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Author: gocanucks Big red star, 1000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 21596  
Subject: are we there yet? Date: 5/30/2012 9:22 AM
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so Europe is imploding. Spanish yield at new high. Spain/Italy are too big to fail (save?). something has to give. is this bad enough that the politicians in Berlin have to write another big check? Super Mario already showed his hand once last November. Time to do it again? with all the focus on debt level, i am not even sure Italy has a solvency issue since the country is among the wealthiest in the world, and my guess is their net worth/asset is a lot higher than that scary debt load, so in theory they can internalize the debt just like Japan.

i was reading the chapter on Ray Dalio in Hedge Fund Wizards (the latest installment of the excellent Market Wizards series). His one take-away was never under-estimate the power of Central Banks. He learnt the lesson the hard way in 70's and 82, yet he seemed to fall for it again in '09 (granted, he had a great positive '08 and smashing '10).

we know the market has put the politicians in a corner now. Valuation across Europe is attractive if we were to believe CAPE P/E's predictive power adjusting for survivorship bias (a HUGE condition admittedly).

is there a hellacious rally waiting in the wings in Europe?

i just don't know if S&P is priced in for the bad news. the breadth is horrendous and people are increasingly crowded in a few names.
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Author: LeKitKat Big gold star, 5000 posts Top Favorite Fools Feste Award Nominee! Feste Award Winner! Old School Fool Global Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 14201 of 21596
Subject: Re: are we there yet? Date: 5/30/2012 10:39 AM
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people are increasingly crowded in a few names

I am guessing Apple is one. What are the others?

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Author: gocanucks Big red star, 1000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 14202 of 21596
Subject: Re: are we there yet? Date: 5/30/2012 11:49 AM
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What are the others?


take your pick. each industry has a few, from tech to financials to consumer to healthcare to industrials. The P/E disparity between the haves and have-nots within the same space is huge.

one can also point to some difference in valuation between industries -- say retail/restaurants vs. banks. i always like to think of what kind of macro is priced in one group of stock vs. the other, and hopefully make some money off the discrepancy.

according to GMO, when multiple disparity is big, valuation is a great factor (i.e. buy cheap stocks).

on the other hand, the last phase of a market plunge is usally the most painful, so i don't want to jump in with both feet yet, especially when the "haves" have not completely cracked (usually a sign near the bottom), and the US market (consensus is US has decoupled) has some room to catch up with the global market. interestingly, the citi group economic surprise index has gotten close to the negative extreme point (probably another month of downward sloping), and as usual, the market lags that index by 2-3 months.

i have been nibbling here and there, but still hold a huge chunk in cash.

realize a lot of it may be "market timing" and not pure in value school, but it is what i do.

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Author: TheBullet Big red star, 1000 posts Top Favorite Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 14204 of 21596
Subject: Re: are we there yet? Date: 5/30/2012 12:49 PM
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The problem with austerity (not that in and of itself is a bad thing for those countries that need to implement it) is that it cuts funding to whole industries - look what has happened to Spain's clean-energy sector:

http://www.bloomberg.com/news/2012-05-29/spain-ejects-clean-...

The second thing about the whole crises is that, as we all know, people make the same mistakes. People will be buying this market ahead of the summer if we get a couple of percent dip, but the whole PIGS situation hasn't gone away, despite what the politicians may come out and say over the next few months. Spain is magnitudes larger than Greece, and its banks are suffering. Spanish gov't yields are not yet there, but edging toward, the point where it negates much of the already-imposed austerity measures. That in turn has a dribble, nay, a cascading effect on the whole economy, banks included. Which in turn...

effects international banks with exposure...which in turn... ad nauseum.

Add in Italy, Portugal to the extent that it actually does need a bailout in the next six months if its economy continues to wither... things are not looking good here.

For the time being, as many investors are arguing, the U.S. is a better choice for the market as a whole to outperform, that that of course doesn't mean it won't fall, and sharply, should things deteriorate over here. Add to that what one fund mananger said yesterday, that Europe is more attractive long term because it has a lower budget deficit than the U.S., highlights to me what will very likely be a volatile next six months. For now, safe-haven German Bunds and U.S. Treasuries may still have a lot of upside irrespective of the low yields.

‘Sell in May and Go Away – Don’t Come Back until St Leger Day’ (being the day on which the St Leger horse race is run) will be an interesting maxim to look back on in Q4.

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Author: MisterCHW Big gold star, 5000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 14205 of 21596
Subject: Re: are we there yet? Date: 5/30/2012 1:49 PM
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I bought some short term stuff today (trading lomg ACWI, in around 42.33) and thought to myself, "I'm not scared in the least, this isn't good." And that made me scared.

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Author: gocanucks Big red star, 1000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 14207 of 21596
Subject: Re: are we there yet? Date: 5/30/2012 2:25 PM
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I'm not scared in the least, this isn't good." And that made me scared.

yep. same feeling here.

owe you a reply on LCAV. i got lucky on my sale and started buying back this week below $5. i am a little less positive on the stock -- the last Q was just ok, and they said they had to resort to discounting this quarter again to juice up sales, which is never good. compares get a lot tougher in Q3.

i think mgmt execution has been very good in the sense they are the last man standing in the industry, but for the stock to work, we need economy to improve quite a bit and volume grow 15-20% from here. the incremental margin is very good (as seen in the last couple of quarters). but the macro is largely out of their control.

the stock has $2 in cash and they are close to cashflow break-even, so we are paying $2.5 in option value for a company that could earn $1+ in a "normal" environment.

fairly speculative play. contradicts my gut feeling on US economy, but i still have a small position, given my experience with PIR and CPWM (it could happen).

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Author: TMFKMHinson Big red star, 1000 posts Old School Fool Coverage Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 14210 of 21596
Subject: Re: are we there yet? Date: 5/30/2012 3:32 PM
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You touch on some very interesting stuff here...

"Valuation across Europe is attractive if we were to believe CAPE P/E's predictive power adjusting for survivorship bias (a HUGE condition admittedly)."

Where do you get CAPE data for Europe. That's not on Schiller's website anywhere, is it?

"i am not even sure Italy has a solvency issue since the country is among the wealthiest in the world, and my guess is their net worth/asset is a lot higher than that scary debt load, so in theory they can internalize the debt just like Japan."

This is an interesting statement to me, but I don't understand what you mean specifically. What assets are you referencing that could manage that debt?

Just thinking in ballpark terms... and using very general numbers... Italian GDP is equivalent to something like 2T US$... debt-to-gdp is ~120% today... but more importantly, questionable bank debt could ratchet that up quickly to something closer to 140-160%... Reinhart and Rogoff say anything > 90% is unsustainable based on history... so let's say the ECB loses its ability to prop up questionable debt and the bank assets get marked, and Italy subsequently wants to get its debt load back down to 80%, they need in the ballpark of 1.2-1.5T US$ (sorry, I think in US$, not Euro)... with a population of what... 60 million... maybe 35 million of those are workers (guess)... that would require in the ballpark of 40k US$ per worker. How is that possible? Private citizens in Italy may have quite a bit of wealth, but how does that get seized to cover bad bank debt without cratering the economy?

I think I understand the theory of what's going on... the banks get liquidity from the ECB or ESF or whatever... they buy Italian sovereign debt with it... and then Italy can shoulder its contribution to the ESF... it's very circular, like some kind of cliche' street corner hussle where you're supposed to follow your card, but in the mean time, the banks collect a fairly fat margin on that capital and bolster their balance sheets so the government never has to backstop them. Under that scenario, it would only take ~15k US$ per worker to get the debt down to something manageable. That definitely seems more reasonable if done over a few years.

It's always hard to step away from the headlines and grasp the reality of a situation. I'm don't think I have a handle on this one, so I'm curious what you had in mind when you suggested Italy had assets that make this debt load manageable.

kevin

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Author: NajdorfSicilian Big funky green star, 20000 posts Feste Award Nominee! Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 14212 of 21596
Subject: Re: are we there yet? Date: 5/30/2012 3:53 PM
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the top 25 HF owners of Apple reduced their holdings last Q, as I posted earlier.

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Author: NajdorfSicilian Big funky green star, 20000 posts Feste Award Nominee! Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 14213 of 21596
Subject: Re: are we there yet? Date: 5/30/2012 4:02 PM
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"Valuation across Europe is attractive if we were to believe CAPE P/E's predictive power adjusting for survivorship bias (a HUGE condition admittedly)."

Where do you get CAPE data for Europe. That's not on Schiller's website anywhere, is it?
....
It's always hard to step away from the headlines and grasp the reality of a situation.


Kevin, I asked this before but got no answer, so I'll try asking you:

Why would you use nominal PE ratios instead of real Earnings Yields?

Do you think a PE ratio of 15 with 9% inflation is the same as a PE ratio of 15 with 1% inflation?

Or better than 18/1%? Which of these two markets is 'cheaper' to you?


It is trivially easy to find historic inflation numbers for the US [whichever ones you like].

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Author: stillwater9999 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 14214 of 21596
Subject: Re: are we there yet? Date: 5/30/2012 5:00 PM
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Finding an increasing number of values. But some things that I would love to buy back into (Oceaneering, Precision Cast Parts) are still to pricey for this investor.

sw

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Author: gocanucks Big red star, 1000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 14216 of 21596
Subject: Re: are we there yet? Date: 5/30/2012 7:45 PM
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Naj, i am not sure how a snapshot of current inflation should impact P/E, considering most of the FCF/terminal value embedded in P/E is in future years with likely different inflation. iirc, there is no/little correlation between p/e and inflation. the stronger relation exists between inflation volatility and p/e.

won't got into CAPE debate. we have different views on whether margins are mean reverting. hence our different opinion on aapl, i suppose.



Kevin, i get CAPE from various sell-side reports and bloomberg. Germany/France is close to 8. Greece is supposedly below 2. but i have no idea whether the equity is worth anything if there is regime/currency change/unrest, hence my mention of survivorship bias. Japan/German equity were wiped out after WW2. i am somewhat skeptical to extrapolate what worked in US to overseas, since arguably US is an exception.

on Italy, my problem with all the arguments focusing on debt/GDP is that it ignores the other side of the balance sheet, assets. This is an issue pointed out many times by Naj -- US may have a lot of debt, but assets/net worth dwarf the debt load. The same is true for Japan and Italy.

Italy is in fact one of the wealthiest countries in the world. The issue is do they have the mechanism/system in place to internalize/transfer the wealth like in Japan.

Grant's interest rate had a very interesting piece on Italy in the 90's. Basically one day, the central bank/government confiscated (stole?) a small % of everybody's deposit in the banking system. it apparently balanced government's budget and had a positive impact on the market after the initial shock.

couldn't find much on the web on that episode. but i guess the point is anything could happen in this weird weird world.

this is way way beyond my league. just throwing out my random laughable thoughts and hoping someone more knowledgeable (wink wink) will chime in.

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Author: TMFRichDad Big gold star, 5000 posts Old School Fool Coverage Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 14217 of 21596
Subject: Re: are we there yet? Date: 5/30/2012 8:32 PM
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This dovetails into what I've spent the last couple of weekends studying so I can at least throw out some data for everyone to chew on.


Do you think a PE ratio of 15 with 9% inflation is the same as a PE ratio of 15 with 1% inflation?


Obviously, no, they are not the same and I'd pick the current situation as the better bet.

However, when paying 15x earnings when inflation is 9% an investor at least has the hope that if inflation pressures subside the resulting lower inflation and interest rates will result in even higher equity multiples going forward.

I'm not sure the same can be said for when interest rates and inflation decide its time to go significantly higher.

Course, we could be looking at decades of low growth, low inflation and low interest rates due to the aging of the work force. Things don't always go up or down. Flatline is a possibility.


Why would you use nominal PE ratios instead of real Earnings Yields?


It really doesn't matter either way. Both tell the same story.

Here's a statistical summary of Shiller's "real" data from 1/1960 thru 5/2012 (pre 1960 seems unrepresentative, to me):

         CAPE E/P    Spread
Avg 6.1% -0.5%
Max 15.1% 4.7%
Min 2.3% -4.4%
Std Dev 2.7% 1.7%


The CAPE E/P is real earnings yield. The spread is that over 10yr T-bonds.

The current spread as of this past weekend was 2.85%. Compared to the historical average of neg 0.5%, that tells me that equity investors today are getting a much better deal than normal. There is the possibility that stock investors aren't buying what the Fed is selling and that they are pricing in an un-stimulating "real" interest rate . . .

Interestingly, the max 4.7 spread occured in March 2009. The min -4.4% spread occured in January 2000. Two extremes in stock market valuation many of us here experienced first hand.

On a nominal basis, the results are for all practical purpose the same:

         Nom. E/P  Spread
Avg 6.4% -0.2%
Max 14.7% 5.8%
Min 0.0% -4.4%
Std Dev 2.8% 2.0%


On average, investors price stocks ever so slightly more optimistically (justifiably so considering growth potential) than what is offered by T-bonds with wide swings either way depending on which emotion rules the day; fear or greed. Today, it is fear.

Interesting, but not all that useful really. But it does seem to show that the Fed's formula for stock valuation is substantiated by history, more or less.

Rich

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Author: MDCigan Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 14218 of 21596
Subject: Re: are we there yet? Date: 5/30/2012 8:51 PM
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Course, we could be looking at decades of low growth, low inflation and low interest rates due to the aging of the work force.

Keep in mind the Millenials are a very large generation. Anything is possible, but I think/hope we aren't going to have decades of low/below trend growth and that in another 5-10 years max we'll be back off to the races like the 80s and 90s.

The Millenials are in their 20s and 30s so in another 10 years they should enter their peak asset accumulation years. Boomer liquidation of stocks will probably keep multiples compressed for the next several years, but hopefully the Millenials will jumpstart the next secular multiple expansion. I'm wondering if I'll see a 25-30 P/E multiple again on the SPX in my lifetime.

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Author: NajdorfSicilian Big funky green star, 20000 posts Feste Award Nominee! Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 14219 of 21596
Subject: Re: are we there yet? Date: 5/30/2012 9:19 PM
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So...you can normalize earnings over 10 years but not inflation? Really?!?

I can't believe anyone here would be espousing that $1 of earnings at 1% inflation is worth the same as $1 at 12% inflation.


[I'm not going into the mean-reverting questions, either, although CAPE doesn't make the identical assumptions with the operating/reported EPS ratio, which to be intellectually consistent you ABSOLUTELY have to.]


CAPE would have kept you out of the US stock market for almost the entire decade of the 90s [and you didn't need it to realize that stocks were overvalued in 1999, reported PE of 35-40 was plenty].

That's a mega-perverse outcome!

At least if one is going to use some formula to 'value' the markets we should examine the logical underpinnings and faulty assumptions implicit in every model. It would have gotten you in the market in Oct 2008 and back out in Sept 2009 with zero gains!
{I know it's not a market timing model - but then that should not happen!}

The current valuation of CAPE is 1000 on the SPX. That's almost a 30% below today's value for 'fair value...' I guess you need a drop to ~800 to be 'cheap?' My head hurts, because that looks like bizarroWorld.

Here's what the CAPE real earnings yield looks like using the long-bond [which is the best, unbiased estimate of US inflation expectations] over the past 120 years, as of a few months ago:

http://i.imgur.com/dB6c0.jpg

The S+P looks to be around the 3rd cheapest since the late 1950s, after 1974 and 2008. Notice that the chart 'works' well - the market is expensive going into the Crash of '29, and super-cheap at the bottom in 1933.
It gets very cheap again in 1950, gets expensive in the late 60s, very cheap in the mid 1970s, and is most expensive in 2000. Not bad, huh?


Canucks, you're a very smart guy. There are probably another ~dozen very smart buy-side investors on this board, each of us hoping to learn something new. This is directed at all of us:

If we posters are unwilling to discuss broad queries about valuation on this discussion forum, then why are we all here? I know there's more than 1 other poster that uses backwards-looking models to value stocks/the market, a few of you need to share your thoughts on these topics more. [instead of waiting to see if Roark sees his shadow come Spring.]

We shouldn't have a board where someone's disciples just proclaim 'Shiller!' or 'Garzarelli!' or 'omgiluvCRAMER!!!' and give up on engaging questions from curious, knowledgeable posters about the market's prospects.



















































If that's all we're left with, [and hyperlinks to idiotic blog posts from inferior sites] then we should just shut down the board and follow GM into the wild blue yonder.

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Author: gocanucks Big red star, 1000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 14221 of 21596
Subject: Re: are we there yet? Date: 5/31/2012 9:42 AM
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hey Naj, thanks for the link. interesting chart.

i guess my fascination with CAPE comes primarily from GMO/Hussman's posts as well as Russell Napier's book. I thought those charts were very convincing in terms of predicting 7+ year future returns. Are they good timing tools? probably not. but then again, i think most on this board focus more on individual ideas.

Could CAPE keep me out of the market in the 90's? possibly the large cap stocks, but there are tons of small-cap names that were ignored at the time. it was probably painful for a while going into '99, but i think there are enough stocks to buy, looking at what GM did back then.


So...you can normalize earnings over 10 years but not inflation? Really?!?

I can't believe anyone here would be espousing that $1 of earnings at 1% inflation is worth the same as $1 at 12% inflation.



again, i am not sure how you normalize inflation and insist using 1% current inflation in the discount rate. by extension, you would say stocks should be at 6x in 1982 given the inflation/treasury yield at the time.

i know if inflation changes, then arguably the future FCF stream changes as well, which is why equity is an inflation hedge and P/E should be real rather than nominal, but my head hurts when i start to think of it. i am no WEB. i cannot do DCF in my head.

speaking of individual names, i thought about taking a punt in TLB yesterday, as they showed some signs of "improvement" last quarter and compares are easier, sorta distressed CTRN with a take-out kicker.

even did a quick model and was close to pull the trigger, but then got sidetracked by some meetings and Europe mess.

would have been my best IRR ever...

lesson is to still focus on individual names!

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Author: gocanucks Big red star, 1000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 14222 of 21596
Subject: Re: are we there yet? Date: 5/31/2012 10:30 AM
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i think it is safe to say US economy has slowed.

regional PMI, durable orders, unemployment claims, payroll, rail traffic, restaurant traffic, retail sales (Naj, i think we can settle whether there was pull forward in the spring now).

Cleveland Research is a boutique shop that does great channel checks. today they had a report out, where their fundamental positive/negative index falls for the second straight month in May and turns negative since April 2009.

Deflation is back in favor with US/German 10 year yield at record lows, and QE3 looks increasingly likely with another FOMC meeting next week, esp if payroll disappoints tomorrow.

Feels like we are close to another response by Uncle Ben.

my concern remains US equity/VIX is nowhere close to prior bottom/stress level (US/MSCI ex-US index actually hit new high since '04). it is usually the most painful/precipitous fall during the recognition phase...

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Author: NajdorfSicilian Big funky green star, 20000 posts Feste Award Nominee! Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 14226 of 21596
Subject: Re: are we there yet? Date: 5/31/2012 11:57 AM
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and insist using 1% current inflation in the discount rate.

CPI is 2.3%, happy to use that as well. It's just easier to use the long-bond which has future expectations in it, the key is to use something to convert nominal to real is all.

Just like bond returns - no one runs out and buys debt from countries with nominal 40% coupons because they tend to be the ones with 75% inflation -- as you know.


lesson is to still focus on individual names!


Agreed 110%! S+P has done ~4.1% cagr for 10 years, not very impressive.

After all, we could have just bought LULU or GooG at the IPO and gone on vacation...

;)

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Author: NajdorfSicilian Big funky green star, 20000 posts Feste Award Nominee! Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 14227 of 21596
Subject: Re: are we there yet? Date: 5/31/2012 12:06 PM
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say US economy has slowed.

... unemployment claims, payroll, ...retail sales (Naj, i think we can settle whether there was pull forward in the spring now).


You've honestly lost me here. GDP was revised down for Q1, are you saying there was pullthrough there that sped it up from where it is now? Or something else?

Retail Metrics [firm in MA] showed a 4% increase in the 20 firms they track vs a 1.8% estimate. Target up 4.4% vs 3.5% estimate, TJX, etc.

"Retailers are also showing resiliency, since many are up against significant comparable-store sales gains from last year.

The general tenor of the reports "shows an underlying strength of the U.S. consumer," said Joel Bines, managing director of AlixPartners. "We are back to a bit normal in retail where consumption is at a relatively strong pace."

Target reported 4.4% growth, which was at the high end of the company's expected range. Analysts were looking for 3.5%. Target said larger average transaction sizes helped fuel the gain..
Limited Brands Inc. posted a 6% rise in same-store sales, when 4.7% was projected. ...
Macy's reported that same-store sales rose 4.2% in May, topping analysts' expectations for a 4% gain. "The momentum in our business continued in May, and came on top of a very strong month last year," Chief Executive Terry Lundgren said, noting that growth came from stores, online, and all geographic areas and categories. " ~CBS

Corp profits:
'In a positive sign, companies registered their biggest quarterly gain in profits since the end of 2009. Corporate profits--after tax and unadjusted for inventories and capital consumption--increased at an 11.7% annual rate from the previous quarter. Profits were up 14.8% year on year in the first quarter, Commerce said. '

This doesn't show any pullthru:
'Thursday's report showed the inventory buildup was even less than expected in the first quarter, with the contribution to GDP falling to just 0.2 percentage point from 0.6 percentage point. '

Chicago PMI was very weak though. Macro is hard.


You wanna know when the market/economy is about to stress/tank? Watch the OIS spread, not the VIX. JMHO.

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Author: gocanucks Big red star, 1000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 14229 of 21596
Subject: Re: are we there yet? Date: 5/31/2012 1:19 PM
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i meant retail sales were strong in Feb/March, and have definitely slowed in April/May. At the time, I said I believed there were some pull forward, and you disagreed.

TGT/TJX/M/LTD have been relative winners. i can easily list more names that said they saw things slow down starting in April. Restaurant traffic slowed down significantly in April as well.

interesting you brough up Chicago PMI. “three consecutive declines are associated with the onset of each of the last seven national recessions, with a lead of some six-to-eight months,” ISM-Chicago said in a news release today.

which is sorta similar to what ECRI/Hussman said about their own indicators. no need to call them idiots. :)

one thing i learnt the last few years. These indicators could prove to be false positives in the end, but the reality is that the market will react as if they were right. The first phase of a hard landing/soft landing will look the same. Only when price corrects to a certain level, we can then debate what is priced in.

Like last year, we got a good scare on the economic front (i was actually positive then with my work on autos), but the market didn't care and fell 17% from the peak, when the indicators were flashing slowdown/recession.

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Author: NajdorfSicilian Big funky green star, 20000 posts Feste Award Nominee! Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 14231 of 21596
Subject: Re: are we there yet? Date: 5/31/2012 2:59 PM
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i meant retail sales were strong in Feb/March, and have definitely slowed in April/May. At the time, I said I believed there were some pull forward, and you disagreed.

Yes I did. I still think it was the early Easter.

What I really disagreed that warm weather was the cause of any possible 'pullthru.' I still have seen no evidence that higher temps caused a pullthru vs other things.

Of course, the slowdown could just be from a general economic US slowdown and have nothing to do with weather, Easter, and the like.

If we get another summer slowdown like the last two years, so be it. Maybe the 'new normal' is a lot like the 'old normal,' where we got a slowdown virtually every summer it seemed.

Restaurants slowdown shortly after gas prices jump up, so a slowdown last month doesn't surprise me all that much.

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Author: TMFKMHinson Big red star, 1000 posts Old School Fool Coverage Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 14233 of 21596
Subject: Re: are we there yet? Date: 5/31/2012 4:39 PM
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Hey Naj...

"Why would you use nominal PE ratios instead of real Earnings Yields?

"Do you think a PE ratio of 15 with 9% inflation is the same as a PE ratio of 15 with 1% inflation?"


I know we've discussed this before... and I also know we'll probably never look at it the same way, so I'm not trying to convince you... but I still enjoy the conversation. It usually makes me think things through, and question if I know what the heck I'm talking about... both good things.

So the way I see it... the only way to justify most stock prices is by valuing future cash flows to equity over a very long period of time. I'd say at least 20 years, and typically much greater than 20 years, otherwise, why on earth would you be paying in the ballpark of 15X next year's earnings if you weren't going to get something much larger over a period of time. I have no ability to predict 20 years of cash flow, nor does anybody else, so we look at multiples of current earnings and make guesses about the future of the company. At least that's what I do. The problem for me is... earnings fluctuate wildly year to year. Companies whose 2012 earnings will be 3X their 2009 earnings are surely not worth 3X more than they were three years ago. The earnings power of most companies over the next few decades has barely budged over the last three years, but their single year earnings and stock prices have fluctuated wildly. So for me, I find a simple multiple on last year's earnings as misleading without having a good guess at what components are structural/sustainable over the long run... and what is a result of stimulus driven demand and/or current distortions in the market... unsustainably low interest rates... historically low labor costs... etc. For the aggregate market, that's hard, and I think something that moves a bit slower... and mutes the year-to-year fluctuations more accurately tracks the growth in value compared to simple multiples on last year's earnings... or worse... multiples of guesses about next year's earnings. Those guesses are reasonable when we're moving in a straight line, but they're terrible otherwise.

As for inflation... perhaps you disagree, but it seems to me that today's inflation has a bigger role in your decision if you're playing primarily a relative value game. 15X earnings seems great if your alternative is treasuries yielding < 2%. But what's a normalized inflation over the long run... and is 15X today's earnings a good absolute value when the company will have to operate in a variety of future inflationary environments? If the question in front of me is "what non-cash asset to put my capital in today" then stocks at 15X earnings is logical. If the question is "do stocks at 15X this year's earnings represent good absolute value" I think it's less clear, becuase this year's earnings are being pushed around by all kinds of unusual factors. It seems to me, presently, that CAPE is a reasonable way of cutting through those year to year factors without making guesses about the future.

I wonder though... people by nature are inherently uncomfortable with ambiguity. Perhaps CAPE seems useful because it's simple and seems to eliminate some ambiguity. Maybe instead we should just be comfortable with the ambiguity. I've read a lot about CAPE's predictive power. I haven't been able to replicate that using historical numbers. I'd love to see the study that shows CAPE's correlation to future returns. Anybody know where that is? I haven't seen it on Shiller's site, but his site isn't the easiest to navigate either.

I know you're not buying what I'm putting down... but that's where I'm at personally. Always learning though.

kevin

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Author: MDCigan Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 14235 of 21596
Subject: Re: are we there yet? Date: 5/31/2012 4:54 PM
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I wonder though... people by nature are inherently uncomfortable with ambiguity. Perhaps CAPE seems useful because it's simple and seems to eliminate some ambiguity. Maybe instead we should just be comfortable with the ambiguity. I've read a lot about CAPE's predictive power. I haven't been able to replicate that using historical numbers. I'd love to see the study that shows CAPE's correlation to future returns. Anybody know where that is? I haven't seen it on Shiller's site, but his site isn't the easiest to navigate either.

I'll try to find the link later, but CAPE is quite effective at predicting 7-10 year returns. If you sort CAPE by quintiles, the higher the quintile the lower the long-term CAGR. Now, year to year it is worthless. This is also affirmed by other long-term return forecasting methodologies like what Hussman does or Grantham where the 7-10 year returns pretty much match exactly with the forecasting model. I think with Grantham he got almost the exact rank order of 10 asset classe back in 2000 lookng at 10-year returns just recently.

Now, the fact is most of us really are not investors in that we are looking to buy the long-term stream of cashflows. How many people here have held a stock 5 years? No hands I bet. 2-3 years...still probably none. Most everyone here is a trader, even if it is a fundamentals based trader using valuation and business momentum to gauge inflection points. From that perspective, any long-term broad valuation metric is simply an academic exercise.

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Author: TMFKMHinson Big red star, 1000 posts Old School Fool Coverage Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 14237 of 21596
Subject: Re: are we there yet? Date: 5/31/2012 5:37 PM
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Thanks MDCigan! If you can track that down, I'd love to see it.

"How many people here have held a stock 5 years? No hands I bet. 2-3 years...still probably none. Most everyone here is a trader..."

Ha... yeah, probably a fundamental disconnect between myself and the rest of this board. I'm sure I would get eaten alive if I tried trading. I have no advantage there, so I wouldn't venture into it.

I think trying to predict future cash flows over the long run and then valuing is pretty absurd in practice, and yet the fact that those unknowable future cash flows to equity give value to the shares of stock is pretty fundamental to making any purchase in my mind, otherwise what would provide value to any shares and make this any more substantial than gambling on future squiggles in lines?

Differences of opinion, approach, etc. is what makes the market though, and lets each of find the niche we're trying to exploit to beat everybody else. Lots of ways folks find success that I'll never be able to replicate or perhaps even understand.

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Author: chk999 Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 14239 of 21596
Subject: Re: are we there yet? Date: 5/31/2012 6:27 PM
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How many people here have held a stock 5 years

I have investments I've held for almost 30 years. I got a great price and a great average return and I'm not letting them go until I need the money.

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Author: MDCigan Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 14240 of 21596
Subject: Re: are we there yet? Date: 5/31/2012 6:49 PM
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Thanks MDCigan! If you can track that down, I'd love to see it.

I'll have to do some hunting around for the quintile ranks with forward returns. It may have been in Easterling's book (see links below0

http://advisorperspectives.com/dshort/updates/Crestmont-PE-R...
http://dshort.com/articles/Easterling/PE-So-Many-Choices-01....
http://dshort.com/articles/Easterling/PE-So-Many-Choices-02....

His book is a really good one and check out the Crestmont website

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Author: jkm929 Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 14241 of 21596
Subject: Re: are we there yet? Date: 5/31/2012 8:18 PM
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How many people here have held a stock 5 years? No hands I bet. 2-3 years...still probably none. Most everyone here is a trader, even if it is a fundamentals based trader using valuation and business momentum to gauge inflection points.

I sold some shares today that I've held for almost 38 years.

jkm929

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Author: TMFRichDad Big gold star, 5000 posts Old School Fool Coverage Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 14242 of 21596
Subject: Re: are we there yet? Date: 5/31/2012 8:19 PM
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How many people here have held a stock 5 years?


4 hands raised.

Have owned BRK since 2006, SU since 2004 and COP since 2006. Still own 'em. I have both bought and sold some shares along the way but have always maintained a position continuously since those dates.

There's also a 4th that I bought in 2005 that I sold out on earlier this year.

My ports only 20 positions, so that's a pretty high percentage. Still, I "trade" too much.

Rich

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Author: MDCigan Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 14243 of 21596
Subject: Re: are we there yet? Date: 5/31/2012 8:51 PM
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4 hands raised.<./i>

I stand corrected. Still, I'm pretty sure we've got some people here whose long-term holding is 12 months and who probably have turnover of hundreds of percent. Nothing wrong with that...but if you are buying a stock for 3-6 months who cares what their cash flows may or may not be in 5-10 years.


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Author: NajdorfSicilian Big funky green star, 20000 posts Feste Award Nominee! Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 14244 of 21596
Subject: Re: are we there yet? Date: 5/31/2012 10:06 PM
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5 years+ JPM, LB, Exxon among others.

~10 years - AMD, Xoma. Got out of both of those at the right time at least.

There are several other stocks I'd gladly have held for over 10 years if they hadn't been bought out by PE funds or merged/acquired by larger competitors. Mirage, KKR made 4x on Dollar General, ad infinitum.

That's one reason why 'turnover' numbers are often a crock, although I'm the first to admit to trading more than I probably* should.












*But it keeps me from riding losers all the way down to value-trap land!

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Author: NajdorfSicilian Big funky green star, 20000 posts Feste Award Nominee! Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 14249 of 21596
Subject: Re: are we there yet? Date: 6/1/2012 10:42 AM
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Well, we got a 'growth' problem now...

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Author: gocanucks Big red star, 1000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 14250 of 21596
Subject: Re: are we there yet? Date: 6/1/2012 11:10 AM
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what do u make of the chart? another day like today, we are below 200 day and the set-up looks scarily similar to the Friday before Black Monday.

i think everybody is looking for QE3. QE is supposed to help by lowering interest rate. now rate is already at all time low across the globe. what next?

my operating thesis has been when deflation fear is in the air, it is time to load. yet i haven't added much this week at all and still sit on cash. i actually can't find too many no brainer bargains as in last fall.

i dunno, ECRI's call suddenly looks not so bad any more.

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Author: howardroark Big red star, 1000 posts Top Favorite Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 14251 of 21596
Subject: Re: are we there yet? Date: 6/1/2012 11:45 AM
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what do u make of the chart? another day like today, we are below 200 day and the set-up looks scarily similar to the Friday before Black Monday.

Forget the chart. Real yields on 10-year Treasury bonds are -0.65%. I am trying to think of what odds I would have put on ever seeing that in my lifetime just a few years ago. I remember in June of 2003 when the 10-year dipped to 3% (Buffett made an offhanded comment implying absurdity) and real rates were around 1.5%, thinking something really sophisticated like "wow, that's pretty low." Japan has had very low nominal rates but any reliable estimates of inflation expectations surely would have been low enough to render the real 10-year real rate above -0.65%. Right now my cupboard is a diversified portfolio of canned soup and cumin that might outperform US Treasury Bond for the next 10 years. Know that my cumin has at best average marginal productivity. Every second people are willingly trading 100 seeds of cumin today to secure 93 seeds of cumin in 2012 as long as they can minimize the risk that it won't be 92 or 91. Imagine what they would pay if the USG was AAA.

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Author: jkm929 Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 14252 of 21596
Subject: Re: are we there yet? Date: 6/1/2012 12:06 PM
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Forget the chart. Real yields on 10-year Treasury bonds are -0.65%.

The long bond now is two basis points above the low set on Dec. 18, 2008. The long TIPS yield is at a record low of .36%.

jkm929

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Author: jkm929 Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 14253 of 21596
Subject: Re: are we there yet? Date: 6/1/2012 12:20 PM
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The bond market looks like December, 2008. The market bottomed in March, 2009. Maybe we're three months from there.

jkm929

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Author: gocanucks Big red star, 1000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 14254 of 21596
Subject: Re: are we there yet? Date: 6/1/2012 2:14 PM
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Forget the chart. Real yields on 10-year Treasury bonds are -0.65%.

what's the implication? temporary irrationality by investors, or market telling us to load up on mortgage REITs?

what do you make of the chart in this link which shows proxy of short-term t-bills at negative real rate very often?

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Author: gocanucks Big red star, 1000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 14255 of 21596
Subject: Re: are we there yet? Date: 6/1/2012 2:15 PM
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http://www.econbrowser.com/archives/2010/10/negative_real_i....

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Author: howardroark Big red star, 1000 posts Top Favorite Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 14257 of 21596
Subject: Re: are we there yet? Date: 6/1/2012 3:04 PM
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what's the implication? temporary irrationality by investors, or market telling us to load up on mortgage REITs?

If by implication you mean, "is there some obvious way to profit from this," you're on your own. People are putting an extremely high premium on either safety or the value of tomorrow versus today. Given other asset prices, it's mostly safety. The market is either saying that marginal investment is going to produce horrible returns, okay but very risky returns, or okay returns at normal risk but the market suddenly doesn't want any normal risk.

what do you make of the chart in this link which shows proxy of short-term t-bills at negative real rate very often?

I don't understand what you're asking (I assume "duh" would be impolite). Maybe you are asking why it's surprising to see a real 10yr rate of -65bps when real 6-month negative rates are somewhat common? Because the term structure matters a lot. And if you look back to the 70s at 10-yr rates you can't cheat and use ex-post index inflation. It's gotta be some version of forward looking inflation expectations or bust.

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Author: MDCigan Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 14258 of 21596
Subject: Re: are we there yet? Date: 6/1/2012 3:05 PM
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my operating thesis has been when deflation fear is in the air, it is time to load. yet i haven't added much this week at all and still sit on cash. i actually can't find too many no brainer bargains as in last fall.

I still think one has to believe Bernanke and his 2002 speech...he absolutely will NOT allow persistent deflaton to take hold. I'm not sure what other tricks they've got up their sleeve, but I'm sure they got something.

The 2010 bootom was 1010, the 2011 bottom was 1070....we are still at 1280 even after the last 2 month sell-off....this broad market level seems to jibe with you not finding too many no brainer bargains at the individual level

Strange day today, market down big, oil down big, but gold up big. Gold almost seems to be anticipating the next round of "money printing" in reaponse to the signs the economy is worsening. Gold should be going down as well on deflation fears just like 2008 unless the next round of bazooka reflationary policies are coming.

what do u make of the chart?

Well...we are now in a textbook downtrend channel, and most momentum indicators have flipped negative. To my eye, the bounce was really, reall weak as we couldn't even make it back to the declining 50 DAM or 1350 before selling resumed.

Anything is possible, but this doesn't seem like crash-like conditions or 1987, especially because sentiment is already pretty bearish.

You said in an earlier post something about Ray Dalio learning not to fight central banks. I think people who think the second leg of the 2007-2009 bear market is coming are making that mistake. I still think we'll never see the S&P trade below 1000 again. I believe the Fed will NOT mimic the ECB and allow the S&P 500 to look like the Greek stock index or Spanish stock index.

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Author: gocanucks Big red star, 1000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 14260 of 21596
Subject: Re: are we there yet? Date: 6/1/2012 3:33 PM
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thanks to HR as always.

Well...we are now in a textbook downtrend channel, and most momentum indicators have flipped negative. To my eye, the bounce was really, reall weak as we couldn't even make it back to the declining 50 DAM or 1350 before selling resumed.

Anything is possible, but this doesn't seem like crash-like conditions or 1987, especially because sentiment is already pretty bearish.


i think part of the problem is lots of people had good plans to sell into the rally to 1350.

not sure i agree with your low probability for crash. there was already panic on the Friday before Black Monday -- the market was down big (like 3-4%) on Friday. Then the global market continues to sell off on Monday before US opened, and the avalanche just never stopped.

i think this was the point Hussman tried to make. the big crash does not happen out of the blue, it actually tends to happen in weak/panicky markets like this.

who knows. maybe we will experience the super choppy market last fall again. remember that week with Dow up/down by 300 points 4 days in a row? it felt so long ago...

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Author: MDCigan Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 14262 of 21596
Subject: Re: are we there yet? Date: 6/1/2012 5:40 PM
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Real yields on 10-year Treasury bonds are -0.65%.

This dynamic may explain some of the price movement we are seeing in long-term U.S. bonds

http://contraryinvestor.com/mo.htm

So if we have capital leaving the BRIC countries and deposit runs on Euro area banks, to where is this global capital flowing? Below is a table that summarizes select country US Treasury purchases over the past year that we believe tells a very important story. Each month the US Treasury publishes global purchases of US financial assets. Remember, in a period of global sovereign debt crisis, capital FIRST moves to the immediate perception of safety and quality. What really are Treasury purchases by the foreign community? They are purchases of dollars. They are purchases of the perception of safety and quality.

The implications in the table appear pretty darn clear. The most troubled periphery Euro countries saw the most meaningful purchases of US Treasuries/dollars over the last year. Global capital flight to perceived quality and safety? If not, then what is this?


So perhaps the marginal buyer/price setter of Treasuries is at least at this moment price insensitive, and simply fleeing to perceived safety.

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Author: TMFKMHinson Big red star, 1000 posts Old School Fool Coverage Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 14263 of 21596
Subject: Re: are we there yet? Date: 6/1/2012 5:49 PM
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"I believe the Fed will NOT mimic the ECB and allow the S&P 500 to look like the Greek stock index or Spanish stock index."

There's supposedly so much pessimism in the stock market, and yet this seems to be a common understanding. I turned on CNBC for a few at lunch (so ashamed) and all the talking heads were certain that after this dreadful decline in the market (eek, a whole 10% or so?! Oh my.), the Fed would most certainly "do something" in June. How is all this oft-discussed pessimissm priced into the market when nobody believes the Fed will let it go down?

It is unfortunate that the Fed has adopted as its mandate propping up the stock market. How has the stated goal of "price stability" morphed into the action of creating a wealth effect via high asset prices to prop up the economy. Have we abandoned letting the market set prices entirely? What if they're too high? "Too bad, they can't go down, that would be deflationary!" WTF?! Is it so much better than letting prices set themselves to instead punish savers and retirees and the poor in order to keep the numbers on the ticker high?

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Author: MDCigan Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 14264 of 21596
Subject: Re: are we there yet? Date: 6/1/2012 6:27 PM
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There's supposedly so much pessimism in the stock market, and yet this seems to be a common understanding. I turned on CNBC for a few at lunch (so ashamed) and all the talking heads were certain that after this dreadful decline in the market (eek, a whole 10% or so?! Oh my.), the Fed would most certainly "do something" in June. How is all this oft-discussed pessimissm priced into the market when nobody believes the Fed will let it go down?

I'm not sure how common it is or isn't...but I'm just trying to learn from the last 3-4 years. We had QE1 in 2009, than QE2 in 2010 when David Tepper correctly said on CNBC to basically buy all risk assets, and than yet again 2011. Perhaps I'm the general fighting the last war thinking recent history will repeat, but it sure seems to me that central banks have an unstated mandate to keep equity prices from falling too much

It is unfortunate that the Fed has adopted as its mandate propping up the stock market. How has the stated goal of "price stability" morphed into the action of creating a wealth effect via high asset prices to prop up the economy. Have we abandoned letting the market set prices entirely? What if they're too high? "Too bad, they can't go down, that would be deflationary!" WTF?! Is it so much better than letting prices set themselves to instead punish savers and retirees and the poor in order to keep the numbers on the ticker high?

You are preaching to the choir. If I had it my way, we would have had a complete deflatonary purge of all the excesses of the past 25 years. Write off all the garbage bad debt rather than transfer it to the sovereigh balance sheet, let housing just collapse, and let prices fall to where they are based on actual real incomes of the typical worker instead of propped up by high asset prices and willingness to borrow.

But that isn't the world we live in, and unless Bernanke is playing the biggest game of bait and switch ever, we aren't going to live in that world. He is going after what Dalio calls that "beautiful deleveraging". Just enough money priting and policy maneuvers to keep deflation from taking hold, but not enough for inflation to start raging. Depending on what metric you want to measure him on (GDP growth the last few years, equity prices, etc) you can argue he has done a fine job.

In some way, shape, or form, the U.S. equity market has lived with a central bank backstop since 1987 with Greenspan, although it took one hell of a drop in 2008-2009 to really get them going. I can't fathom Bernanke wanting to even get near a repeat of that.

Its all well and good to criticize policies, and that makes for interesting discussion (Hussman has been on point I think on this regard) but it is a mistake to allow opinions of policy I think to drive at what levels you thinkg stocks become a buy.

Just my .02

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Author: MorrieSeaCreatur Three stars, 500 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 14265 of 21596
Subject: Re: are we there yet? Date: 6/1/2012 7:34 PM
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At what point do retirees and pensioners figure out they have been screwed by this policy. Using dollars to prop up equity.

For pensions, who in general are at 60% in bonds as their bonds roll off its their returns are getting lower and lower. That is great but they are still sticking to their 8 or even 8.5 return in total. If State Pension like Illinois are getting 2% returns on the 60% portfolio they need to get 15% on the other 40% just to get to 8%. Saying nothing of what they need to get to be in better shape overall (Aren't there certain Illinois funds at 40% funded?). I mean it makes sense why these guys and life insurers have gone from 70% to 60% bonds over the last decade and now they are moving their equity from 30% to 20% with the increase going to PE.

But when do retirees on Fixed income and the guys in the pension wake up and realize they are getting fleeced? Does it only happen when one state can't make their payments? I live in Wisconsin and the past year has been all about the budget changes requiring state employees to contribute minimally to their pension and we got a recall out of it and Wisconsins state pension is funded to 97% one of the 5 best in the country. The election is Tuesday and as of today it looks like the governor will keep his job in a squeaker but its not a sure thing and has torn families apart.

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Author: TMFKMHinson Big red star, 1000 posts Old School Fool Coverage Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 14267 of 21596
Subject: Re: are we there yet? Date: 6/1/2012 10:46 PM
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"Its all well and good to criticize policies, and that makes for interesting discussion (Hussman has been on point I think on this regard) but it is a mistake to allow opinions of policy I think to drive at what levels you thinkg stocks become a buy."

Yeah... it's a good 2 cents. I (grudgingly) agree completely. I need to gripe about it because it's so frustrating, but clicking my heels and wanting to go home to a place where it isn't so is probably a subpar investment approach.

There's just a lot of unknown consequences in every decision, and what's worked for three years could fall apart catastrophically in six. Or not.

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Author: redrackam One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 14274 of 21596
Subject: Re: are we there yet? Date: 6/4/2012 12:59 AM
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what do u make of the chart? another day like today, we are below 200 day and the set-up looks scarily similar to the Friday before Black Monday.

Forget the chart. Real yields on 10-year Treasury bonds are -0.65%. I am trying to think of what odds I would have put on ever seeing that in my lifetime just a few years ago.


Why forget the chart ? Do you think gocanucks's point of the chart being similar "Friday before Black Monday" is not valid ? Or looking at something like this can yield too many false positives ??

People are putting an extremely high premium on either safety or the value of tomorrow versus today. Given other asset prices, it's mostly safety. The market is either saying that marginal investment is going to produce horrible returns, okay but very risky returns, or okay returns at normal risk but the market suddenly doesn't want any normal risk.

What are you looking at when you say "given other asset prices" ? CAPE ? And how do you define "okay" and "normal" risk ? Some premium over the 30-year ?

If by implication you mean, "is there some obvious way to profit from this,
Isn't there ? Per that article "in terms of the historical experience, episodes of negative real interest rates have usually been associated with rapidly rising commodity prices.". In other words, I would rather buy a can of turmeric (sorry allergic to cumin), than mess with a treasury bill. If commodity prices are going to rise, then ... well ...

Just trying to understand :o)).

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Author: NajdorfSicilian Big funky green star, 20000 posts Feste Award Nominee! Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 14277 of 21596
Subject: Re: are we there yet? Date: 6/4/2012 11:38 AM
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I'm practicing diversification by getting my negative real yields in Bunds.

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Author: MDCigan Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 14278 of 21596
Subject: Re: are we there yet? Date: 6/4/2012 11:49 AM
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I'm practicing diversification by getting my negative real yields in Bunds.

Interesting point I read over the weekend that I should have realized on my own...but the negative real yield on German Bunds is essentially buying a call option on a Euro breakup, Germany leaving, and then owning a very rapidly appreciating currency in that new Deutschmark, or similarly owning the new Euro with all the deadbeats booted out.

This is interesting because it carries over to other countries as well. In a truly globalized capital markets where global investors can invest in any country's bonds, buying and owning the bond can be just as much or more a currency bet as any desire to clip a coupon and earn a particular yield.

The other thing that seems clear is when any global shock hits, the USD is the go to safe haven.

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Author: NajdorfSicilian Big funky green star, 20000 posts Feste Award Nominee! Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 14279 of 21596
Subject: Re: are we there yet? Date: 6/4/2012 11:51 AM
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not sure i agree with your low probability for crash. there was already panic on the Friday before Black Monday -- the market was down big (like 3-4%) on Friday. Then the global market continues to sell off on Monday before US opened, and the avalanche just never stopped.

The market was extremely panicky for at least 3 trading days before Black Monday. The US had been hiking rates and urging others to do the same, the G-7 meetings were a mess.

Bonds had gone back up to ~10%. The weeks before, the Dow had already had falls of 3.5%, 4% followed by 2.5% on another day. There was another 4.5% the day before the Crash after some missiles were launched in the Mideast.

Then HK blew up Sun nite/Mon am and that started the ball rolling for realz.

If we had gotten a couple 500+ pt drops the past couple of weeks, and another couple 400+ drops, and the Fed was hiking, I'd be more worried about a crash.





Technical tl/dr: As others have noted, a major factor in exacerbating the crash on Monday was the steep discount that Futures in Chicago were trading at compared to cash equities-- presumably due to earlier and larger margin calls, plus the ease of selling 100 stocks via futures at once.

This means you could earn true arbitrage, risk-free, profits via Selling the Dow/S+P on the NYSE and Buying in Chicago.

I doubt we will ever see such easy arb profits available in equities again in my lifetime.

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Author: NajdorfSicilian Big funky green star, 20000 posts Feste Award Nominee! Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 14280 of 21596
Subject: Re: are we there yet? Date: 6/4/2012 11:56 AM
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It is unfortunate that the Fed has adopted as its mandate propping up the stock market.

Don't worry, they haven't.


Ben's biggest worry is that if he has to act, he has to do it at least ~3mo away from the November election, so the Fed isn't seen as favoring one side. We're 5 mos away now.

to instead punish savers and retirees

The Fed sets overnight rates, that's it. Whining that you can't get 4-5% on short money like the 80-90s is like whining you can't get 18% CAGR on the SPX....like the 80-90s.

The 10-yr in Switzerland is 65% lower than here. The 2-yr in Germany is negative.

None of that is due to our Fed, and the Swiss SURE as hell don't believe in printing money [and they have their own currency to boot.]

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Author: NajdorfSicilian Big funky green star, 20000 posts Feste Award Nominee! Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 14281 of 21596
Subject: Re: are we there yet? Date: 6/4/2012 12:48 PM
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fwiw, of the 54 times the SPX has first fallen below the 200-day ma [1st violation in prior 90 days, so a violation Friday and today only counts Friday], 70% of the time it has rallied the next 3 months, median gain of 3.3%.

Out of 83 10% corrections since 1928, recessions have been avoided 80% of the time, median 12-mo return of 13%.

all data: GS Research

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Author: MDCigan Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 14282 of 21596
Subject: Re: are we there yet? Date: 6/4/2012 1:41 PM
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fwiw, of the 54 times the SPX has first fallen below the 200-day ma [1st violation in prior 90 days, so a violation Friday and today only counts Friday], 70% of the time it has rallied the next 3 months, median gain of 3.3%.

Is this time one of the 70%? :)

Regarding the 200 DMA, looks like more and more are using it as a trigger point to take some defensive action

http://www.thereformedbroker.com/2012/06/02/will-the-tactica...

2. How much money is really run based on technicals these days? My friend Scotty V runs an RIA firm in Sacramento CA and his model strategies employ the use of the 200-day (to the best of my recollection) as a primary risk management line in the sand. My other friend Scott, also an RIA firm in Cali, has a similar discipline for his client accounts. And I'm certain you're all familiar with my pal Mebane Faber, the brilliant author of The Ivy Portfolio and the white paper that spawned it, has done a great deal to popularize this particular tactic with his work on the ten-month moving average (similar to 200-day) as buy or sell signal.

FWIW, the weekly MACD is about to go to a sell. Base case scenario is we probably have alot of day to day volatility over the next few months. I'll personally be watching the weekly MACD to turn instead of retaking the 200 DMA on a weekly basis. It should lead to less whipsawing and in the case of a deeper correction, will go to a buy signal first.

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Author: MDCigan Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 14283 of 21596
Subject: Re: are we there yet? Date: 6/4/2012 1:41 PM
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fwiw, of the 54 times the SPX has first fallen below the 200-day ma [1st violation in prior 90 days, so a violation Friday and today only counts Friday], 70% of the time it has rallied the next 3 months, median gain of 3.3%.

Is this time one of the 70%? :)

Regarding the 200 DMA, looks like more and more are using it as a trigger point to take some defensive action

http://www.thereformedbroker.com/2012/06/02/will-the-tactica...

2. How much money is really run based on technicals these days? My friend Scotty V runs an RIA firm in Sacramento CA and his model strategies employ the use of the 200-day (to the best of my recollection) as a primary risk management line in the sand. My other friend Scott, also an RIA firm in Cali, has a similar discipline for his client accounts. And I'm certain you're all familiar with my pal Mebane Faber, the brilliant author of The Ivy Portfolio and the white paper that spawned it, has done a great deal to popularize this particular tactic with his work on the ten-month moving average (similar to 200-day) as buy or sell signal.

FWIW, the weekly MACD is about to go to a sell. Base case scenario is we probably have alot of day to day volatility over the next few months. I'll personally be watching the weekly MACD to turn instead of retaking the 200 DMA on a weekly basis. It should lead to less whipsawing and in the case of a deeper correction, will go to a buy signal first.

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Author: MisterCHW Big gold star, 5000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 14284 of 21596
Subject: Re: are we there yet? Date: 6/4/2012 1:48 PM
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We live in interesting times... I believe the market's telling us that there is an increased probability of Europe falling apart. Assuming they come up with some sort of solution, like bailing out Spanish banks, there could be an pretty strong rally. If they don't, then I don't think we're near the bottom yet.

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Author: gocanucks Big red star, 1000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 14286 of 21596
Subject: Re: are we there yet? Date: 6/4/2012 2:10 PM
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well, i have no idea what will transpire, but i just went on a buying spree last 3-4 days. i was about 80% cash at beginning of May, now I am down to 25%, with the bulk of buying last week.

fairly wide spread buying. tech, financials, consumer discretionary.

i am usually early as always.

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Author: NajdorfSicilian Big funky green star, 20000 posts Feste Award Nominee! Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 14289 of 21596
Subject: Re: are we there yet? Date: 6/4/2012 5:27 PM
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fairly wide spread buying. tech, financials, consumer discretionary.

i am usually early as always.


I started JPM and slowly adding to apple.

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Author: redrackam One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 14291 of 21596
Subject: Re: are we there yet? Date: 6/4/2012 7:02 PM
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Here's what the CAPE real earnings yield looks like using the long-bond [which is the best, unbiased estimate of US inflation expectations] over the past 120 years, as of a few months ago:

http://i.imgur.com/dB6c0.jpg


We can also get this from the Schiller PE right ? He adjusts it based on the CPI rather than the long bond (btw is that graph you posted from a website or calculated it yourself) ?

www.econ.yale.edu/~shiller/data/ie_data.xls

And it also shows the (important) relationship between real CAPE and interest rates. At this point, they are low. But again - looking at the 50s, I think the perception is that 4-5% is not that excessive. The big drawdown in the P/E seems to have happened only after they crossed 6% - in the 1970s.

Superinvestors seem to have done pretty well during this period.

http://www4.gsb.columbia.edu/null?&exclusive=filemgr.dow...

No data available for mere mortals unfortunately.

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Author: TMFKMHinson Big red star, 1000 posts Old School Fool Coverage Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 14292 of 21596
Subject: Re: are we there yet? Date: 6/4/2012 10:29 PM
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"Don't worry, they haven't."

Not true. Bernanke has stated in very clear terms that it is among their objectives to maintain high stock prices as a means of stiumulating consumer spending and hence a key means of stimulating employment growth.

"The Fed sets overnight rates, that's it. Whining that you can't get 4-5% on short money like the 80-90s is like whining you can't get 18% CAGR on the SPX....like the 80-90s."

Is that seriously your assessment, or are you trying to be insulting? The Fed has bought up what... $2.5 Trillion in securities... on a capital base of less than 1/50th of that? They are printing money and inserting it into the market when they buy securities, and that drives up the price of equities, bonds, etc. as any yield is better than 0. Asset prices must rise before anybody is content holding all that new zero yielding money. Inflation has yet to be a problem, because we're fighting deflation and the economy isn't being stimulated by all this, so the velocity of money has fallen commensurately. It is debasing our currency though, and most folks whose earning years are behind them will suffer in the long run as their savings get trashed over time with the US$. Your assumption that people "whining that you can't get 4-5% on short money" are the only people being hurt by the Fed isn't even trying to do justice to the consequences. Is it the right or wrong course of action? I have no idea, but it is and will be quite damaging to many people.

"None of that is due to our Fed, and the Swiss SURE as hell don't believe in printing money [and they have their own currency to boot.]"

The Swiss peg their currency to the Euro, and the Euro presses are humming, so I'm not sure I understand your argument. Simply becuase the Euro is being trashed faster than the US$ doesn't make us all that much better off.

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Author: TMFKMHinson Big red star, 1000 posts Old School Fool Coverage Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 14293 of 21596
Subject: Re: are we there yet? Date: 6/4/2012 10:30 PM
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"Assuming they come up with some sort of solution, like bailing out Spanish banks, there could be an pretty strong rally. If they don't, then I don't think we're near the bottom yet."

Please just tell me which will come to pass, so I can position accordingly. :)

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Author: NajdorfSicilian Big funky green star, 20000 posts Feste Award Nominee! Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 14297 of 21596
Subject: Re: are we there yet? Date: 6/5/2012 10:18 AM
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Is that seriously your assessment

That's my serious assessment, yes, and has been for some time on this board on this very topic.

You [and others] seem to think you have a constitutionally-written, god-given right to a certain level of short-term return. You don't.
I wish we did, my job would be a lot easier.

because we're fighting deflation

You got it in one! THAT'S why s/t-rates are low today. The entire fixed-income investing world [almost] is more worried about deflation today than inflation.

Regardless, you are making the same mistake that other novice fixed-income investors have been making the past few years, which is fixating on nominal yields and ignoring real yields. Real yields are quite high today on a historic basis. You have it good and you don't even know it.

In addition, lower nominal yields with real yields held constant is far, far better for individual investors than higher nominal yields with the same real yield.



In 2009, if you were willing to buy intermediate paper, the market was just giving away 5.0-5.25% AA-rated State GOs[!] at a discount in the 8-12 year tenor.
Shorter you could have easily gotten over 4%, even triple tax-free. if you didn't, isn't that your fault, and not the Fed's?

You could have bought BBB-rated consumer staples paper, like Heinz, at 66% of par due 2017, now trading at par of course.


The Swiss peg their currency to the Euro, and the Euro presses are humming, so I'm not sure I understand

The SNB is trying to moderate the increase in their currency which is a completely different issue, as CHF strength is killing their exports. That's not a problem for the Euro-zone.

The SNB has placed a lower bound on their currency, which is quite different from a peg. The CHF had rallied 20 euro-cents in a few months, compared to the EUR which has fallen ~$0.22 in the past year.

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Author: MorrieSeaCreatur Three stars, 500 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 14299 of 21596
Subject: Re: are we there yet? Date: 6/5/2012 12:21 PM
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I agree with the thesis that the focus should be on real yields. For the average retiree they should be ok if they are getting 2 or 3% and inflation is 0 or negative. Great.

Care to explain how this helps the states or its taxpayers with their underfunded pension systems. Most of them have goals or 8 or 8.5%. These guys are screwed when 60% is getting 2% returns. Do you think everything is ok here as well?

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Author: Garranova Three stars, 500 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 14300 of 21596
Subject: Re: are we there yet? Date: 6/5/2012 2:19 PM
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Most of them have goals or 8 or 8.5%. These guys are screwed when 60% is getting 2% returns. Do you think everything is ok here as well?

Not addressed to me, but no I don't think everything is ok. However, anyone setting investment goals like this is likely to get themselves in trouble.

These pension managers should not have promised such a high return. Bring them back down to 4%. I think the same sort of thing happened in the 70s. Of course, once they brought pension expectations down we got that great bull market in the 80s and 90s.

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Author: NajdorfSicilian Big funky green star, 20000 posts Feste Award Nominee! Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 14301 of 21596
Subject: Re: are we there yet? Date: 6/5/2012 3:24 PM
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Most of them have goals or 8 or 8.5%

It's nice to have goals.

Don't forget, total return is what matters, not interest income. They have massive gains on their long-term bond holdings [not that that will fix the problem, it won't, but it's a +]

3% real is far better than 'ok' in my book on fixed income. That is awesome. I'm getting twice as rich in just over two decades in real terms.

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Author: MrTompkins Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 14311 of 21596
Subject: Re: are we there yet? Date: 6/6/2012 10:13 PM
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Where do you get CAPE data for Europe


http://www.mebanefaber.com/2012/05/24/global-shiller-capes/



Matthew

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Author: jkm929 Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 14314 of 21596
Subject: Re: are we there yet? Date: 6/7/2012 12:43 PM
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3% real is far better than 'ok' in my book on fixed income. That is awesome. I'm getting twice as rich in just over two decades in real terms.

Latest figures show the long bond yielding 2.73% and the long TIPS .48%, indicating an expected inflation rate of 2.25%. Are you requiring corporate debt to yield at least 5.25% before buying it?

jkm929

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Author: NajdorfSicilian Big funky green star, 20000 posts Feste Award Nominee! Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 17659 of 21596
Subject: Re: are we there yet? Date: 7/12/2013 11:22 AM
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fairly wide spread buying. tech, financials, consumer discretionary.

i am usually early as always.

I started JPM...


I'd just like to thank Jamie Dimon, the London Whale, but much more importantly, Mr. Market for allowing me to get a 75% return in 13 months on one of the best-run, large-cap, blue-chip firms in America.

$6.5Bn profit last Q.


Didn't miss that fat pitch...shoulda bought in HAM but what can you do.

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Author: readyteddy Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 17660 of 21596
Subject: Re: are we there yet? Date: 7/12/2013 1:13 PM
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I bought a bank stock sector fund early this year and added on the recent dip. Gotta think the yield curve helps banks.

Wanted to buy more stocks on the bond dip but couldn't really find anything compelling so I bought some index stuff. Sort of a "buy 'em all and let God sort it out" strategy.

BTW, giving myself a shout out. An IRA I started with a borrowed $2000 contribution in 1983 just passed a milestone of sorts.

I put a total of $2000 a year in this thing for five years back in the eighties, after which my employer created a 401K which priced me out of making more pre-tax IRA contributions.

Anyway, after yesterday's rally, the little IRA account passed $200K and it is still beating the SPX for 30 years.

By my calculations, a buck invested in SPX at the beginning of 1983 is now worth $24.96, but a buck given to Teddy is now worth $27.93!

Full disclosure. All the alpha came from getting out of stocks in 1999 (back in in March 2003), beating the SPX by 30% in 2008 (well, duh) and bailing on stocks in August of 1987.

Peter Lynch deserves some early credit too.

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