Doug Kass: Being Out of the Market is the Most Crowded Trade

Thursday, October 13th, 2011

A few days ago Doug Kass asked 10 questions for the bulls, and he now asks 10 questions addressed to bearish investors. The answers to these questions could help us determine the outlook for equities over the balance of the year and into 2012.

Here is his question on valuation:

“Over the last 50 years the S&P 500 has averaged 15x (while the yield on the 10-year U.S. note averaged 6.67% during that period). Today, the market’s multiple is about 12x on projected 2011 profits of $95 per share (while the yield on the 10 year U.S. note is only about 2%). The risk premium (earnings yield less corporate bond rates) is at a multi-decade high, placing stocks statistically (very) inexpensive on a quantitative basis. In fact (relative to interest rates), the U.S. stock market seems to be discounting 2012 S&P profits of around $60 a share, a level of profits that seems incomprehensible.

“Given that interest rates will be low as far as the eye can see, shouldn’t we give interest rate dependent valuation models more weight, and shouldn’t we be attracted to a 12x multiple within the context of a 2% 10-year bond yield?

“Finally, stocks are even cheaper today than in late 2008 relative to sales, cash flow and earnings.”

Click here for the full article.

Also, see the Yahoo! Finance interview with Kass below.

Sources: The Street, October 10, 2011 and Yahoo! Finance, October 12, 2011.

Tags: Amp, Bond Yield, Bulls, Cash Flow, Corporate Bond Rates, Decade, Doug Kass, Earnings, Few Days, Incomprehensible, Interest Rate, interest rates, Nbsp, Profits, Quantitative Basis, Risk Premium, Stocks, U S Stock Market, Valuation Models, Yahoo Finance
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European debt crisis at “the end of the beginning,” says Martin Wolf

Thursday, October 13th, 2011

After months of being “behind the curve”, European policymakers are “finally aware” of the acute nature of the crisis, says Martin Wolf, chief economics commentator at the Financial Times (via Yahoo Finance! The Daily Ticker). “They are coming under enormous pressure … to do something big.”

Source: Yahoo Finance! The Daily Ticker, October 10, 2011.

Tags: Commentator, Curve, Debt Crisis, Economics, Financial Times, Martin Wolf, Nature, Policymakers, Wolf, Yahoo, Yahoo Finance, Yahoo Ticker
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US Dollar Depreciation – Fed’s Dirty Little Secret

Monday, May 9th, 2011

Since Bernanke took office on Feb 1, 2006, the dollar’s purchasing power has fallen 11%, and its down 21% in the past decade and 82% since the U.S. got off the gold standard in 1971, according to Miller Tabak (via Yahoo Finance – The Daily Ticker).

“Currency depreciation is always a central bankers dirty little secret,” says Vincent Reinhart, a former director of the Fed’s Division of Monetary Affairs, in an interview with Aaron Task of Yahoo Finance – The Daily Ticker. “They don’t mind some depreciation at time …The trick is to generate some depreciation but not a lot.”

Reinhart said: “A design principle of Federal Reserve policy is to get inflation up – to create more dollars so inflation doesn’t fall anymore; that’s associated with currency depreciation. Nothing the Fed chairman or Secretary of Treasury says is going to change that. [But] they’ve got to say ‘a strong dollar is in the national interest’ because they don’t want to be seen as promoting a weak dollar.”

Source: Yahoo Finance – The Daily Ticker, April 28, 2011.

Tags: Currency Depreciation, Decade, Design Principle, Dirty Little Secret, Fed Chairman, Federal Reserve, Federal Reserve Policy, Gold, Gold Standard, inflation, Miller Tabak, Monetary Affairs, National Interest, Purchasing Power, Reinhart, Secretary Of Treasury, Strong Dollar, Ticker, Weak Dollar, Yahoo, Yahoo Finance
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The Shocking Cost of Regulation

Wednesday, September 29th, 2010

I saw some shocking numbers this week on the costs of regulation by the U.S. government.

An article in the online Wall Street Journal pegs the cost of federal regulations in the U.S. at close to $2 trillion in 2008 – the equivalent of 14 percent of GDP. It works out to roughly $8,000 per private sector employee, and for small employers, the figure is more than $10,500 per employee.

And with new regulatory measures passed during the current administration, that already huge number will be going considerably higher.

The article points out that such high regulatory overhead makes it hard for American businesses to compete with overseas rivals, and thus it affects hiring as well, particularly for small companies.

“As much as it is fashionable to blame China for the demise of small manufacturing in America, the evidence suggests that looking for some reasons closer to home is warranted,” the article says.

The cost of regulatory measures is high but the biggest drag on economic recovery may be the number question marks surrounding the business community. Small businesses have become paralyzed awaiting the result of new healthcare, tax and other reform.

It’s good to hear that a business person may be appointed to one of the administration’s top economic posts – someone who could bring a different perspective to the White House’s internal debate now dominated by academics. A Bloomberg survey reported in an article of The Economist reported that 75 percent of American investors believe the current administration is anti-business.

I might also suggest looking for inspiration at the places where jobs are being created – the large emerging nations whose policies are more focused on social investing than on social welfare.

I did an interview yesterday discussing the hidden cost of overregulation with Yahoo! Finance’s Tech Ticker. I also discuss the role leverage played in the demise of Lehman Brothers and Fannie Mae. You can find it on Yahoo! Finance’s homepage.  

Tags: American Businesses, American Investors, Article Points, Business Community, Business Person, China, Current Administration, Demise, Different Perspective, Drag On, Economic Recovery, Fannie Mae, Internal Debate, Lehman Brothers, Private Sector Employee, Question Marks, Regulatory Measures, Social Welfare, Trillion, Wall Street Journal, Where Jobs, Yahoo Finance
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Learning from the S&P 500 Monthly Moving Averages

Tuesday, May 18th, 2010

This article is a guest contribution by Doug Short of dshort.com

Last week I analyzed the Nikkei 225 monthly closes since 1970 to back-test several monthly moving average strategies versus buy-and-hold (see here). Now let’s make a similar analysis of the S&P 500. The index was created in March 1957. But I’m also including the spliced S&P Composite monthly closes from January 1950, the starting point for my data source, Yahoo Finance. By including these earlier years, we get a more complete view of the post World War II bull market that began six months earlier in the summer of 1949. See this monthly update for more on secular bull and bear markets.

This log-scale chart highlights the four periods we’ll focus on:

Limitations of this Approach

Like the Nikkei study, this is a purely hypothetical exercise since there was no mechanism for investing in the S&P 500 until the first Vanguard index fund was launched in 1976. In addition, the Yahoo Finance S&P 500 data excludes dividends. Similarly, I’ve excluded interest earnings when the SMA strategies signal a move to cash. Finally, this approach doesn’t factor in trading costs, which will impact SMAs, especially the shorter ones with more buy/sell signals. Despite these limitations, the analysis should still provide a general idea of relative performance for passive buy-and-hold (B&H) versus active management with the various monthly SMAs.

Charting the Relative Performance

The bar charts that follow show the nominal value of one dollar invested using B&H and fourteen monthly SMA strategies. I’ve divided the 60-year timeframe into the four secular bull/bear markets illustrated above. The boundaries are determined by peaks and troughs based on monthly-close highs and lows and thus don’t correspond to the specific intramonth dates. They are November 1968, July 1982, August 2000 and the most recent close. Thus we will examine two secular bull markets (1950-1968 and 1982-2000) and two secular bear markets (1968-1982 and 2000-?). The chart for the last cycle extends to the latest S&P data. But one day we conclude that the cycle really ended in March 2009.

Comparative Performance: 1950 to Present

The first chart shows us the big picture. Over the past 60 years, B&H outperforms two-thirds of the monthly SMAs, including the 10-month SMA, which is the system highlighted in the The Ivy Portfolio. However, the authors, Faber and Richardson, point out that the 10-month SMA, as illustrated by their data from 1973, significantly minimized the downside risk (psychological and financial) of bear-market declines.

January 1950 to November 1968

This chart covers most of the postwar boom that began in the summer of 1949, six months before the earliest data available from Yahoo Finance. However, since the index gained over 20% in the last half of 1949, a chart understates the returns for the entire post-war boom.

November 1968 to July 1982

The nearly 14-year span in the next chart saw the combined effect of consolidation from extreme overvaluation in 1968, when the cyclical P/E10 was in the top quintile of market valuations (see the P/E data here), and the relentless erosion caused by the decade of stagflation.

The B&H performance was just shy of break even, returning 99 cents on the dollar, excluding dividends. Twelve of the fourteen monthly-SMAs outperformed B&H, especially the longer ones, and they dramatically reduced losses during the three cyclical bear markets during these 14 years (declines of 36.1%, 48.2%, and 27.1% illustrated here).

Side note: That 2-month SMA is a curious outlier that worked surprisingly well during the recessions of this period (see this chart).

July 1982 to August 2000

The most interesting chart in this study is the amazing 18-year Boomer bull market — probably the most favorable extended period in US history for passive investing.

I use the “Boomer” label because this period coincided with the financial coming-of-age of the Baby Boomer generation. The 401(k) plan was introduced in 1980 and IRA rules were liberalized the following year. The US saw the massive growth of a new investor class with a limited understanding of markets and risk. The bulge of Boomers became a windfall for Wall Street, the oldest having just turned 35 in 1981. Stagflation was replaced by the Great Moderation. We entered an era of optimism and investor confidence, we and witnessed the emergence of the Boglehead philosophy of B&H passive investing with low-cost index funds. The crash of 1987 was a minor blip for the passive investor, but it gave a nasty whipsaw to many of the monthly SMAs — further insuring their underperformance and validating the strategy of passive investing.

August 2000 to the Present

The Tech Wreck of 2000 marked the beginning of a massive secular change in the market, one that was confirmed by the more recent Financial Crisis. In less than nine years, the S&P 500 suffered two staggering declines — 49.2% and 56.8% from peak to bottom. Compared to B&H, the monthly SMAs showed their superiority for capital preservaton and risk management.

Some Conclusions

Like my study of the Nikkei SMAs this is another back-test of investment strategies in a hypothetical environment. It is based on authentic, but partial, data — monthly closes excluding dividends, interest on cash, and trading costs. Naturally it would be foolish to cherry-pick a single monthly SMA strategy based on these charts, intriguing as the results may be, especially since the results for the various timeframes demonstrate that no single strategy is a consistent winner.

What we can conclude is that in secular bull and bear markets, passive management (B&H) is a successful strategy on the way up, but it is a losing proposition on the way down. The reverse is true for active management with SMAs. It’s has reduced odds to outperform B&H on the way up, but outperformance on the way down is a virtual guarantee.

Unfortunately it’s impossible to pin-point those secular tops and bottoms and change strategy on a dime. For example, more than a year after the March 2009 market lows, it’s still impossible to say for certain that we’re in a new secular bull market.

Copyright (c) 2010 Doug Short

Tags: Active Management, Bar Charts, Bear Markets, Bull And Bear, Bull Bear, Bull Markets, Data Source, General Idea, Highs And Lows, Interest Earnings, Moving Averages, Nikkei 225, Nominal Value, Relative Performance, Sma, Timeframe, Troughs, Vanguard Index Fund, World War Ii, Yahoo Finance
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Face-to face with the bears: Marc Faber and Mish Shedlock

Monday, March 15th, 2010

In the three-part interview below, Aaron Task and Henry Blodget of Yahoo Finance – Tech Ticker interview Marck Faber, publisher of the Gloom, Boom and Doom Report, and Mish Shedlock, investment advisor at Sitka Pacific Capital and author of the economics blog, Mish’s Global Economic Trend Analysis. They discuss, among others, the economic outlook, inflation vs deflation, and the prospects for stock markets.

These are admittedly two of the most bearish commentators around, but well worth listening to.

Part 1: Economic outlook

Source: Yahoo Finance – Tech Ticker, March 12, 2010.

Part 2: Inflation vs deflation

Source: Yahoo Finance – Tech Ticker, March 12, 2010.

Part 3: Prospects for stock markets

Source: Yahoo Finance – Tech Ticker, March 12, 2010.

Tags: Advertisement, Bears, Boom, Commentators, Deflation, Doom, Economic Outlook, Economic Trend, Economics, Face To Face, Gloom Boom And Doom Report, Henry Blodget, inflation, Investment Advisor, Marc Faber, Marck, Prospects, Stock Markets, Trend Analysis, Yahoo Finance
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Barry Ritholtz Sticks with Stocks, Especially Emerging Markets

Friday, February 26th, 2010

“As long as the Fed is going to make money free … it’s hard to find a short,” said blogger and FusionIQ CEO Barry Ritholtz. According to Yahoo Finance – Tech Ticker, he is not as bullish as he was last March when he called the market bottom, but Ritholtz is sticking with stocks. “The easy thing to do now would be to go to cash,” he said, “[But] I rarely find the easy trade is the one that makes you money.”

Ritholtz is now favoring emerging markets that will withstand a weak US economy, including the likes of South Korea, Brazil, Taiwan and Singapore.

Source: Yahoo Finance – Tech Ticker, February 25, 2010.

Tags: Barry Ritholtz, Blogger, Brazil, Ceo, Economy, Emerging Markets, Market Bottom, Money, Singapore, South Korea, Stocks, Taiwan, Yahoo, Yahoo Finance
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Barry Ritholtz – still bullish on stocks, but not for the long term

Sunday, December 20th, 2009

“The market’s bias is still to the upside. We’re giving the rally the benefit of the doubt. Innocent until proven guilty,” said Barry Ritholtz, CEO of Fusion IQ in an interview on Yahoo Finance – Tech Ticker.

Ritholtz expects the market to continue to go higher in the first part of 2010, suggesting 1,250-1,300 as an upside target for the S&P 500, but still thinks we are in a cyclical (short-term) bull market within a secular (long-term) bear market, which began in 2000.

“The goal from now until let’s call it 2015 is to preserve capital – see if you can make a little money here or there – but be ready for the next 15-to-20 year bull market,” he said.

Source: Yahoo Finance – Tech Ticker, December 18, 2009.

Tags: Barry Ritholtz, Bear Market, Benefit Of The Doubt, Bias, Bull Market, Ceo, Fusion, Innocent, Iq, Money, Rally, Stocks, Target, Ticker, Yahoo, Yahoo Finance
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Beware “nosebleed” valuations, says John Mauldin

Tuesday, December 8th, 2009

John Mauldin of Millennium Wave Investments says (via Yahoo Finance – Tech Ticker) long-term investors should ignore the temptation to get a piece of the stock market action. In his view there is only one metric to consider: valuations. At this moment, stocks are too rich for his blood – “nosebleed” is the term he used.

Mauldin said: “There’s lot of other things you can do while you’re waiting for valuations to come down.” According to Yahoo Finance – Tech Ticker, his recommendations include fixed-income and dividend-yielding utility stocks. He also thinks buying real estate for rental income is a smart move now that housing prices have come down so dramatically.

Source: Yahoo Finance – Tech Ticker, December 4, 2009.

Tags: Advertisement, Buying Real Estate, Dividend, Dividend Stocks, Fixed Income, Investments, John Mauldin, Metric, Millennium Wave, Nosebleed, Smart Move, Stock Market Action, Temptation, Term Investors, Utility Stocks, Valuations, Yahoo, Yahoo Finance
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Marc Faber Video Bonanza

Thursday, September 24th, 2009

Marc Faber, editor of The Gloom, Boom & Doom Report, recently did a wide-ranging interview with Aaron Task and Henry Blodget of Yahoo Finance – Tech Ticker. The video clips are must-see footage for any serious investor.

Part 1:
Bullish today, Marc Faber is “highly confident” the future will be very bleak.

Part 2:
Buy stocks because US dollars will be “worthless,” says Faber.

Part 3:
Faber: Emerging market economies will challenge and surpass the west.

Part 4:
Faber: Ken Fisher is wrong! America already has way too much debt.

Source: Aaron Task and Henry Blodget, Yahoo Finance – Tech Ticker (here, here, here and here), September 22, 2009.

Tags: Bonanza, Boom, Buy Stocks, Doom, Emerging Market Economies, Emerging Markets, Gloom, Henry Blodget, Investor, Ken Fisher, Marc Faber, Ticker, Video Clips, Video Editor, Yahoo, Yahoo Finance
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