By Monty Pelerin, on January 3rd, 2010 The recovery of the stock market in 2009 was impressive. The Dow Jones hit bottom in March at 6,547 and recovered to close the year at 10,428, an intra-year gain of about 59%. This occurred despite deteriorating economic conditions. Yes, third quarter GDP was positive (although revised downward to 2.2%). The fourth quarter is likely to come in positive as well.
While government and their rented economists tell us that we are in recovery, virtually all growth is from direct government spending or government-induced spending from programs such as Cash for Clunkers.
There are limits to how much the government can continue to spend. More importantly, there can be no recovery without private sector growth, and that has not occurred.
The private sector continues to shrink, as measured by growing unemployment and declining state income and sales tax collections. The Wall Street Journal reported:
State and local tax revenues tend to lag behind the downturns as well as the upturns in the economy because of the time it takes for collections to catch up with depressed store sales and diminished incomes. The third quarter was the fourth consecutive quarter in which tax collections were below year-ago levels. Through the first three quarters of 2009 state and local tax revenues totaled $875 billion, nearly 8% below the $951 billion collected in the first three quarters of 2008. In the same period, federal receipts were down nearly 19%. WSJ,
Continue reading Market Manipulation?
By Monty Pelerin, on December 21st, 2009
Stocks 1999-2009: Worst. Decade. Ever.
By Barry Ritholtz – December 21st, 2009, 6:00AM
From today’s WSJ, comes this (amusing) article about the past decade: Its the worst equity performance in nearly 2 centuries.
Why do I say amusing?
Because despite what many fools and asshats were claiming in the 1990s, stocks can only gain so much relative to earnings. Sure, other factors like population growth, economic expansion, productivity gains, all matter on the margins, but the bottom line is Earnings. But over the long haul, there is only so far you can run ahead of historical median rates of return.
The current horrific decade lost half a percent each year on average versus average annual returns of about 10-12% over the past century. Why? This under-performance is payback for the massive gains in the salad days of the late 1990s. As the table at right shows, the gains were far above median.
There is only so far you can deviate from the historical mathematical norm before mean reversion rears its ugly head.
Here’s the WSJ:
“Even with the rebound this year, the U.S. stock market is on the verge of posting its worst performance for any calendar decade in nearly 200 years of American stock-market history.
Investors would have been better off investing in pretty much anything else, from bonds to gold or even just stuffing money under a mattress. Since the end of 1999,
Continue reading Anything But Stocks
By Monty Pelerin, on December 10th, 2009 The continued levitation in the stock market continues to amaze. This was discussed recently. Another article suggests that markets are overvalued by 100%. A quote from S&P 500 Overvalued by 100 Percent:
“It is hard to justify the 1,100 mark for the S&P 500. The 676 low of March, as disastrous as it may have felt, actually reflected a more accurate measure of earnings potential of the 500 S&P companies. The S&P 500 is a good index because it measures 500 companies with a current collective market cap of $9.6 trillion. The S&P 500 over a century of data has seen price to earnings ratios of between 5 and 10 after severe contractions. It is safe to say that what we are experiencing is a strong contraction.”
For those interested in understanding why many feel that markets are overvalued, this reference provides an explanation with several graphs.
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By Monty Pelerin, on November 29th, 2009
… your $200,000 ten years ago has been halved in terms of purchasing power. However, in terms of planning purposes, your anticipated retirement amount has been reduced by 75%. Given these outcomes, who will be able to retire? And for those already retired, how many will “unretire?”
For Buy and Hold investors, better have a look at the following post. There are lessons to be learned, even if your broker would prefer you not know them. When viewing the charts below, remember that Japan has completed two lost decades with no end yet in sight. We are just finishing our first decade, but the results have been devastating for investors, retirees and those planning for retirement.
To put things into perspective, suppose you were nearing retirement in 2000 and had $200,000 invested in the stock market. Your anticipated retirement date was 2010 and you expected your investment to compound forward at 8% per year. Doing the math, you expected to have $426,000 at retirement. Instead you would have ended up with $138,000. To make matters worse, inflation over this period meant that your purchasing power in 2000 dollars was even less.
The government-issued CPI index shows purchasing power decreased by about 22% over this period. Thus, your starting $200,000 in purchasing now compares with about $108,00. (The CPI index is felt by many to understate actual inflation. John Williams at Shadowstats.com argues your purchasing power decreased quite a bit more.)
Using the government’s CPI numbers, your $200,000
Continue reading Retirement, For Whom?
By Monty Pelerin, on October 22nd, 2009
Image via Wikipedia
John Hussman is an astute observer of markets. Currently, he is very concerned about overbought conditions.
That said, investors clearly are approaching the current market with every belief that the extreme valuations of 2007 represent the sustainable norm to which stocks should return. This despite the fact that the 2007 peak reflected rich valuation multiples against earnings that were themselves inflated by abnormally elevated profit margins. Last week, Bill Hester reviewed the evidence that forward earnings estimates presently assume a return to record profit margins observed just before the market turned down. If the expectations of investors and analysts are heavily anchored to those 2007 levels, as seems to be the case at present, then the fact that stocks are richly valued on the basis of sustainable, normalized earnings and cash flows may not be sufficient to give investors pause.
To read his complete take, The Stock Market Has Never Been This (Intermediate-Term) Overbought
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Friedrich von Hayek
Friedrich von Hayek founded the Mont Pelerin Society.
“Monty Pelerin” is a pseudonym chosen by this blogger to convey general agreement with the philosophy, goals and spirit of the Mont Pelerin Society. No other connection exists between the blogger and the Society.
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