Monies Invested Today in a MMF or Short Term Bonds, go to sleep like Rip Van Winkle for 10 years, Then Awake To Out Perform the Market. This is a High Probable Event!

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."

Ben Graham's Corner II

3-1-15

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

Determining Intrinsic Value S&P 500

Current Fair Value 1153 to 1054

Market Overvalued 83% to 100%

DYI Comments:

All of the different ways to measure the market it continues to be extreme in its valuation.  10 year returns from here are now flirting with the very possible outcome of zero return.  That is a nominal return before inflation(2%?), management fees, trading cost, and possible income taxes.  This is clearly a negative return environment.  In order for the market to be in the fair value trading band of 1054 to 1153 a 40% to 50% decline is needed. This would bring future returns out of the sub atomic range and back to the more normal range of 7% to 10% depending on the severity of the coming bear market.

 March 1, 2015

Plan to Exit Stocks Within the Next 8 Years?

 Exit Now !

John P. Hussman, Ph.D.

Last week, the cyclically-adjusted P/E of the S&P 500 Index surpassed 27, versus a historical norm of just 15 prior to the late-1990’s market bubble. The S&P 500 price/revenue ratio surpassed 1.8, versus a pre-bubble norm of just 0.8. 

On a wide range of historically reliable measures (having a nearly 90% correlation with actual subsequent S&P 500 total returns), we estimate current valuations to be fully 118% above levels associated with historically normal subsequent returns in stocks. 

Advisory bullishness (Investors Intelligence) shot to 59.5%, compared with only 14.1% bears – one of the most lopsided sentiment extremes on record. The S&P 500 registered a record high after an advancing half-cycle since 2009 that is historically long-in-the-tooth and already exceeds the valuation peaks set at every cyclical extreme in history but 2000 on the S&P 500 (across all stocks, current median price/earnings, price/revenue and enterprise value/EBITDA multiples already exceed the 2000 extreme). Equally important, our measures of market internals and credit spreads, despite moderate improvement in recent weeks, continue to suggest a shift toward risk-aversion among investors. An environment of compressed risk premiums coupled with increasing risk-aversion is without question the most hostile set of features one can identify in the historical record. 

Short term interest rates remain near zero, 10-year bond yields have declined below 2%, and our estimate of 10-year S&P 500 total returns has declined to just 1.4% (see Ockham’s Razor and the Market Cycle for the arithmetic behind these historically-reliable estimates). 

Recent weeks mark the first time in history that our estimates of prospective 10-year returns on all conventional asset classes have simultaneously declined below 2% annually. We don’t expect a portfolio mix of stocks, bonds and cash to achieve any meaningful return over the coming 8-year period. 

The fact that the financial markets feel wonderful right now is precisely because yield-seeking speculation and monetary distortions have raised security prices today to levels where they are likely to stand years from today – with steep roller-coaster rides in the interim.

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

DYI Comments:  My formula based (Shiller PE10) Allocation for Stocks and Bonds has busted through the 25% level as of March 1st now rests at 22%.  Benjamin Graham stated that a Defensive investor should not go below 25%, I would hope that if he were alive today due to the extreme valuations he would bend a bit on that condition. DYI are NOT market timers but weight the market to determine our asset allocation based on valuation, sentiment, and history.

Due to the Fed's long term policy of sub atomic low interest rates the sentiment levels of the market have created a crowded trade.  All major asset categories except gold are at nose bleed levels as compared to money market funds or short term bonds (which pay near zero or very little) in the classic sense the big bargains.  What this is telling you that returns going forward for stocks, long term bonds, REIT's, will be so poor that cash or short bonds will out perform over the next 7 to 10 years.  Or the very least a tie without the gut wrenching roller coaster ride.

Market Sentiment

Smart Money buys aggressively!
Capitulation
Despondency--Short Term Bonds -------
Max-Pessimism *Market Bottoms*MMF --- Undervalued!
Depression
Hope
Relief *Market returns to Mean* 

Smart Money buys the Dips!
Optimism--Gold ---- Gold Stocks, Oil/Gas/Service stocks, European Stocks
Media Attention
Enthusiasm

Smart Money - Sells the Rallies!
Thrill
Greed
Delusional---Long Term Bonds ---------
Max-Optimism *Market Tops*--REITs ----- Overvalued!  
Denial of Problem--U.S. Stocks ----------
Anxiety
Fear
Desperation

Smart Money Buys Aggressively!
Capitulation

DYI's two model portfolios remain very defensive.  Super Max this month due to higher levels in the market has increased its short position from 8% to 12%.  Look for this to increase if madness of crowds decides to "blow the roof off" and propel this market to even more absurd levels.

AGGRESSIVE PORTFOLIO - ACTIVE ALLOCATION

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 Fund - VTSAX
 0% - REIT's- REIT Index Fund - VGSLX

[See Disclaimer]

Maximum Aggressive Portfolio

(Super Max)

73% Cash - Hussman Strategic Total Return Fund - HSTRX

15% Gold - Tocqueville Gold Fund - TGDLX

  0% Lt. Bonds - Zero Coupon 2025 Fund - BTTRX

 12% Stocks - Federated Prudent Bear Fund - BEARX

  0% REIT'S - REIT Index Fund - VGSLX

[See Disclaimer]

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!

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Use this site at your own risk.

PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.

DYI