Stocks, Banks, Gold-This board has all been wrong.

[sdappraiser]

Nice. You drill others for disclosure and track records yet you refuse to disclose. Very convenient for when you eventually publish your “outstanding” results and perfect market timing. You said you put your money where your mouth is.. how much is riding on this prediction?

[privatebanker]

“What really cracked me up is privatebanker’s post criticizing PS because the bear funds PS identified have fallen over recent years (as the markets have climbed).

Makes me wonder if privatebanker figures a “good” bearish fund should RISE in a rising market? Seems a bit clueless. ”

I said that first of all, those two funds have been ineffective thus far. Sure the markets have been in somewhat of a bull market since they were incepted however, they haven’t turned over a dime. Putting all of your retirement money into a speculative strategy such as that is crazy. Most of those bear funds are good hedges for your portfolio but they aren’t meant to be your core holding.

You might want to read the entire post next time before calling someone clueless. I’ve been in the private banking industry for a very long time and have seen all kinds of market cycles.

[(former)FormerSanDiegan]

powayseller incorrect statements …

1. The S&P 500 P/E ratio is not 25
You are incorrect. According to Standard & Poor’s (who happen to run the index – see reference at bottom of this post) they reported a P/E of 17.83 as of 1Q 2006. Current earnings on the S&P 500 are coming in about 10-14% higher than a year ago and the index has not climed that much in the same period. You are off by about 40% ! If this is one of the reasons you expect a correction of a certain magnitude then be prepared to be off by 40%.
By the way a P/E of 17.83 corresponds to and earnings “yield” equivalent of 5.6%. Compare this to alternative investments.

2. The current rally has not been limited to a few Dow stocks. It has been broad. See previously posted charts showing broader indexes outperfming the Dow since 2003 and tracking the Dow since the start of the summer rally.

You may be correct that the stock market corrects or declines over the next six months. But you are basing your decision on false premises not facts.

S&P Fundamentals
http://www2.standardandpoors.com/servlet/Satellite?pagename=sp/Page/IndicesIndexPg&l=EN&b=4&f=1&s=6&ig=48&i=56&r=1&xcd=500&fd=IndexLevelFundamentals_500

[powayseller]

I bought RYTPX and RYCWX with 10% of our retirement portfolio (I used my entire account, as my husband has his own account through work; he is adding 10% of his account to the Rydex funds).

I called Rydex because of a bad experience with bear ProFunds. The Profunds prospectus did not say anywhere how they invest their money, i.e. options or shorting, etc., and I e-mailed back and forth with them multiple times and could never get a straight answer. I verified each of the Rydex funds since inception to ensure they do indeed track the inverse of the index, and after it all checked out, I made the move.

I do not claim to be a perfect market timer. When Chris congratulated me earlier this year for making some money in gold, I admitted it was pure luck. I got out of the stock market in March, and missed this last rally. Please don’t confuse my conviction about the direction of the economy and my long-term investment positioning, with any claim that I am a good short-term market timer. If you want good short-term market timing advice, you need to talk with Chris Johnston. He knows how to make money on a rally in the middle of a bear market; I do not.

This investment does have some risk. The stock market rally could go on for a few months longer. If the stock market sizzles out next week, it will be pure luck for me. I am very confident in the long term direction of the economy, but not of the short term moves. However, without risk there is no reward. I also convinced myself that someone who is in the stock market now, say in an index fund, is taking an even greater risk than I am. The stock market has a greater chance of going down, since we’re going into a recession, than it has a chance of rising. Also, the bear fund seems less risky than shorting or put options.

[powayseller]

FormerSanDiegan, my apologies; I was taking the info from a book that was published this summer. My Zeal newsletter shows the PE of the S&P500 is 19.4, Dow 30 is 17.8, and the NAS100 is 34.3. According to Zeal, they are overvalued by 3%, 9%, and 28%, respectively. Are you long the market?

SDAppraiser, what are your investments now?

As far as the broadness of the rally, I don’t know much about it other than what I read from The Big Picture and from you. Barry Ritholtz says the Dow Transports and many of the major Dow stocks are not part of the rally, and that is a bearish sign. For me, the broadness of the rally is not relevant; I am more interested in whether the rally is based on improving fundamentals, and in my opinion the fundamentals are declining.

I do enjoy this conversation, because we all learn more if we can consider the opposite points of view.

[(former)FormerSanDiegan]

powayseller –

I have always had some portion of my investments long the market since the mid-90’s. (I also have had continuous holding of real estate and cash since then.) I try to reduce my risk by putting significant portions into cash or other investments from time to time. Over the last year I have been increasing my cash position from about 5% to about 35%, anticipating buying opportunities in the stock market this fall (and making sure I have enough cash cushion to soften the real estate blow).

Re: Stock fundamentals: The S&P 500 stocks show a year-over-year double-digit increase in earnings for the past 12 quarters. If the the current earnings season holds form, then it will be 13 straight quarters of double-digit earnings increases.

It’s gotta slow at some point, right ?

[qcomer]

PS,
Good to hear that you know what you are doing and that you are taking a calulated risk and not just convinced 100% about the market move, one way or the other. I am also happy to know that you have just put 10% of your retirement money in Rydex funds. This is because I know people who had been betting on a housing, stocks, dollar decline by buying inverse funds since early 2005 and haven’t done too well. I would always recommend people to hedge some percentage of their money against their major bets, no matter how stupid it seems. Also,don’t fall in love with your opinion or positions and keep updating it as more data comes out like Q3 earnings, etc. This is just my experience of 4 years in trading.

I always chuckle when people think the other inverstors are “clueless or ignornat” about what they are investing in. They either credit their intellect too much or undermine others too much. Small investors don’t move markets one way or other for 3 months and most big institutional investors do their homework.

I don’t think right now is the time to jump into bearish funds for me. I don’t trade until I get strong signals about a trend forming or a wave turning the other way. This is why I am waiting for Q3 earnings and Q4 forecasts before making a move against the markets. Or If I get a CPI report that overshoots expectations or GDP report under 2%, then I am out.

[Anonymous]

“Pfizer, Verizon, and American Electric. I am keeping my foreign ADR’s (Honda, Mittal, Consol, etc.)”

I think I would choose alternatively.

There will soon be a global recession—in this it is manufacturing and cyclical industries which are hurt the most.

Honda — cars, trucks & equipment manufacturing
Mittal — steel
Consol — coal

Those are classic cyclical industries.

Pfizer, Verizon & electricity— pharmaceuticals and utilities, they are best choices in the beginning of recession. You buy cyclicals when they are doing horribly in the middle to end of a recession.

My feeling is that global markets are becoming more synchronized, and industry sector will matter more than in-USA than outside-USA. If there is a recession in USA and the Fed lowers rates, then Europe & Japan’s bank will probably follow quickly as well as their export-driven economies would be hurt as well. Hence there will probably not be a sharp drop in the dollar/rise in euro which would make foreign instruments very appealing because of currency.

Pfizer is at a multi-year low in terms of historical P/E.

Verizon has protected markets and regulators in its pocket.

Electric utilities are pretty safe too. AEP just recommended a dividend increase to its board.

[powayseller]

The problem with rate cuts is that it will probably devalue the dollar as foreigners find more attractive options elsewhere. Other FCBs are raising interest rates. When foreign investors are faced with lower rates in the US, coupled with a recession and IMF warnings about the deep recession, and they see higher rates and better fiscal restraint in Europe, I think they will start moving their money into euros. Italy moved a chunk of dollars to British pounds recently, and China has been talking about diversitying for some time now.

Once money moves out of the US, the long bonds are going to be cheaper, raising interest rates even more. It’s only a matter of time before the conservative foreign investors leave our country: I’m talking about insurance companies and pension funds. China’s FCB will be the last to pull out, but let’s remember that other countries have been publicly talking about getting out of the dollar. Gee, if the US lowers interest rates, the dollar is going to take a serious tumble. I should post this on Roubini’s blog, to see what he says.

[Anonymous]

That scenario (sharp dollar loss) depends on an assumption which I feel is probably not going to be true:

A sharp decline in US demand (recession) will not affect Europe and Asia much.

Europe (certainly Germany) is a net exporter and Asia, of course, is huge exporter to US.

Already many Europeans are complaining about the strength of the euro. If there’s a recession and USA declinees then European economic activity will also go down as well. I think then the pressure to lower European rates as well will likely be pretty strong. Without US demand commodities will go down and external inflation pressures will subside.

Also, Europe’s housing bubble hasn’t popped yet, and it’s really time for it to go.

If Europe stays strong, including its equity market, then your scenario will play out. I tend to think it won’t be so.

Insurance companies and pension funds tend to have future obligations in their domestic currencies so they won’t change foreign vs domestic asset allocation very much.

Japan’s central bank is still pushing down the yen like crazy and they have an even worse fiscal situation than the USA, without an Asian land war. (But if Kim Jong Evil acts up more….)

Of course China’s yuan is highly undervalued but I bet they won’t do anything until after the 2008 Olympics.

In sum, I see a modest decline in the dollar but not an enormous one. The pound is already shockingly high.

[rseiser]

DrChaos, if all currencies fall in tandem, long bonds won’t be such a good investment either, would they?

[Anonymous]

Generally FX markets are considered two sided at least among developed countries currencies, trading cash for cash.

If all currencies fall in tandem then that means global inflation which of course would be bad for bonds.

This is hard to imagine though if you have massive debt destruction as the housing bubbles unravel. Remember that making loans in the current financial system (fractional reserves on deposit with Fed) is essentially equivalent to printing money: in a loan, bank sends you cash which is registered eventually with the Federal reserve by deposit somehwere, and bank holds a piece of paper that they’ll get paid back—sometime in the future. Banks can consider that an asset (if the credit is good) and then go out making new loans based on the asset ratio.

Once those assets backing up the banks go bad, then it works in reverse. They need more capital and make less loans; result is effective destruction of money, and certainly lowering of money velocity.

The canonical example is Japan—there the debtors were companies and firms which invested in commercial real estate but the banks were the eventual holders of defaulted loans.
This resulted in deflation despite miniscule interest rates and enormous deficit spending.

From 1990 to I guess 1997 obviously Japanese government bonds (not corporate!) were a good investment as rates went to zero. Well, good only in comparison to everything else, plunging shares and real estate. Shares were more overvalued in Japan then than US shares are now. Real estate, probably not.

On the good side then, though, the world got the benefits of the end of the Cold War and rock bottom oil prices, and Japan decoupled from the world economy.

I don’t think that will happen now. Fascism is returning to Russia along with expensive oil.

[ltokuda]

I did a quick calculation for the Dow 30 and came up with the following:

P/E: 18.54
PEG: 1.66

It seems overvalued to me but maybe someone else has another take on it? Is there a fundamental reason why the Dow 30 would be a good long-term buy and hold opportunity right now? Also, are there any charts showing the historical P/E of the Dow?

[cabinboy]

Bears: You might want to reconsider your position in the near term for stocks. The money we were spending on higher priced gasoline is now going out the door for other retail. Unless oil goes back up I’d bet on a strong holiday retail season. At the very least, bears should wait for additional earnings reports next week before getting out of the stock market or buying into inverse index funds.

See:
http://biz.yahoo.com/ap/061013/wall_street.html?.v=43

The markets were caught off guard Friday by a 0.4 percent decline in September retail sales. The drop reported by the Commerce Department stemmed from a 9.3 percent decline in spending on gasoline. Spending increased in other areas, however.

Malone said he believed the retail sales figure was positive because it showed consumers spent elsewhere as prices at the pump retreated. “For all the talk of the death of the consumer, that is definitely not manifesting itself.”

Indeed, consumers have grown more upbeat as gas prices have fallen. The University of Michigan’s preliminary consumer sentiment figure, released Friday, was a stronger-than-expected 92.3 for October. That compares with a 85.4 reading for September.

Noman Ali, a portfolio manager for U.S. equities at MFC Global Investment Management, said investor enthusiasm in recent weeks is tied to expectations of strong profit reports and the notion that consumers have continued to open their wallets.

“Underlying consumer strength is still pretty strong. There’s really little to worry about in terms of the economy going into recession.”

[Author]

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