John Stewart for Treasury Secretary

Old habits die hard.  This has to be commented on.  You can’t just watch the edited interview with Jim Cramer on the show, you have to watch the whole interview on the Daily Show web site.  This is better financial reporting than anything I’ve seen in any “real” news source anywhere in a long time.  Truly amazing.

Last Post

In the second half of last year I started thinking about potentially leaving my current employer and starting my own investment firm.  There were many reasons for this, not the least of which is complete disillusionment with company management.  For a number of months now I have been exploring this possibility, researching regulatory requirements, interviewing financial service providers, developing a business plan, etc.

I started this blog as part of this research.  The concept was to incorporate it into a more traditional business web site and use it as a way of effectively communicating updates to clients and prospective clients.

The blog has turned out to the the easy part.  Creating one and filling it with content has been simple compared to the other tasks.  And, after a very detailed examination of the alternatives, I have decided to shelve the idea of launching own firm for now.  The rate of change and amount of uncertainty in the financial services industry is at extreme levels, and I may end up elsewhere, but for now it will not be of my own volition.

So, this is the last entry for the Durable Investor.  I will turn my efforts back to concentrating solely on success in my current role.  Yes, management at my company remains questionable, and perhaps has even been borderline criminal in the past, but I have the ability to work independently to a very large extent and protect my clients from my own company as well as the overall markets.

To close, here’s a final thought: while the future does not look appealing right now, it does not look as bad as many think.  We may be in a “Great Recession”, but it remains highly unlikely that we are in Great Depression II.

Look at this entry from Calculated Risk.  CR was one of the very early voices warning about the bubble economy.  Behavioral investing is all about being aware of crowd dynamics and irrational actors.  We are currently in a pessimism bubble; try to keep things in perspective.

One Good Day in Perspective

Today was a good day in the markets.  For some perspective, take a look at this chart.  The markets are still tracking the course they set during the Great Depression.  Even if we start to see a rally, here’s some perspective from today’s Barron’s.

Recent volatility doesn’t even begin to compare to what it was like during the 1930s.

In fact, there were eight calendar months during the decade of the 1930s in which the Dow rose or fell by more than 20%. The month with the biggest Dow move was April 1933, when the Dow rose by 40.2%. In August 1932, furthermore, the Dow rose by 34.8%.

The biggest monthly losses during that decade were almost as big. The largest came in September 1931, when the Dow lost 30.7%.

A quick look at a Yahoo! chart of the Nikkei over the past 20+ years also shows up upswings followed by even bigger losses.

For the foreseeable future any time we see some upside from Mr. Market, the very tough question will continue to be, is this rally the real thing or a head fake?

Ahead of Roubini?

I am just a simple financial consultant trying to do my best for my clients, but it looks like Nouriel Roubini is late to the game on this prediction.  Below is excerpt from the latest “alert” message from Dr. Roubini.  I’ve been talking about this for some time now.  (Emphasis in the original.)

Earnings per share (EPS) of S&P 500 firms will be in the $ 50 to 60 range, but they could fall to $40. The price earnings (P/E) ratio may fall in the 10 to 12 range in a U-shaped recession. If earnings are closer to 50 or the P/E ratio falls to 10 then the S&P could fall to 600 (12 x 50 or 10 x 60) or even to 500 (10 x 50). Equivalently the Dow (DJIA) would be at least as low as 7000 and possibly as low as 6000 or 5000.

Drinking the Kool Aid?

This week’s Barron’s magazine is pretty much mono-thematic: stocks are cheap, time to buy.  I hope they are right this time, but I’m not drinking this Kool Aid just yet.

More on Market Valuations and P/Es

Here’s an interesting post on the P/E ratio method of valuing the market over the past 100 years.  Using the Schiller method, the S&P is trading at an 11.85 P/E.  That’s well below the long term average 16, so the markets are oversold, but still above the level were markets bottomed in major downturns in the past.

So, if you have a long-term perspective, you could buy and have a reasonable expectation of coming out ahead in the long run.  But there could still be some decent downside in the meantime.

Another post from the same site shows that, on an inflation-adjusted basis, the DOW is the same today as it was in 1966.  Flat for 43 years.  “Stocks for the long run, indeed.”

Emerging Debate in Financial Planning

As I have stated elsewhere, I believe that we are in a long-term bear market.  Most of us started investing in the greatest bull market of all time, the period from 1982 to 2000.  Most investors adhere to principles that were developed during that time.

Concepts like asset allocation, diversification, indexing, mean regression, etc., existed prior to the great bull but they became commonly accepted, even canonized during that period.  What we are seeing now, however, is that these concepts largely fail during bear markets.

During bears most asset classes become highly correlated, eliminating the benefits of diversification.  It is now clear that there are very real limits to traditional asset allocation during periods of high correlation.

This article is representative of new commentary that is beginning to emerge.  The bottom line from these authors is that “advisors should focus more on hedging than diversifying”.  This certainly assaults the current orthodoxy of my profession.

Something Interesting Did Not Happened Today

As the markets took another bath today on no news of note, something very interesting did not happen.  I did not get a single call from a client.  Not one.  This is the first time in a long time on such a big down day.  A sign of capitulation in the retail investor market?

And here’s my favorite quote of the day: “the markets are the most oversold they’ve ever been until tomorrow”.

“Stocks Finally Start Looking Affordable”

That’s the title of this NY Times Economix entry today.  As I have discussed repeatedly of late, a key metric to watch is the overall P/E ratio.  The article agrees.  Using Schiller’s method of calculating the S&P P/E, it is down to 12.3 at today’s close, which makes the market undervalued by about 30%.

And, “when the p-e has been between 12 and 13 over the last 125 years or so, stocks have doubled over the next decade, on average. (Adjusting for inflation, they have risen almost 50 percent.)”.

But, in the 1930s and 1980s the P/E dropped all the way to 7.  So, we could be in for some more cliff diving.  “But long-term investors – and that describes most of us – should start to feel perfectly fine about buying stocks.”

I think it’s entirely premature to buy stocks.  But it may finally be too late to sell.  Although based on the number of panic calls I got today from clients, a new wave of panic selling may be forming.

Uh-Oh

If you are a member of plastic pocket protector set, or just a wannabe, this entry at Econbrowser is all for you.  It provides a mathematical model showing fair market values based on historical dividend payout.

The conclusion is that if dividends are not dramatically cut, current fair market value of the S&P is 830.  If dividends are cut to Great Depression era levels, fair value of the S&P is 608.

I found this just after reading the FT article below…