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amassafortune (29.49)

Perspective

Recs

5

May 05, 2013 – Comments (4)

 

S&P intra-day March 24,2000 -  1,553

S&P           October 11, 2007 -  1,576

S&P                 May 3, 2013  -  1,614

 

There has not been a lot of progress for buy-and-hold investors since 2000. That's 13 years ... almost half an investing lifetime. We will only hear "new all-time high" from most news reports and returns will mostly be calculated from the March, 2009 low and appear to look very positive historically. 

Be aware, there is some growth bias from new companies added to the S&P as they replace declining companies dropped from the index. 

Don't forget the banks are still working under the suspended mark-to-market rule which means they can legally misrepresent the value of real estate assets on their balance sheets. If that rule were restored Monday morning, the banking crisis would be restored by lunchtime. 

Inflation-adjusted, priced in gold, or adjusted to the monetary base, the S&P results are less than mediocre.

The Shiller P/E is at 23.97 compared to a long-term mean of 16.47.

OK. Being negative may help avoid losses, but it rarely captures the majority of the upside. 

For younger investors, those who began investing during the past eight years, the market has been a valuable generator of capital gains and dividends, but risk increases as higher highs continue without an equivalent amount of core growth.

Pimco's Mohamed El-Erian is at the same crossroad. His experience is telling him to be careful, but he knows central bank intervention can still take this market higher. As he puts it,

 "In a classroom you can discipline a single a person. However, if the whole class misbehaves it is an entirely different issue.   Currently the whole class is misbehaving and that is a very different paradigm than what we have seen in the past ..."

That's how we get people paying their monthly mortgage on a house backed by documentation signed by an $18.00-per-hour robo-signer. That's how we get large banks paying $881 million drug money laundering fines and still making a profit on the unpunished crime.

El-Erian also warns,

"...  it is also important to understand that all waves eventually break.   The question is whether you crash or “walk off” the surf board. This wave will crash. When it does it will depend on how you are positioned that will determine whether you suffer or not."

Despite the warning, it is pretty clear El-Erian plans to ride this wave a little longer. He may be hedging and taking steps toward diversification, but he is still riding the wave. 

Central bank largess has given us new nominal highs, but how far beyond this point can we expect to trend?

We've had a year's worth of gains in the first four months of 2013. In today's world, that can continue, but just keep things in perspective.

This wave will break. "This wave will crash." "When" is the unknown.  

 

4 Comments – Post Your Own

#1) On May 05, 2013 at 8:13 PM, HarryCarysGhost (99.68) wrote:

Oddly enough I was just having this conversation with my Father today, he's about to turn 70&1/2.

Even though his portfolio is comprised of mostly safe dividend aristocrats, I still advised him to get out.

So to me it's a matter of how old you are and what your risk tolerance is.

Now if I had listened to Tyler Durden all those many moons ago, I would have no profit to lose on a possible crash.

Cheers.

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#2) On May 05, 2013 at 8:13 PM, HarryCarysGhost (99.68) wrote:

Oddly enough I was just having this conversation with my Father today, he's about to turn 70&1/2.

Even though his portfolio is comprised of mostly safe dividend aristocrats, I still advised him to get out.

So to me it's a matter of how old you are and what your risk tolerance is.

Now if I had listened to Tyler Durden all those many moons ago, I would have no profit to lose on a possible crash.

Cheers.

Report this comment
#3) On May 06, 2013 at 1:02 AM, awallejr (81.55) wrote:

Pimco has been calling it wrong for years.  One of the greatest rallies in history and they kept scaring people out of it.  Same with Shiller.

Comparing and Index to itself is silly.  Look at the underlying stocks. Think AAPL even with its correction makes an anemic comparison?  What about C which crashed to near worthless and is still there but for the 10 for 1 stock reversal. Plenty have done great and plenty have not.  Do your DD.

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#4) On May 06, 2013 at 10:43 AM, amassafortune (29.49) wrote:

The S&P index, like most indexes, is specifically designed so comparisons can be made over time. Adjustments are made for stock splits, etc. and the choice of companies is made partly with the goal of having the index represent various business types proportionally.

The Shiller index is a consistent calculation to indicate how richly investors are willing to value stocks. It is historically high today at 23.97, but I don't know of any other conclusion Shiller has attached to the calculation. 

You'll be happy to hear there is a Fed model suggesting the S&P does not get too rich until 1,775. 

If the Shiller index passes 40.0 as it did at the 2000 dot com peak the current trend will continue for some time.

Bulls and bears both know it's the "Fed's got your back" theme that can continue to drive this market up, but little else. 

This is the main point of putting recent highs in perspective. We are near the point that dot com stalled, we are near the valuation point at which the housing bubble peaked, and it may be a good point to consider how the special case of Fed support will make "this time different."

Is this time a little different, or 1,175+ different?

 

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