Steven Romick’s FPA Crescent Fund 2Q15 Commentary – No Value To Find

It continues to be a seller’s market. Private equity firms have been refinancing their debt at historically low rates and/or reducing their ownership stakes for the past few years. Shares in initial public offerings (IPOs) are being sold at the quickest rate in years. 2014 was the largest IPO year since 2000 and IPOs remain robust in 2015, thus far, despite decelerating from last year.6 And, the vast majority of those newly-issued shares in 2015 are for companies that have negative earnings. 

It remains challenging to find those investments that appropriately discount a reasonable worst case scenario. Until such time as that changes, we continue to add depth and breadth to our library of prospective investments so as to be ready when opportunities arise. Mark Landecker, Brian Selmo and I thank you for your continued trust in our Contrarian Value team.

Respectfully submitted,Steven RomickPresidentJuly 14, 2015

DYI Comments:  No doubt....It is a seller's market.  Prices in relation to sales, earnings, or dividends have now topped all preceding U.S. markets except the last few weeks of 1929 or the year 2000 Great Insanity.  Currently today on a price to dividend basis the market is 117% higher than its average since 1871.  Once our averaging formula exceeds 100% DYI is "kicked out of the market" and for good reason.  The market has transformed at those levels to nothing more than a gambling hall all looking for greater fools to sell their over priced securities.

Except for Precious metals mining companies or oil/gas/service companies there is no other value left to be found.  You may find some possibilities with individual stocks such as the list DYI has in its Dividend Room even there the pickings are very slim.  World wide central banks along with our Federal Reserve have embarked upon ultra low interest rates which only till very recently rates have moved up a bit.  A very little only to have our averaging formula with a 2% position at the long end of the market.  With commodity prices dropping all around the world deflationary talk will reemerge in the financial press along with dropping interest rates despite the Fed's intentions.

So hang onto your head while everyone else is losing theirs.  The Great Wait Continues and will reward the patient value player.

DYI

Memorize This, Earn a Dollar 

John P. Hussman, Ph.D.

If I were to choose anything that investors should memorize – that will serve them well over a lifetime of investing – it would be the following two principles: 

1) Valuations control long-term returns. The higher the price you pay today for each dollar you expect to receive in the future, the lower the long-term return you should expect from your investment. Don't take current earnings at face value, because profit margins are not permanent. Historically, the most reliable indicators of market valuation are driven by revenues, not earnings. 

2) Risk-seeking and risk-aversion control returns over shorter portions of the market cycle. The difference between an overvalued market that becomes more overvalued, and an overvalued market that crashes, has little to do with the level of valuation and everything to do with the attitude of investors toward risk. When investors are risk-seeking, they are rarely selective about it. Historically, the most reliable way to measure risk attitudes is by the uniformity or divergence of price movements across a wide range of securities.

DYI Comments:  The Dividend Yield Investor is concerned with John Hussman's point number one as the premise for this blog.  My formula based asset allocation increases or decreases your exposure to stocks, bonds, or gold depending upon their current valuation.  Currently today valuations for stocks are so high our formula has "kick us out of the market" for good reason.  Today the best you can expect to receive for stock held or bought today and then held for the next 10 years is about 1%. 

Please note: this is before fees, trading/impact costs, possible taxes, and, of course, INFLATION. Most typical 401k plans have an expense ratio of around 1% most are managed funds which will cause a further drag due to commissions plus impact costs or around 0.50% per year. For those of you who are not aware these fund managers control such large sums when they exit or enter a stock no matter how careful drive the price higher or lower reducing/increasing their return or loss.  Add on the Federal Reserve which is hell bent on delivering us a 2% inflation rate and if they achieve this your returns just got clipped further.

Let's add up these additional costs for our typical 401k owner.  1% expense ratio, 0.50% trading/impact cost and a 2% inflation tax. That's -3.5% added to our 1% 10 year return estimated return and you all you receive is a negative -2.5% return for your efforts.  Of course for those who have additional money outside of a pension, inside a taxable account, you can add on an additional 1 or 2 percent cost depending on your tax bracket.

Today or for the past two years has been a terrible time to acquire stocks on a whole sale basis such as your basic S&P 500 index fund or broad based managed fund.  This may work out well for the clever speculator who will sell off his shares in time to a greater fool but for us "real" value based long term investors it is a rotten time to buy.

The only area of the market that is showing low valuations are your precious metals mining companies.  They have gone through a massive bear market from peak to trough of around an 80% drop! This is an excellent time to dollar cost average into your favorite mining mutual fund as there will be plenty of time to build your position as these shares move through the accumulation stage that could very well last a few years before the next bull stage.

So....While everyone else is losing their head don't go around losing yours.  It is time to be be very defensive as valuations have become so elevated that after any reasonable costs plus inflation you will end up with losses.

AGGRESSIVE PORTFOLIO - ACTIVE ALLOCATION -  7/1/15

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

83% - Cash -Short Term Bond Index - VBIRX

15% -Gold- Precious Metals & Mining - VGPMX

 2% -Lt. Bonds- Long Term Bond Index - VBLTX

 0% -Stocks- Total Stock Market Index - VTSAX

[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!

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.

DYI         

Contrarian Alert!...Gold & Precious Metals have become the Rodney Dangerfield asset class...They Get No Respect!...Excellent Time to Dollar Cost Average into your Favorite Precious Metals Fund

Gold rout could turn into stampede out of commodity investment

World's largest mining companies are running out of options as commodities slump tipped to deepen

During the boom years of the commodities super-cycle, when iron ore traded at $180 per tonne, gold topped out at more than $1,900 per ounce and oil looked cheap at $100 per barrel, no bet on resources was too risky to take. China’s demand for raw materials, energy and food was expected to drive growth in the entire commodities sector uninterrupted for at least the next 25 years. 

However, those days are over; and despite glimmers of hope that the current slowdown in Chinese economic growth may be short-lived, the crash in resource-based asset prices has turned from an orderly exit into a stampede. This sense of nervous panic is partly why gold prices tumbled so fast on Monday, only for them to recover their losses in the following days. 

During the commodities super-cycle mining investments were easy. All resources were then viewed by investors to be equally likely to benefit from China’s remarkable economic transformation. However, in the current environment it has grown harder to identify the assets which mining companies covert the most, ones with long-term demand profiles that can be developed cheaply.

Hedge Funds Are Holding First-Ever Gold Net-Short Position

Hedge funds are holding the first ever bet on a decline in gold prices since the U.S. government started collecting the data in 2006.

Goldman Sachs Group Inc.’s Jeffrey Currie says the worst is yet to come for gold, and that prices could fall below $1,000 an ounce for the first time since 2009. “The risks are clearly skewed to the downside,” Currie, the bank’s New York-based head of commodities research, said in a phone interview Tuesday.

DYI Comments:  Gold peaked at $1921.50 on September 6, 2011 and as of Friday traded at $1098.20 for a 43% decline.  Not to be outdone your highly volatile precious metals mining funds are off from peak to trough around 70% to 85%.  An excellent time to re-balance or dollar cost average as these companies are simply cheap in relation to their respective sales, earnings, and dividends.  They represent excellent value.  Please note they could get cheaper due to their highly volatile nature but a lessor price would only encourage me to purchase more.

DYI  

Social Security operates on a simple principal: "You give your money to politicians and they squander it on something else!" Harry Browne Fail-Safe Investing

The Bankruptcy Of The Planet Accelerates – 24 Nations Are Currently Facing A Debt Crisis

There has been so much attention on Greece in recent weeks, but the truth is that Greece represents only a very tiny fraction of an unprecedented global debt bomb which threatens to explode at any moment.  As you are about to see, there are 24 nations that are currently facing a full-blown debt crisis, and there are 14 more that are rapidly heading toward one. 

Right now, the debt to GDP ratio for the entire planet is up to an all-time record high of 286 percent, and globally there is approximately 200 TRILLION dollars of debt on the books. 

That breaks down to about $28,000 of debt for every man, woman and child on the entire planet.  And since close to half of the population of the world lives on less than 10 dollars a day, there is no way that all of this debt can ever be repaid.  The only “solution” under our current system is to kick the can down the road for as long as we can until this colossal debt pyramid finally collapses in upon itself.

 According to a new report from the Jubilee Debt Campaign, there are currently 24 countries in the world that are facing a full-blown debt crisis…■ Armenia■ Belize■ Costa Rica■ Croatia■ Cyprus■ Dominican Republic■ El Salvador■ The Gambia■ Greece■ Grenada■ Ireland■ Jamaica■ Lebanon■ Macedonia■ Marshall Islands■ Montenegro■ Portugal■ Spain■ Sri Lanka■ St Vincent and the Grenadines■ Tunisia■ Ukraine■ Sudan■ Zimbabwe 

And there are another 14 nations that are right on the verge of one…■ Bhutan■ Cape Verde■ Dominica■ Ethiopia■ Ghana■ Laos■ Mauritania■ Mongolia■ Mozambique■ Samoa■ Sao Tome e Principe■ Senegal■ Tanzania■ Uganda

Well, the truth is that the “wealthy” countries are some of the biggest debt offenders of all.  Just consider the United States.  Our national debt has more than doubled since 2007, and at this point it has gotten so large that it is mathematically impossible to pay it off 

It Is Mathematically Impossible To Pay Off All Of Our Debt

Did you know that if you took every single penny away from everyone in the United States that it still would not be enough to pay off the national debt?  Today, the debt of the federal government exceeds $145,000 per household, and it is getting worse with each passing year.  Many believe that if we paid it off a little bit at a time that we could eventually pay it all off, but as you will see below that isn’t going to work either. 

It has been projected that “mandatory” federal spending on programs such as Social Security, Medicaid and Medicare plus interest on the national debt will exceed total federal revenue by the year 2025. 

That is before a single dollar is spent on the U.S. military, homeland security, paying federal workers or building any roads and bridges.  So no, we aren’t going to be “paying down” our debt any time in the foreseeable future.  And of course it isn’t just our 18 trillion dollar national debt that we need to be concerned about.  Overall, Americans are a total of 58 trillion dollars in debt.  35 years ago, that number was sitting at just 4.3 trillion dollars.  There is no way in the world that all of that debt can ever be repaid.  The only thing that we can hope for now is for this debt bubble to last for as long as possible before it finally explodes.

 Many believe that that we could improve the situation by raising taxes.  And yes, a little bit more could probably be squeezed out of us, but the impact on government finances would be negligible.  Since the end of World War II, the amount of tax revenue taken in by the federal government has fluctuated in a range between 15 and 20 percent of GDP no matter what tax rates have been.  I believe that it is possible to get up into the low twenties, but that would also be very damaging to our economy and the American public would probably throw a huge temper tantrum.

DYI Comments:  Our out of control spending is the culprit.  There is no political will to reform Social Security or end the growing medical oligarchies(and their associated fraud) that has "jacked up" the cost to Medicare.  The corruption is now so bad that our top major 25 banks are repeatedly fined for major crimes and no one sees one day in jail.

Currently and for about the next 5 years ultra low inflation/deflation will reign supreme, as we enter the 2020's governments will do what they do best; money printing in order to pay for past debts and social programs, at the expense of the middle class and poor.

 Social Security operates on a simple principal: "You give your money to politicians and they squander it on something else!"

Harry Browne

Fail-Safe Investing

DYI

Precious Metals and their Mining Companies are Now at Depressed Prices! Excellent Opportunity to Re-Balance.

Commodity Meltdown Deepens as Expanding Gluts Drag Down Shares

There are few places left to hide from the commodity meltdown that’s dragging down shares of miners and energy producers and sending gold prices to their lowest since 2010.  

The Bloomberg Commodity Index fell in a four-day selloff that’s the worst losing streak in three months. Brent oil capped the longest run of weekly declines since January, copper is languishing near its lowest since 2009 and wheat fell for a sixth session. 

Bulls suffering through the rout can blame expanding inventories, with U.S. crude stockpiles remaining almost 100 million barrels above the five-year average for this time of the year. A stronger dollar has also cut the appeal of commodities as alternative assets, and looming concerns over China’s economy threaten to shrink demand further. 

 Two-Tier Markets, Full-Cycle Investing, and the Benefits and Costs of Defense 

John P. Hussman, Ph.D.

A constructive shift in precious metals

Last week, the ratio of spot gold to the Philadelphia Gold and Silver Index (XAU) spiked to about 20.8, a level that is by far the highest extreme in history. Moreover, core inflation moved ahead of its level of 6 months ago, and leading economic measures continued to slip (though we don’t see them as being indicative of recession risk at present). It’s reasonable to view part of the weakness in gold stock prices as being the result of spot gold falling close to its marginal production cost (which has gradually escalated over the past 15 years). So there are certainly near-term earnings concerns for gold stocks here. But marginal production cost has historically provided a good support level for spot gold, and we would expect any increase in gold prices to quickly ease earnings concerns for these stocks.

Overall, we don’t endorse an aggressive outlook on gold stocks, but we did become more constructive last week, and we do believe that the current extreme is notable. Trend-following methods don’t perform terribly well with this group, and the equities are quite volatile, so investors should be very aware of their own risk tolerance. While the marginal production cost issue undoubtedly makes the current extreme in the gold/XAU ratio less compelling than it might appear otherwise, we do believe that precious metals shares are quite depressed in valuation terms. 

Guide to Vanguard Precious Metals and Mining Investor Fund (VGPMX) - Best of Funds

Vanguard Precious Metals and Mining Inv(VGPMX) a Zacks Ranked #1 (Strong Buy) seeks long-term capital appreciation. VGPMX invests in stocks of foreign and U.S. companies engaged in exploring, mining, processing, or marketing gold, silver, platinum, diamonds, or other precious metals and rare minerals. VGPMX may also invest up to 20% of its assets directly in gold, silver, or other precious-metal bullion and coins. VGPMX’s adviser emphasizes quality companies with sound operations and attractive holdings of ore or other reserves, while also trying to maintain geographic diversity. Dividends and capital gains, if any, are distributed annually in December. 

The Vanguard Precious Metals and Mining Inv fund, managed by Vanguard Group , carries an expense ratio of 0.29.

DYI Comments:  An excellent time to re-balance from your high flying stocks and bonds to increase your commitment (or first time purchase) into your favorite gold mining mutual fund.  Our's of course is Vanguard's Precious Metals and Mining Fund.  VGPMX since May 14, 2015 til today has dropped 21% from an already depressed price.  As may or may not know precious metals (along with oil and gas a lessor drop) have experienced a major bear market of around 70%.  The DOW/GOLD RATIO today is at 16.21 to 1 which is currently at its mean level.

Fred's Intelligent Bear Site brought to you by Fred Filskov. Public, private, and commercial distribution of this material is permitted as long as a link to this site is attached.

Market Sentiment

Smart Money buys aggressively!
Capitulation
Despondency
Max-Pessimism *Market Bottoms*Short Term Bonds
Depression MMF
Hope

Relief *Market returns to Mean* Gold

Smart Money buys the Dips!
Optimism
Media Attention
Enthusiasm

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

Smart Money Buys Aggressively!
Capitulation

DYI Comments:
With this continued fall off of commodity prices will simply emboldened world wide central banks to continue their ultra-loose monetary policies no matter what our current Fed Chairman is saying.  With many major economies slowing down or in outright recession I would not be surprised if our central bank postpones any rate increase stating that they are data dependent.  With all of the worlds money printing it will be miracle our central bank will exit their balance sheet of government bonds without losses (pure money creation).  As we move into the the 2020's Boomers will be signing up in mass for Social Security and Medicare placing extreme costs to the tax payers.  What can't be absorbed though increased taxes, governments will do what they do best by monetizing those debts and inflate the problem away at the cost of middle class and poor.

My two portfolio's remain defensive as our averaging formulas are so far above the average for stocks, long term bonds, and gold we have been either "kicked out" of the market or very limited exposure.

AGGRESSIVE PORTFOLIO - ACTIVE ALLOCATION

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

83% - Cash -Short Term Bond Index - VBIRX

15% - Gold - Precious Metals & Mining - VGPMX

 2% - Lt. Bonds - Long Term Bond Index - VBLTX

 0% - Stocks - Total Stock Market Index Fund - VTSAX

[See Disclaimer]

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

Maximum Aggressive Portfolio

(Super Max)

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

74% Cash - Hussman Strategic Total Return Fund - HSTRX

15% Gold - Tocqueville Gold Fund - TGDLX

  2% Lt. Bonds - Zero Coupon 2025 Fund - BTTRX

  9% Stocks - Federated Prudent Bear Fund - BEARX

[See Disclaimer]

DYI

Yes! It is a Stock and Bond Bubble!

7-1-15

Secular Market Top - Since January 2000

+53.3%   Dow       

+171.8% Transports 

+94.2% Utilities

+40.4%   S&P 500

+22.5%   Nasdaq

+52.2%   30yr Treasury Bond

+304.6% Gold

+132.3% Oil

From High to Low

+304.6% Gold

+171.8% Transports

+132.3% Oil 

+94.2%  Utilities

+53.3%  Dow Jones

+52.2%  30 Year Treasury 
+40.4%  S&P 500

+22.5%  Nasdaq

It is easily seen that in the year 2000 the Nasdaq was horribly overvalued and gold was on the give away table, such lopsided returns 15 years later!

Here we today back in bubble land!  Shiller PE10 at 27.30 and a minuscule S&P 500 dividend yield of 1.92%.  This stock market is horribly over valued.  According to moneychimp.com the 10 year estimated return is 1.64%.  Not much return considering your risk.

   

Long term bonds offer very little respite as yields have been pounded down by world wide central banks and 1st world Boomers saving for retirement(savings glut).  Currently today the U.S. 30 year Treasury bond is yielding 3.08%, this presents a possible speculation as the economy is long in the tooth creating the real possibility of an upcoming recession to pound down the yield further pushing the bond up in price.  However, for the long term value investor, rates are now so below average capital appreciation have simply become rank speculation.

As rates move up our averaging formula will increase your position.  This has begun with a very small 2% position.  I use the 10 year Treasury as my benchmark in determining over all bond allocation.  In order to go to DYI's 60% maximum in bonds would require a yield of 9%!  At today's yield of 2.34% that is a long way off. 

Time has a funny way of changing the economic landscape, just as the inflationary 1970's (MMF, short term bonds) gave way to the dis-inflationary (long bonds) 80's and 90's, now we have the ultra low inflation/deflation(long bonds) of the 2000's - 2010's.  As the savings glut ends with more and more Boomers moving out of the workforce and a return to a growing economy rates will begin to rise again. Exactly when I have no idea and nor does anyone else.  It has been one hell of bond rally of lifetime as pictured below.

   

 DYI's secular sentiment indicator shows clearly where stocks and bonds are overvalued.

 

Market Sentiment

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

Smart Money buys the Dips!
Optimism
Media Attention
Enthusiasm

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

Smart Money Buys Aggressively!

Capitulation 

Slow Growth is not forever and rates will rise again.  We have invested accordingly.

   

AGGRESSIVE PORTFOLIO - ACTIVE ALLOCATION

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

83% - Cash -Short Term Bond Index - VBIRX

 15% -Gold- Precious Metals & Mining - VGPMX

  2% -Lt. Bonds- Long Term Bond Index - VBLTX

  0% -Stocks- Total Stock Market Index - VTSAX

[See Disclaimer]

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

Maximum Aggressive Portfolio

(Super Max)

74% Cash - Hussman Strategic Total Return Fund - HSTRX

15% Gold - Tocqueville Gold Fund - TGDLX

  2% Lt. Bonds - Zero Coupon 2025 Fund - BTTRX

  9% Stocks - Federated Prudent Bear Fund - BEARX

[See Disclaimer]

My favorite economist and money manager A. Gary Shilling stating that slow growth is NOT forever.  I don't agree with the slow-growth-innitely forecasts.

I've long said that, until global deleveraging is completed, gross domestic product will continue to grow by about 2 percent annually. I've also noted that reducing debt levels after a financial crisis, especially one caused by a borrowing binge, normally takes about a decade. This episode is eight years old, and at the rate things are going, it may take longer than 10 years. U.S. household debt relative to after-tax income has fallen to 102 percent from 130 percent, but it's still a long way from the 65 percent norm. 

Nevertheless, the process will end at some point, and I continue to believe it will be followed by rapid real economic growth of at least 3.5 percent a year. That growth will no doubt be fueled by today's new technologies, including computers, the Internet, biotech, telecom, semiconductors, robotics and 3-D printers. 

Note that the Industrial Revolution and railroads started in the late 1700's and grew explosively, but from zero starting points. It was only after the Civil War that they became big enough to drive the U.S. economy. 

Secular Stagnation 

Productivity is a complex phenomenon. It comes in waves that are often unrelated to the current economic situation, so recent weakness shouldn't be extrapolated. Even in the Depression-era 1930's, output per hour rose at a healthy 2.4 percent annual rate, higher than the 2.1 percent growth of the Roaring '20s. Many of the tech advances of the 1920's -- electrification of factories and homes, increased use of telephones, the dawn of the radio era -- weren't exploited until the following decade, when they became must-have conveniences. 

In the current setting, companies may have compensated for anemic revenue growth by cutting costs so much that productivity growth, which normally would have been spread out, was concentrated in 2009-2010. Recent productivity weakness probably indicates that companies have reached the bottom of the cost-cutting barrel. The leap in profit margins since the recession has also topped out in the last two years; corporate profits have now begun to decline. So businesses will no doubt turn from reducing costs to promoting productivity. Companies will probably redouble these efforts if wage increases push up unit labor costs. 

At the same time, companies will probably increase research-and-development spending and reinstitute labor-training programs as the supply of unemployed skilled workers shrinks. The need for trained workers will be enhanced by the growing use of robots, which generates jobs in design, engineering, maintenance, marketing and logistics.  

Solutions to the current crisis in higher education may end up promoting productivity, as well. Students and their tuition-paying parents now know that a college degree no longer guarantees a job that pays well. In this regard, two education developments are encouraging. First, many colleges are emphasizing degrees in the STEM (science, technology, engineering and math) fields, where jobs are waiting. Second, German manufacturers have transplanted their apprenticeship program to plants in the southeastern U.S., where they coordinate worker training with nearby community colleges. American businesses are beginning to copy this model.  

As for the Reinhart-Rogoff argument -- that high government debt depresses GDP -- it's probably the other way around. Slow economic growth depresses tax revenue and raises government social spending, thereby causing bigger deficits and debt levels.  

The argument that growth is stymied because companies have cut capital spending may also be missing a larger trend. Much of the spending to build new tech and social-media companies, such as Google and Facebook, isn't counted as capital outlays. The brains of the entrepreneurs and developers substitute for capital spending. A high-tech startup in a garage or a college dorm doesn't register in government data the way a new auto plant does. Many successful startups didn't need much more than a laptop, and most of the money they raised went to advertising and marketing, not building factories. 

Fed economists believe that the pricing of high-tech equipment may result in understated business investment. Not surprisingly, capital equipment prices have fallen 21 percent since the early 1980's. Furthermore, the correlation between capital spending and productivity is, contrary to the belief of the slow-growth advocates, weak to nonexistent. This is shown by the correlations between private, fixed capital investment and productivity with a series of leads and lags. 

From the first quarter of 1948 to the fourth quarter of 1990, the strongest relationship was between capital spending and productivity growth three quarters later, which makes sense. But the statistical fit, according to my firm's research, was very poor. Even that weak relationship broke down between the fourth quarter of 1990 and the first quarter of this year. The best fit was between productivity growth now and capital spending 16 quarters later, which defies any causal explanation. 

So there doesn't appear to be any meaningful statistical relationship between capital spending and enhanced productivity. Spending money on more machines doesn't do the job, suggesting that productivity flows mainly from new technology such as robotics, better management, more motivated employees, better logistics and, probably, dumb luck.  

The pessimistic argument that American corporations have been buying back stocks instead of investing in plant and equipment carries some weight, but dividend increases still leave the payout ratio (the percentage of net income paid to shareholders) for the S&P 500 at 42 percent, well below the long-term 52 percent average. It can be argued that low interest rates make low dividend yields (dividend per share divided by price per share) acceptable. In any event, the dividend yield for the S&P 500 index is now just 1.97 percent, well below the earlier 3 percent norm. 

True, government regulation is excessive, as the slow-growth advocates maintain. Since 1970, more than half of Americans have relied on government for meaningful income; in 2007, it was 58 percent, according to my firm's research. Yet voters haven't used the ballot box to accelerate their government goodies. 

Apparently, Americans still believe they can get further on their own merit than by pushing government to redistribute income in their favor. And if I'm right about a coming economic boom, they will have even less reason to rely on government largess. 

DYI 

 

The Immortal Words of the Intelligent Investor-Ben Graham 

1.  It requires strength of character in order to think and to act in opposite fashion from the crowd and also patience to wait for opportunities that may be spaced years apart.

DYI Comments:  Below is the Dow/Gold Ratio chart that shows very clearly that gold peaked in 1980 (and stocks on the give away table) and moved into a secular bear market lasting until July of 1999.  Stocks peaked at that time and then moved into a secular bear market.

 Fred's Intelligent Bear Site brought to you by Fred Filskov. Public, private, and commercial distribution of this material is permitted as long as a link to this site is attached.

Value players in the late 1970's and early 1980's were purchasing stocks on an aggressive basis while at the same time systematically selling off their gold/gold mining companies.  As months turned into years and as years turned into decades did our value player forget gold?  NO!  They continued to monitor the ratio for secular over valuation of stocks and under valuation of gold.  The trip from overvaluation to under was almost two decades!  THAT'S PATIENCE!

2.  If a company was so sound that its stock carried little risk of loss, the company also must present excellent chances for future gains. It is easier for a company to build a profitable empire on a solid foundation than on a shaky one.

That is the premise of DYI's  THE DIVIDEND ROOM.  I look for high quality blue chip companies that have an excellent dividend yield 50% greater than the S&P 500.  Then hold to these companies for years only selling when their financial rating goes below investment grade or the current dividend yield falls below the S&P 500.  Benjamin Graham's defensive investor at its best.

3. Never buy a stock immediately after a substantial rise or sell one immediately after a substantial drop.

Greed and Fear is an immortal as time itself.  This is basic instinct for the value player who will look at the financials to determine after a drop to purchase additional shares or in the case of rise in price to make a sale.  Under no circumstances is he or she feels forced to buy or sell.  Mr. Market is not the value players enemy but his friend.  Wikipedia had to say about Ben's Mr. Market.

Mr. Market is an allegory created by investor Benjamin Graham. Graham asks the reader to imagine that he is one of the two owners of a business, along with a partner called Mr. Market. The partner frequently offers to sell his share of the business or to buy the reader's share. This partner is what today would be called manic-depressive, with his estimate of the business's value going from very pessimistic to wildly optimistic. The investor is always free to decline the partner's offer, since he will soon come back with an entirely different offer

4. Experience teaches that the time to buy stocks is when their price is unduly depressed by temporary adversity. In other words, they should be bought on a bargain basis or not at all. 

DYI'S THE DIVIDEND ROOM look's for beaten down companies for what ever reason.  Most of them are just on the basis of neglect.  Wall street has its fads and fashions of the moment to were the majority of investors (actually speculators) go galloping off riding the lasted hot stock(s) of the moment. Leaving great companies with great financials who's stock prices will become depressed in price over time simply due to neglect. Many of our stable of companies have yields double that of the S&P 500 with excellent prospects of increasing dividends.

5. People who habitually purchase common stocks at more than about 20 times their average earnings are likely to lose considerable money in the long run.

Amen to that Ben!  Currently today the majority of stocks on a value basis have been bid up to the moon.  Our worlds central banks sub atomic low interest rates have pushed our 1st world Boomer's seeking yield for their massive savings pool along with the U.S. budget deficits artificially pushing our economy forward.  Below is the Shiller PE10 going all the way back to 1871 it is easy to see that stocks on a whole sale basis are once again "jacked up" in price.

http://www.multpl.com/shiller-pe/

DYI's averaging formula for stocks has now pushed us out of the market.  Currently today the the price to dividend ratio is now 122% above their average going back to 1871.  Below is our aggressive portfolio.  Any wonder why I'm so defensive?

AGGRESSIVE PORTFOLIO - ACTIVE ALLOCATION

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

83% - Cash -Short Term Bond Index - VBIRX

15% - Gold - Precious Metals & Mining - VGPMX

 2% - Lt. Bonds - Long Term Bond Index - VBLTX

 0% - Stocks - Total Stock Market Index Fund - VTSAX

[See Disclaimer] 

Most investors (speculators) will keep on dancing along as the music keeps on playing.  Most will not recognize a short term minor correction from the beginning of a major onslaught of the bear. They will not begin to sell until they are half or more through the bear's rampage.  Average John and Jane Doe will sell out at the bottom to never buy stocks again.  Once bitten twice shy.

6. On the other hand, investing is a unique kind of casino – one where you cannot lose in the end, so long as you play only by the rules that put the odds squarely in your favor. 

7. In market analysis there are no margins of safety; you are either right or wrong, and if you are wrong, you lose money. 

8. It remains true that sound investment principles produced generally sound results. 

9. The disciplined, rational investor neither follows popular choice nor plays market swings; rather he searches for stocks selling at a price below their intrinsic value and waits for the market to recognize and correct its errors. It invariably does and share price climbs. When the price has risen to the actual value of the company, it is time to take profits, which then are reinvested in a new undervalued security.

Sound investment principals produce sound results!  At DYI I will trade with Mr. Market when the odds of success is in our favor.  I'm not forced by quarterly results in order to maintain my job as a money manager and hence forced to speculate.  I'll place my hard earned dollars, Pounds, Euros or Yen to work when Mr. Market offers me a bargain and only then.

10. Never mingle your speculative and investment operations in the same account, nor in any part of your thinking.

Speculative operations are not part of my blog.

11. The determining trait of the enterprising investor is his willingness to devote time and care to the selection of securities that are both sound and more attractive than the average. Over many decades, an enterprising investor of this sort could expect a worthwhile reward for his extra skill and effort in the form of a better average return than that realized by the passive investor. 

12. Most of the time common stocks are subject to irrational and excessive price fluctuations in both directions as the consequence of the ingrained tendency of most people to speculate or gamble to give way to hope, fear and greed. 

13. The stock investor is neither right nor wrong because others agreed or disagreed with him; he is right because his facts and analysis are right. 

14. An investment is based on incisive, quantitative analysis, while speculation depends on whim and guesswork.  

15. The intelligent investor is a realist who sells to optimists and buys from pessimists. 

Point 15 is what this blog is all about selling to the optimists and buying from the pessimists.

So, what has all this taught me? 

(a) People buy when others are buying and sell when everyone sells. 

(b) The greatest motivator isn’t profit, but fear. 

(c) We all misinterpret risk. It’s not losing money but lacking it. 

(d) Nobody invests when stuff is cheap. 

(e) Financial illiteracy is the norm.

DYI

CHINA ‘BLACK TUESDAY': STOCKS FALL 5%, DESPITE SUSPENDING 25% OF ISSUES

Despite the Chinese communist government’s efforts to hide the severity of the “Black Tuesday” stock crash by indefinitely suspending trading in over a quarter of the nation’s weakest stocks, the Shanghai B Share Index suffered a 9.1 percent loss, while the  Shenzhen Exchange plunged 5.8%.

With retail customers accounting for 85 percent of Chinese stock trading, there are reports in social media that a number of China’s “equity citizens,” who have suffered $2.9 trillion in losses over the last three weeks, are now committing suicide. 

The crash would have been epic, but suspensions in trading were called in what appeared to be the weakest 702 of the roughly 2,800 firms listed on China’s main Shanghai and Shenzhen stock exchanges. Officials said the “temporary suspensions” were linked to restructuring, planned share placements or the pending release of a “significant matter.” But they also acknowledged that the ten-day suspensions can be extended for three months. 

The market crash has fed doubts about the effectiveness of $200 billion in credit and price support measures unleashed by Beijing’s communist leadership to halt a waterfall in stock prices that have seen a 31 percent decline in major indexes since June, and a worse price drop for the average stock. With Tuesday’s painful loss, China’s stock crash has erased about $3.4 trillion of China’s wealth. 

The initial 150 percent straight-up move in prices through June 12 reinforced the public’s confidence in the “Party” and the “Leadership”. But the severity of the stock market crash and the government’s inability to stabilize the situation has now become a huge threat to the supposedly all-powerful China Communist Party.

DYI Comments:  China watchers such as myself have been anticipating a huge debt blow off that would spin off major parts of China especially their autonomous regions.
 
So far not enough damage has been done for China to fly apart only time will tell if this is the beginning of their 1930's style economic tsunami.

DYI 

Here is How The Next Crisis Will Play Out

In contrast, the current Crisis that we are facing involves bonds… the bedrock of the financial system. 

Every asset class in the world trades based on the pricing of bonds. So the fact that bonds are in a bubble (arguably the biggest bubble in financial history), means that EVERY asset class is in a bubble. 

By the time it’s all over, I expect: 

1)   Numerous emerging market countries to default and most emerging market stocks to lose 50% of their value. 

2)   The Euro to break below parity before the Eurozone is broken up (eventually some new version of the Euro to be introduced and remain below parity with the US Dollar). 

3)   Japan to have defaulted and very likely enter hyperinflation. 

4)   US stocks to lose at least 50% of their value and possibly fall as far as 400 on the S&P 500. 

5)   Numerous “bail-ins” in which deposits are frozen and used to prop up insolvent banks.

DYI Comments:  My model portfolio until July's update only invested in gold/precious metals mining companies.  Now that interest rates are moving up slightly DYI's long term bond portion has added a 2% position.  Higher rates go the bigger our position will grow and the faster you can compound your money plus your duration shortens reducing your risk.

AGGRESSIVE PORTFOLIO - ACTIVE ALLOCATION -  7/1/15

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

83% - Cash -Short Term Bond Index - VBIRX

15% -Gold- Precious Metals & Mining - VGPMX

 2% -Lt. Bonds- Long Term Bond Index - VBLTX

 0% -Stocks- Total Stock Market Index - VTSAX

[See Disclaimer]

This is a very awkward time for value investors as every of measurement for stocks and bonds have been shown to be very overvalued.  However, with oil prices way down this has embolden the Fed to goose the economy and financial markets.  The reflation trade was back into effect.  The past two years stocks and bonds have been way overvalued only to be pushed up higher.  As value investor those gains will be seen as transitory, as a trail of tears for those investing heavily during that time period.

Precious metals have come off a 70% decline and for those who need to rebalance this is a good time to do it.  Gold is pricey but NOT overvalued historically as shown by the DOW/GOLD RATIO.


  Fred's Intelligent Bear Site brought to you by Fred Filskov. Public, private, and commercial distribution of this material is permitted as long as a link to this site is attached. 

As you can see above the ratio is now at it's mean.  Based upon our weighted average formula DYI arrives at 15% of the portfolio.

My sentiment indicators show how up side down (except gold) every thing has become.

Market Sentiment

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

Smart Money buys the Dips!
Optimism
Media Attention
Enthusiasm

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

Smart Money Buys Aggressively!
Capitulation

The Great Wait Continues

DYI