real estate to create additional cash flow to pay bills to further free up money for more income producing assets.  They put themselves into the virtuous circle as compared to the never ending vicious circle of debt payments.

DYI 

Deflationary Forces are Here; If they Continue...LOWER Interest Rates will Soon Follow!

Retail prices fall at fastest rate since records began

High street prices in the UK dropped 3.1pc in January, as retailers continued to slash prices to win over consumers

The supermarket price wars are proving beneficial for UK consumers, as new data from the Office for National Statistics (ONS) show a 3.1pc fall in prices in January compared to last year. 

This was the greatest decline since records began in 1997. 

Shoppers rushed to take advantage of the low prices, driving up retail sales by 5.4pc year-on-year, the ONS said.

Here in the U.S.

Producer Price Index: Headline and Core Go Negative Month-over-Month

The Headline Finished Goods for January came in at -2.13% MoM and is down -3.31% YoY. Core Finished Goods were up 0.16% MoM and 1.49% YoY.

Now let's visualize the numbers with an overlay of the Headline and Core (ex food and energy) PPI for finished goods since 2000, seasonally adjusted. The plunge over the past several months in headline PPI is, of course, energy related -- now at its lowest level since 2009. Core PPI has remained quite stable over the past year.

DYI Comments:  Deflationary forces appear to be on their way to the U.S.  If this is the case then anticipate lower interest rates in the near future with 10 year and 30 year Treasuries bonds bottoming out under 1% and under 2% respectfully.

Vanguard Readies ‘Ultra-Short-Term’ Bond Mutual Fund

The actively managed Vanguard Ultra-Short-Term Bond Fund will own high-grade bonds, including money markets, government and corporates, and will carry an estimated duration of about one year, according to the firm’s press release. It will be Vanguard’s 12th actively managed taxable bond fund. Gregory S. Nassour, and David Van Ommeren will serve as portfolio managers.

DYI Comments:  Current deflationary forces are in play for DYI's cash holdings we will continue to use Vanguard's Short Term Bond Index as it simply will pay more. However, at the end of this decade as Boomer's begin to exit the work force (but still consuming) a labor shortage will developed causing wage push inflation.  Along with wages pushing up costs so will the Fed's attempt to hold down interest rates (they will rise) as the
Treasury borrows massively to pay for Social Security and Medicare for the ageing Boomer's. The 2020's will be marked by high taxes, high inflation, and a labor shortage.

Short Term Bonds have Not Bottomed Out

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--Gold
Media Attention
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

AGGRESSIVE PORTFOLIO - ACTIVE ALLOCATION -  2/1/15

Active Allocation Bands (excluding cash) 0% to 60%

85% - Cash -Short Term Bond Index - VBIRX

15% -Gold- Precious Metals & Mining - VGPMX

 0% -Lt. Bonds- Long Term Bond Index - VBLTX

 0% -Stocks- Total Stock Market Index - VTSAX
 0%-REIT's- REIT Index Fund - VGSLX

[See Disclaimer]

The Great Wait Continues
DYI

Extreme Overvaluation and the Inventory Problem 

John P. Hussman, Ph.D.

Last week’s advance had the earmarks of a short-squeeze, featuring a low-volume advance to marginal new highs on a number of indices including the S&P 500, on hopes that a Greek bailout and a firming in oil prices will put a floor under global economic deterioration. On factors that affect our estimate of the market return/risk profile, credit spreads remain broadly wider than they were a few months ago, and our primary measures of market internals remain unfavorable. Meanwhile, equity valuations – on the most historically reliable measures we identify – are now fully 117% above their pre-bubble norms, on average. As of Friday, our estimate of prospective 10-year S&P 500 annual nominal total returns has declined to just 1.4%, suggesting that even the dismal 2% yield-to-maturity on 10-year bonds is likely to outperform equities in the decade ahead.

 The upshot is that equities are likely to produce total returns close to zero over the coming decade. But they still present something of an “inventory” problem. The basic inventory problem is to accumulate inventory prior to advances in price, to hold that inventory as long as it appreciates in price, and to release that inventory when prices are elevated. What we observe at present is a market where the inventory now fetches record prices and is likely to enjoy little return for long-term holders, and suffer severe losses over the completion of the present cycle. But should short-term demand become even greater, one can’t rule out a move to even higher prices and even more dismal long-term prospective returns – something to be celebrated by those who hold out long enough to sell at that point, but tragic for those who actually buy the inventory in the hope that it will be rewarding over time.

Suffice it to say that current equity markets are no place for long-term investors, and that even a resumption of risk-seeking investor preferences would demand a considerable safety net. For now, we believe the best interpretation of recent market action is as a hopeful, low-volume short-squeeze to marginal new highs, despite early deterioration in market internals following a period of extreme overvalued, overbought, overbullish conditions. This pattern is much like we observed in September 2000 and October 2007. Still, we can’t rule out a more durable resumption in risk-seeking preferences, which we’ll infer from market internals and other factors, and we’ll take fresh evidence as it arrives in any event.

DYI Comments:  Completely agree with Professor Hussman DYI's aggressive portfolio remains the same, very defensive.

AGGRESSIVE PORTFOLIO - ACTIVE ALLOCATION -  2/1/15

Active Allocation Bands (excluding cash) 0% to 60%

85% - Cash -Short Term Bond Index - VBIRX

15% -Gold- Precious Metals & Mining - VGPMX

 0% -Lt. Bonds- Long Term Bond Index - VBLTX

 0% -Stocks- Total Stock Market Index - VTSAX
 0%-REIT's- REIT Index Fund - VGSLX

[See Disclaimer]

DYI

 

Americans' 401k Totals Just Reached a New Record.  Don't Celebrate Yet...

The average 401(k) balance reached a record high of $91,300 at the end of 2014, Fidelity Investments reported Thursday. 

That’s starting to sounds like real money. Even better, the average balance for employees in the plan for at least 10 years was $248,000. 

So, is the retirement crisis over? Not so fast.

Roughly one-third of all U.S. families have no money set aside for retirement, Federal Reserve data shows. This includes 19 percent of people aged 55 to 64. 

Plus, looking at Fidelity’s average makes the number look higher. The median account size at Fidelity is just $24,600. That means there are a lot of high net worth accounts skewing the overall average far higher. Baby boomers, who are at or near retirement, are 36 percent of account holders, according to Fidelity.

Many financial planners espouse the “4 percent rule,” which would mean you’d need to have $1 million saved by retirement to safely withdraw $40,000 your first year and make sure your next egg lasts 30 years. The average Fidelity account holder is a long way away from that kind of retirement security. 

DYI Comments:  Our borrow now and pay later society and our sub atomic low interest rates has dropped our savings rate into the cellar.

  

In order to fashion any sort of retirement or to simply get ahead in the savings game a mere 15% savings rate is not enough.  25% is your target plus.  Don't despair not all of this money is destined for retirement many decades from now.  Let's back track for a moment.  The three biggest expenses for young(er) people is housing, cars, and student loans.

Student loans unfortunately has done nothing more than constantly increased the cost of higher education.  Simply put the money went to the University not to the student to defray those costs of higher education, so much so college costs are increasing faster than medical expenses.

Do whatever it takes to hold down student loan amounts.  Attempt to pay as you go.  I know it will take longer and in some cases far longer to get through school.  I routinely run into students who have 30, 40, 50 thousand dollars of student loan debt for undergraduate degrees.  These for profit schools many will have the same dollar amounts as the undergraduate; they have an associates degree.  At any rate think outside the box.  On line schooling, trade schools, pay as you go.  Anything to hold the line on borrowing money.  Student loans cannot be discharge in bankruptcy.

There are ageing Baby Boomers who are having their Social Security income garnished to pay for long ago student loans! Ouch!

Cars or trucks are to needed to get you from point A to point B in a safe manner.  Attempt to pay no more than 30% of your yearly income for your transportation.  At 50 grand income that is a new Honda Civic (or something similar) obviously as a student you will be making far less shop for a quality used car (4 or 5 years old) to get you as close to that 30% threshold as possible.

Housing:  If you are living at home, stay there, til you graduate.  Besides Mom makes great home cooked meals and when you're pressed during finals your laundry may get done as well.  If you are on your own then rent no more than the equivalent for buying at no more than 1.5 times your income. Aspiring millionaires (those who actually make it) will not spend more than 1.5 times their income for housing and that is the maximum.  Many will go as low, to a 1 to 1 ratio.  If you have to play the roommate game then do so.

Back to that 25% threshold for savings(You're finished with school and loans).  Due to our sub atomic low interest rates bond returns such as the 10 year Treasury are at or below 2% along with a "jacked up" stock market, future estimated 10 year average annual returns are 2% or less as well, increased savings is a must.

15% savings rate for retirement and 10% for future general expenses such as car replacement.  Live way below your means, drive modest cars, and most importantly don't give a damn what other people think about your modest lifestyle.  In the end you will have a bountiful life free of stress caused by money.      

DYI

Value = [10yr-AVG.-IA-EPS] x (8.5 + 2 x G) x (4.4 / Aaa)

Determining Intrinsic Value S&P 500

Current Fair Value 1157 to 1057

Market Overvalued 81% to 98%

Over 53 years ago in his 1962 edition of Security Analysis, Benjamin Graham developed a stock valuation model based upon a few market and firm-related variables; I've simply adjusted this formula to determine the S&P 500 intrinsic value.  Wise old Ben observed many common stocks, his attempt is to determine the average stock price to recent earnings plus expected earnings growth.  Higher the current earnings and higher the expected earnings growth, greater the intrinsic value. The goal is to determine the proper PE multiple (similar to PE10) and ultimately the fair value for a stock or in this case the S&P 500.

Value =[10yr-AVG.-IA EPS] x (8.5 + 2 x G) x (4.4 / Aaa)

Where: Value = Estimated Value of S&P 500

• 10yr-IA -EPS = 10 years average inflation adjusted earnings per share. Multpl.com
• G = 10 year real average expected annual earnings growth
• Aaa = Moody's Seasoned Aaa Corporate bond yield (St. Louis Fed) 
• (8.5 + 2*G) x (4.4 / Aaa) = Earnings multiplier

The Growth Rate Controversy 

The growth rate is the most controversial of all numbers just watch the financial channels talking heads on T.V.  Many will throw out numbers that are so absurd to the test the level of mental competency or a sales pitch for the naive.  Plus the U.S. has an unsustainable profit margins that either will be reduced by competition or government edict as we shift from pro business to pro labor policies.  Another factor that pushes GDP growth and ultimately corporate growth as well has been our fertility rate. That has been dancing on a head of a pin between non growth or below replacement since 1973.  If it were not for emigration our population momentum would have stalled years ago along with that portion of GDP growth.

I've gone to two sources for an average growth rate for corporate earnings.  Jason Zweig who wrote his commentary portion of Benjamin Graham book The Intelligent Investor (soft cover page 85) stated that real average earnings growth between 1.5% to 2.0%.  William J. Bernstein book Rational Expectation (soft cover page 160) states that corporate real earnings per share growth rate has average 1.0% since 1871.  The lower number is derived by the dilution of stock offerings (despite their buybacks) for empire building and stock options of many CEO's.

And the Band Played On...1.0% to 1.5%

The solution is a fair value trading band for fair value.  To give an investor a sense of how far above, within, or below fair market in order to adjust one's asset allocation to the risk level of the market.

DYI        

Dividend Room Mid Month Update...A Few New Names have made the List! Average Yield 5.04% or 168% Greater Yield than S&P 500 (1.88%)

Updated 2-16-15

THE DIVIDEND ROOM

Just as the name Dividend Yield Investor indicates is my affinity with dividends; for they have never gone out of style as far as I'm concerned.  In the end they are the real reason investors, as opposed to speculators, purchase quality companies with increasing dividends.  In my mind these are the true growth stocks.  As the dividend is increased over time so will the stock price. As the legendary Charles Dow has written:

"To know values is to know the meaning of the market.  And values, when applied to stocks, are determined in the end by the dividend yield."  

The Dividend Room is a new addition to my blog showing a list of high quality dividend paying stocks for your further study.  All picks are basic time tested value approach. All companies have a reasonable low level of debt for their respective industry and a low PE multiple. Of course a competitive dividend yield two times greater than the S&P 500 with a payout ratio less than 85% for utilities and all others less than 50%.  Also screened companies that have increased their dividends on a regular basis (the true growth stocks). Included is additional screens based upon the Benjamin Graham approach for the defensive investor.

Our attempt is to find ten high quality companies with a yield double that of the S&P 500.  Recommend selling when the dividend yield is less than the S&P 500.

Please note:  Companies that fall off the list are not necessarily companies gone bad they simply have risen in price or no longer represent the deepest value and/or highest dividend yield.

For diversification purposes recommend building up to 40 to 50 companies.

The price of oil is in the news which has pounded down the prices of many of the finest oil/gas/servicing companies in the world.  Let's start there and expand into other industries.

Yield     S&P 500 Dividend Yield 1.95%

               Oil/Gas/Service 

5.10%    Sasol Limited symbol SSL

4.00%    Helmerich & Payne symbol HP

4.30%    Spectra Energy Partners SEP   

              Industrial Metals & Minerals
6.60%   Alliance Resource Partners LP symbol ARLP

               Utilities

6.60%    Companhia de Saneamento Basico symbol SBS

4.10%       UIL Holdings symbol UIL

               Apparel Stores

4.70%    Guess' Inc.  symbol GES

               Tobacco Products

4.50%    Universal Corp. symbol UVV

               Toys & Games
5.50%     Mattel, Inc. symbol MAT

        

DYI recommends that you use our stock allocation formula to arrive at your allocation of stocks to bonds.  Currently it is at 28% for stocks.  For your cash holdings Vanguard's Short Term Bond Index symbol VBIRX or for those in a high tax bracket Vanguard's Limited Term Tax Exempt VMLTX.

 This blog site is not a registered financial advisor, broker or securities dealer and The Dividend Yield Investor is not responsible for what you do with your money.

This site strives for the highest standards of accuracy; however ERRORS AND OMISSIONS ARE ACCEPTED!

The Dividend Yield Investor is a blog site for entertainment and educational purposes ONLY.

The Dividend Yield Investor shall not be held liable for any loss and/or damages from the information herein.

Use this site at your own risk.

PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.

Sweden cuts rates below zero and starts QE

Sweden's central bank has cut its key interest rate from 0% to a record low of -0.1%. 

It also launched a programme of quantitative easing, buying government bonds worth 10 billion kronor ($1.2bn) to inject cash into the economy. 

The central bank, or Riksbank, said that there was a risk that inflation would not rise fast enough. 

Prices have risen in only one of the last 12 months. The annual inflation rate in January stood at -0.3%.

DYI Comments:  Deflation is spreading to a country near you and will be moving in a westward direction.  A slowdown is afoot.  How long will the U.S. be the lone wolf of growth (as good as that is) is any ones guess.  What we do know stock and bond markets are very expensive in relation to sales, earnings, and my favorite dividends.

DYI  

DYI Comment:  I've reported on Canada as they are in a massive housing mania (far greater in scope than what happened here in the U.S.) that has been propelled from the over use of debt.  If oil/gas and the other nature resource commodities that Canada exports remains low the bloom will be of the rose as single family housing declines in the magnitude of 50% and condos will be smashed down by 70%.  Those declines will be years in the making and will be inflation corrected.

Purchasing a house or condo such as in Vancouver Canada for over 10 times your income is beyond my scope of imagination.  Aspiring millionaires who went on to become an actual millionaire the majority will never purchase a house (or equivalent rent) greater than 1.5 times income.  That is 1.5 time income at the maximum.  Many will go down as low as 1 times income.  The reason is simple the house can be paid off quickly leaving monies for building up their business' and to acquire stocks, bonds, and real estate.  They are also the biggest purchasers of modestly priced USED cars or trucks. This of course leaves money available to weather economic storms and to continuously purchase stocks, bonds and real estate.  Such a simple concept why do so few follow it??

DYI  

Baltic Dry closed at 559 last Friday that’s down nearly 50% in 12 months!

The Shipping News: Brutal. As per usual

Those who see the Baltic Dry as an indicator have one very strong proof point: it plummeted through the summer of 2008, presaging the global recession that officially kicked in later that year. 

Now, if you believe in history repeating itself, then get ready: the Baltic Dry closed at 559 last Friday. That’s down nearly 50% in 12 months and nearly 30% year-to-date, and the lowest level it’s tested in 29 years.

 

DYI Comment:  Over the past ten years there has been an increase in the number of bulk and container ships built.  However, this does not explain the shipping rate costs from around July of 2014 til the spike in November of that year followed by a precipitous drop.  That drop is what has most economists concerned about as I find it highly unlikely that the ship building industry just launched so many new ships that it dropped this index.  The price of  copper is very telling as this metal is used in almost everything that is built world wide.  Prices have been dropping significantly.

  
The fall off in price coincides with the Baltic Dry index as well; what we have here is a global economy that is slowing.  World wide recession?  So far no.  Unfortunately evidence is mounting in that direction as Australia has just experienced a sudden drop in employment.

From Down Under: Australia

Unemployment in surprise jump to 6.4pc

Australia's unemployment rate surged to 6.4 per cent in January, making its surprise fall to 6.1 per cent in December short-lived.

The Australian Bureau of Statistics said on Thursday that the number of people employed fell by 12,200 to 11.668 million in January, against market expectations of a fall of 5,000.

This took the official unemployment rate to 6.4 per cent from 6.1 per cent in December, while the participation rate remained steady at 64.8 per cent of the population.

CommSec chief economist Craig James agreed.

"On the basis of the continued softness of the job market, there seems no barrier to the 

Reserve Bank cutting interest rates again at the March board meeting," he said.

"Simply, Australia is growing at a far slower rate than its potential."

DYI Continues:  Economic imbalances created by massive amounts of credit are creating malinvestmet world wide such as in Eaton Square England where a two bedroom penthouse flat is the same asking price for a villa on 60 acres of land.

London house prices: Napolean's 74-bed mansion is up for sale - at the same asking price as a luxury apartment in the UK capital

The historic property, in the Piedmont of Italy, is set in 60 acres and boasts 13 bedrooms, 9 bathrooms and a private chapel with seating for 30 people.

 

The property also has two dining rooms, two kitchens, ten reception rooms and a guest house.There are beautiful formal gardens and terraces along with a vineyard which, if restored, could produce around 100,000 bottles of wine per year.The owners have now put the villa and its grounds on the market with Mayfair estate agency Beauchamp Estates.It is available for £3.8m - the same price as a two-bedroom penthouse that Beauchamp has for sale in Eaton Square, London.

DYI:  Italy of course is clearly in recession if not close to a depression and England has gone mad with the use of debt.  This will not end well for England and as other countries end their credit super cycles.  The possibility of world wide recession grows by the week.  So far the U.S. has been the lone wolf of growth.  The U.S. economy came out of recession in June of 2009 then began its slow growth recovery (of sorts).  Now the economy is long in the tooth with imbalances that will have to be worked off as exampled with the fracking industry that has been powered by massive amounts of debt.  Many will go bankrupt with unemployment leaping in that industry here in the U.S. and Canada.

With a sky high stock market it is not time to "party on" but to be very defensive waiting for better values ahead.  Dividend yield under 2%(S&P 500) and the Shiller PE10 over 27 this is clearly for an investor a market to have very little in the way of stocks or none at all.

AGGRESSIVE PORTFOLIO - ACTIVE ALLOCATION -  2/1/15

Active Allocation Bands (excluding cash) 0% to 60%

85% - Cash -Short Term Bond Index - VBIRX

15% -Gold- Precious Metals & Mining - VGPMX

 0% -Lt. Bonds- Long Term Bond Index - VBLTX

 0% -Stocks- Total Stock Market Index - VTSAX
 0%-REIT's- REIT Index Fund - VGSLX

[See Disclaimer]

DYI

This drop (in oil prices) is a buying opportunity to dollar cost average into your favorite oil/gas/service mutual fund.

Oil could plunge to $20 and this might be ‘the end of OPEC': Citigroup

The recent surge in oil prices is just a “head-fake,” and oil as cheap as $20 a barrel may soon be on the way, Citigroup said in a report on Monday as it lowered its forecast for crude. 

Despite global declines in spending that have driven up oil prices in recent weeks, oil production in the U.S. is still rising, wrote Edward Morse, Citigroup’s global head of commodity research. Brazil and Russia are pumping oil at record levels, and Saudi Arabia, Iraq and Iran have been fighting to maintain their market share by cutting prices to Asia. The market is oversupplied, and storage tanks are topping out. 

A pullback in production isn’t likely until the third quarter, Morse said. In the meantime, West Texas Intermediate Crude, which currently trades at around US$52 a barrel, could fall to the $20 range “for a while,” according to the report. The U.S. shale-oil revolution has broken OPEC’s ability to manipulate prices and maximize profits for oil-producing countries.

Oil’s surge to bull market seen as short-lived as global glut persists

After suffering its longest rout in history, crude rebounded Tuesday, entering a bull market after soaring 24% from a six-year low reached in January. Behind the gain was speculation that curbs in investment will cut production. 

For all the optimism among traders, firms from Barclays Plc to Societe Generale SA and UBS Group AG say the rally is just temporary because less spending won’t eliminate a glut overnight. Instead of heading back to US$100 a barrel, oil could fall as low as US$30 because supply surpluses won’t disappear overnight, said Miswin Mahesh, a commodities analyst at Barclays.

“It’s hard to fight with the fundamentals,” said Tariq Zahir, a New York-based commodity fund manager at Tyche Capital Advisors. “Until you really see production starting to be cut, you are not going to see any kind of sustainable rally. Any kind of strength will be sold into.” 

“I am not convinced prices have hit bottom — it is too soon to say that,” Mike Wittner, Societe Generale’s New York-based global head of oil research, said by e-mail Tuesday. “Rig counts are important because they are a leading indicator of production. But there is a lag of several months before we see an impact on production.”

DYI Comments:  Whether oil prices are going to $30 or $20 a barrel is to be seen.  What we do know is there is weakness in the industry that is temporary.  Oil despite the new technologies has not had a major oil find since the Vanqor field of Russia in 1988, which has over 500 million tons of oil in estimated reserves.  This drop is a buying opportunity to dollar cost average into your favorite oil/gas/service mutual fund.  DYI's all time favorite is Vanguard's Energy Fund symbol VGENX.  Oil and gas are of limited supply, as more and more countries throw off the shackles of socialism hydrocarbons will be in demand.

This drop (in oil prices) is a buying opportunity to dollar cost average into your favorite oil/gas/service mutual fund.

Oil and gas is a natural resource that is in limited supply and will continue so over the next decades.  Nothing has changed the secular upward move in oil/gas prices this temporary drop in prices is a buying opportunity for those with a long term investment outlook.

I would be remiss not to point out precious metals and their mining companies been through a brutal bear market, on average 70% decline from peak to trough.  Future returns now look promising as the mining companies stock prices have significantly dropped more than their base metals.  DYI's favorite (of course) is Vangauard's Precious Metals and Mining Fund symbol VGPMX. Everything else in the stock and bond world has been "jacked up" in price due to our Fed's sub atomic low interest rates my model is very defensive.

AGGRESSIVE PORTFOLIO - ACTIVE ALLOCATION -  2/1/15

Active Allocation Bands (excluding cash) 0% to 60%

85% - Cash -Short Term Bond Index - VBIRX

15% -Gold- Precious Metals & Mining - VGPMX

 0% -Lt. Bonds- Long Term Bond Index - VBLTX

 0% -Stocks- Total Stock Market Index - VTSAX
 0%-REIT's- REIT Index Fund - VGSLX

[See Disclaimer] 

DYI

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."

February 9, 2015

Expect a Decade of 1.7% Portfolio Returns from a Conventional Asset Mix 

John P. Hussman, Ph.D.

Speculative yield-seeking has driven asset prices higher in recent years to the point where many asset classes now provide no risk premium at all. The most historically reliable equity valuation measures we identify (having a correlation of about 90% with actual subsequent 10-year total returns) remain about 112% above – more than twice – their pre-bubble norms. We presently estimate 10-year S&P 500 nominal total returns averaging just 1.6% annually. Yes, even less than the 1.9% yield-to-maturity on 10-year Treasury bonds. Even here, we’re assuming historically normal future nominal growth in revenues, nominal GDP and so forth of about 6% annually – see Ockham’s Razor and the Market Cycle for the arithmetic and long-term historical record of these estimates.

By our estimates, never in history, prior to the past 5 weeks, have the prospective 10-year nominal annual total returns of both stocks and Treasury bonds been below 2% at the same time. We currently project a 10-year nominal annual portfolio total return averaging only about 1.7% annually for anything close to a standard portfolio mix of equities, bonds and cash – regardless of how much diversification one has within each of those asset classes.

DYI Comments:  DYI's estimated 10 year return and Professor Hussman's are near the same.

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.

DYI's 10 year estimation is based exclusively on dividends (Dividend Yield Investor!). Dividends in the long run are why investor's as compared to speculator's purchase common stocks.  The ability to either spend their dividends or compound them back into additional shares or make other investments.  An investor's point of view, he or she makes their money when they buy based upon a quality company spouting a competitive dividend yield.  Even today despite this high flying overvalued stock market there are quality companies (excellent balance sheets) that have a dividend yield 100% greater than the S&P 500.  As you might expect due to the speculative nature of valuations there are very few of them.

Updated 1-20-15


THE DIVIDEND ROOM

Yield     S&P 500 Dividend Yield 1.95%

               Oil/Gas/Service 

6.20%    Sasol Limited symbol SSL

4.60%    Helmerich & Payne symbol HP

4.20%    Spectra Energy Partners SEP   

4.10%    Chevron Corp.  symbol CVX

              Industrial Metals & Minerals
6.50%   Alliance Resource Partners LP symbol ARLP

               Utilities

4.70%    Companhia de Saneamento Basico symbol SBS

               Apparel Stores

4.50%    Guess' Inc.  symbol GES

               Tobacco Products

5.20%    Universal Corp. symbol UVV

              REIT - RETAIL

4.10%   HMG/Courtland Properties symbol HMG

             Financial Asset Management

4.60%  Calanos Asset Management symbol CLMS

DYI recommends that you use our stock allocation formula to arrive at your allocation of stocks to bonds.  Currently it is at 25% for stocks.  For your cash holdings Vanguard's Short Term Bond Index symbol VBIRX or for those in a high tax bracket Vanguard's Limited Term Tax Exempt VMLTX.

Bond and Dividend Averages

Currently the U.S. stock market price to dividend ratio is now 126% higher than its average going back to 1871.  Bonds price to interest ratio is a staggering 132% higher than its average as well.  Those who purchase stocks and bonds today and then go to sleep like Rip Van Winkle to awake 10 years from now would be aghast at their dismal return.  Returns are so poor going forward it will not matter if your stock/bond allocation is 70%/30%, 50%/50% or 30%/70% etc. there is no where to hind except in short term bonds.  The only area that is a moderate buy is gold mining companies that have experienced a brutal bear market or oil/gas/servicing companies that have suffered their own bear market.

DYI's model portfolio remains very defensive 

AGGRESSIVE PORTFOLIO - ACTIVE ALLOCATION -  2/1/15

Active Allocation Bands (excluding cash) 0% to 60%

85% - Cash -Short Term Bond Index - VBIRX

15% -Gold- Precious Metals & Mining - VGPMX

 0% -Lt. Bonds- Long Term Bond Index - VBLTX

 0% -Stocks- Total Stock Market Index - VTSAX
 0%-REIT's- REIT Index Fund - VGSLX

[See Disclaimer]

My secular sentiment indicators spells it out with money market funds at max-pessimism while waiting for the next recession to bottom out short term bonds and max out long term bonds. REIT's and stocks are either on top of the mountain (max-optimism) or just beginning their long journey to max-pessimism.  Gold is the only standout with relative value.

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--Gold
Media Attention
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

The true value player knows of a not so secret weapon; PATIENCE! This period of time of massive overvaluation now going on 2 years plus is a blink of an eye.  It also gives you time to shore up your personal finances plus build cash waiting for the next bear market to put money to work.

Till next time!

DYI

Kenneth E. Royer Editor /Chief Cook and Bottle Washer