Tag Archives: investment advice

A Crisis Less Extraordinary

080519_USEconomy1My Comments: For those of you who can stomach economics and the sometimes arcane language of investments, this is an interesting analysis. It comes from a source called Seeking Alpha where I have a membership. Their articles are also infused with lots of charts which I often choose to leave out.

So if for any reason you cannot get to their site to continue reading and see all the accompanying charts, let me know and I’ll forward to you a PDF file with the full article. All this is to help you get ready for the next downturn which will happen.

Eric Parnell, CFA, Gerring Capital Management Aug. 14, 2014

• It is often said that the financial crisis that was unleashed from July 2007 to March 2009 was a once in a century event.
• But upon closer examination, the market shock resulting from the financial crisis was not all that extraordinary.
• In fact, it was rather modest in many ways when compared to other major historical bear markets.
• And this fact alone may be setting investors up for a far more challenging bear market experience the next time around.

It is often said that the financial crisis that was unleashed from July 2007 to March 2009 was a once in a century event. Some investors even take comfort in this notion with the belief that any future stock bear markets will almost certainly pale in comparison. In short, if one could survive the financial crisis, one can certainly weather what may come in the future. But upon closer examination, the market shock resulting from the financial crisis was not all that extraordinary. In fact, it was rather modest in many ways when compared to other major historical bear markets. Instead, the only thing that has been truly extraordinary this time around has been the policy response. And this fact alone may be setting investors up for a far more challenging bear market experience the next time around.

Second Worst Bear Market In The New Millennium

The bear market sparked by the financial crisis was not even the worst bear market we have experienced since the calendar flipped into the new millennium. In many respects, the bear market associated with the bursting of the technology bubble was worse. This is due to the fact that the magnitude of the decline during both bear markets was effectively the same. But stocks (NYSEARCA:SPY) reached the bottom of the financial crisis bear market in a little less than half the time at 412 trading days by March 2009 versus the more than 700 trading days before stocks reached their final post tech bubble bottom in March 2003.

2000 VS 2008Now some might say that what made the financial crisis bear market worse was the sharp magnitude of the declines from October 2008 to March 2009. To this I say nonsense. These two past bear markets moved in complete lockstep for the first 300 trading days. It was not until policy makers allowed Lehman Brothers to fail when the financial crisis bear market deviated to the downside. But the net effect of this outcome was the stock market equivalent of ripping the band-aid off quickly instead of slowly. In short, the Lehman failure delivered stock investors to the bottom much more quickly, which many could argue ended up being a great advantage. For even if policy makers helped rescue Lehman the same way they saved Bear Sterns six months earlier, it still would not have alleviated the rotting mortgage debt problem that was festering in the financial system at the time. Instead, the stock market likely would have continued dying a slow and painful death into the summer of 2010 if not longer. And since policy makers seemingly felt like they screwed up by letting Lehman fail, they have been overcompensating ever since by printing trillions of new currency to support the stock market and the economy, the latter of which has been in vain.

Verdict: Bursting of the tech bubble was worse than the financial crisis for investors.

Great Depression Markets Much Worse

The bear market during the financial crisis was also mild when compared to those during the Great Depression. When matched up against the bear market from 1929 to 1932, the financial crisis market was relatively mild in comparison until the very end and was not even able to catch up to the pace of the Great Depression bear market at its darkest moments. And while the financial crisis bear market ended after 412 trading days, the Great Depression bear market lower for a few more years before finally ended down nearly -90% on a price basis.


Long-Term Care Update: 6 Trends to Watch

retired personMy Comments: The baby boom generation is going to be hit hard by this phenomena, and most of us know it. We just aren’t sure how to deal with it. This is not a solution but a needed reminder that pretending it will go away is not likely. While I disagree with their conclusion about hybrid products, it’s a good article.

by Miriam Rozen / SEP 2, 2014

Just when financial planners imagined long-term care coverage discussions couldn’t get any knottier, they managed to do so.

Long-term care insurance has prompted groans since the product’s inception in the late 1970s, taking black eyes from broad mispricings and the exits of big players like Prudential Financial.

Now three unwelcome new trends have surfaced: long-term care premiums have gotten even more expensive, benefits have shrunk, and cost of living adjustments have done the same — with the latter dropping to 3% from 5% annually, or, in some cases, withering away to nothing.

But planners might welcome other emerging trends in the long-term care insurance industry — including revised pricing and product packaging targeted at the middle market, rather than just high-net-worth clients. Those new developments emphasize portfolio protection and partial, rather than comprehensive, long-term care coverage.

While some of the changes have increased plan flexibility, expanding the types of long-term care benefits that insurers will pay, the complexity in plans’ structures has amped up, as well. A financial planner could easily lose many productive workdays reviewing the wide variety of (usually expensive) provisions for inflation protection and other riders.

Availability is an issue, too: Some financial planners grimly recall recent calls to clients, warning that they only have a week to enroll for a policy because it’s about to be pulled off the shelf. (Existing policyholders usually have more time and warning before the price hikes announced by renewal notices become effective.)

To get the biggest bang for their clients’ buck, financial planners must therefore still focus on the granular distinctions between policy bells and whistles.

“It’s impossible. The fact is that insurance companies are losing money on long-term care insurance because people are starting to use it,” says Lynn Ferraina, a partner at Ciccarelli Advisory Services in Naples, Fla., who has been advising about long-term care insurance for two decades.

“The insurance companies are starting to pay out and they are realizing the costs and that’s why they are increasing the premiums for others,” Ferraina adds. “I think it’s a national dilemma.”


“We stay educated. We go to a lot of conferences,” says Donald Haisman, an advisor in Fort Myers, Fla., who says he has offered long-term care insurance to clients for decades.

When the products first became available in the 1970s, dozens of insurance companies jumped into the market — and most coverage paid only for traditional nursing-home stays.

These days, only a few major providers — Genworth, New York Life, John Hancock and Transamerica Financial — remain in the business. But the products they offer now cover a wide range of needs for the elderly and infirm, including nursing homes, assisted living and home care services.

For help navigating the specialized area, Haisman hires — on an hourly basis — Roger Macaione, a certified financial planner who focuses on long-term care policies. Macaione receives no commissions, so he can help clients understand what they need rather than pushing product, Haisman says.

Indeed, no financial planner can afford to ignore the new developments in long-term care insurance.

Long-term care insurance providers recently introduced yet another round of prices increases, along with gender-based premium pricing. That means everyone should expect to pay considerably more for less — but particularly women.

Prices vary by location: Floridians can expect some of the highest increases; New Yorkers some of the lowest. Overall, according to the American Association for Long-Term Care Insurance, premiums have risen on average 4.8% in the past two years.

“How much higher can pricing go? I don’t know,” says Rachelle Kulback, who helps the planners at Schneider Downs Wealth Management Advisors in Pittsburgh with long-term care questions.
“We’ve had one client who simply chose to cancel,” when faced with a premium increase, says Benjamin Birken, an advisor at Woodward Financial Advisors in Chapel Hill, N.C.


Long-term care insurers have started to recognize that their industry has soured its reputation by raising premiums, halting sales of new policies, eliminating attractive options — and, debatably, offering an inherently unappealing product. (After all: Who really wants to think about long-term care?)

Haisman himself recalls that when his own father’s health began deteriorating, he initially took comfort in knowing that his father had paid premiums on a long-term care insurance policy for 25 years. But then reality set in. “The insurer would never pay; they always had a reason not to,” Haisman recalls.

Haisman says he submitted paperwork for his claims — “probably 100 documents” — but “there was always some reason that my father’s costs didn’t meet the criteria, according to the insurer, even when we he was in a hospice. … That’s why we do so much research on long-term care insurance policies for clients.”

Providers have responded to the reputational hit by attempting to simplify the structure and marketing of their products. They’re now promoting their products as a way for middle-class clients to get partial portfolio protection rather than as a total solution for all long-term care needs.

Aaron Ball, a senior vice president for long-term care insurance at Genworth — the provider with the largest share of the nearly $406 million market — says his company in late July introduced a new set of products that offer flexibility in terms of how much insurance coverage consumers buy and how they use it. The new FlexFit products let planners offer clients either budget-friendly premiums, starting as low as $100 a month, or packages priced according to asset-protection goals, starting at $100,000 of assets, he says.

Such products may appeal to advisors who understand how the costs of keeping a parent in long-term care can wipe out savings.

Of course, even $100,000 doesn’t sound like much when nursing home costs in some parts of the nation run as high as $95,000 per year. But providers, including Genworth’s Ball, stress that their products cover home care, and that typically costs much less — about $45,000 a year, on average.

As it turns out, home care services are what more than 70% of Genworth’s long-term care claimants seek.

And home care costs may be expected to drop even further, says Dallas advisor Suzanne Fitzgerald, who markets New York Life’s long-term care products. She cites two key reasons: Competition is increasing, as more companies enter the growing business, and technological advancements — such as wireless monitoring, automated pharmaceutical deliveries, and even the Uber app — are making some home care services less expensive to provide.

“There are so many home care providers now and most of my clients want in-home care,” she says. According to the AALTCI, which keeps industrywide statistics, home care claims accounted for 51% of those opened under long-term care policies in 2012, the most recent year of figures available.

Both Genworth and New York Life have attempted to make the home care services options even more attractive for their claimants by providing care coordinators — counselors who help families arrange for home care services in their own communities. Both insurers accelerate coverage (by eliminating waiting periods) for families who rely on those home care-coordinating professionals.

“We have experts in every region of the country. They know who is good and bad,” among home care providers, says Fitzgerald.


While long-term care riders can be complex and expensive, one subset should be particularly worthy of any financial advisor’s attention, says Nancy Skeans, managing director at Schneider Downs Wealth Management: spousal-sharing riders.

These new products, which emerged about two years ago, allow a couple to buy a designated number of years’ coverage — and then permit either spouse to use any of those years.

Since statistics show that long-term care needs rarely exceed three years, the spousal-sharing option makes economic sense, Skeans says: For one price, a couple gains good odds of having coverage for all their needs.

“Each person is buying two years of protection at least, but it is much less expensive than having their own policies,” Skeans says.

Another way providers have been countering the high cost of coverage is to reduce or eliminate options once seen as advantageous to purchasers.
One virtually extinct provision that was once common is the “refund of premium” benefit. If the insured died before a certain age, this provision would have paid heirs all the premium payments that the client had made, minus any benefits already paid against the policy.

Inflation provisions, too, were once a way for financial planners to help clients effectively customize plans for their needs and budgets. But most LTC carriers no longer offer what had once been an industry standard: 5% compound inflation protection.

Genworth’s new products, for instance, allow a 2% compound inflation option. And New York Life’s policies, offered in partnership with a Florida state program, no longer require compounded inflation protection for policyholders age 61 or older.

Birken, for one, thinks some clients may benefit from the reduced inflation protection — because those missing options make long-term care premiums more manageable. “The difference in cost for an inflation rider can make or break” a policy’s affordability for the client, he says.

Birken downplays the benefits of another long-term care funding alternative: hybrids. These combination products — which combine life insurance with long-term care riders — appeal to some financial advisors because they represent an easier sale; life insurance is something clients already understand.

And the hybrids form a growing part of the market, according Genworth’s Ball, whose company sold about $100 million in the products last year.

For Birken and others, though, the hybrids represent a second-rate alternative. Why? They typically offer no inflation protection and less valuable benefits than traditional long-term care insurance, he says.

Because the underwriters’ qualifying requirements are frequently “less stringent,” Birken says, “it makes them an opportunity for some folks.”

However, he adds: “We would never go with a hybrid first.”

Exactly Where We Are In This Cycle

retirementMy Comments: This is a major question for investors. Whether you are accumulating money for the future or are already retired and focused on making sure you have enough money to last, knowing what is likely to happen in the near future leads to peace of mind and financial freedom.

This is one opinion. Watch for another opinion in the next few days called “Are We There Yet?”.

Steve Sjuggerud, / Sep. 9, 2014

I was on stage at The California Club in Los Angeles… being put on the spot. And I didn’t have a good answer… It was a private meeting, so it was a small crowd of less than 50 people. At the end of my speech, I answered a few questions.

I like to give good answers when I can. But this time, I didn’t have a good answer. I fumbled around, sharing some facts. But I knew I could give a more accurate answer once I had run some numbers. I promised that I would respond more accurately in DailyWealth. So here goes…

“Steve, you did some great work on cycles years ago,” an attendee said. “So exactly where are we in this cycle, based on the last 100 years?”

He was asking for the BIG picture. I like that. Most people focus on today, and forget about the big picture. I could answer this question in a variety of ways. But the chart below is the simplest way to answer it…

The big idea is, the stock market goes in big cycles, from being loved to being hated. For example:
• Stocks were loved in the decade of the “Roaring Twenties.” Then they crashed in the Great Depression, and then World War II came along.
• Stocks were loved in the 1990s, then spent much of the 2000s going nowhere, delivering no return at all, really (when you adjust for inflation).

The question is ultimately getting at this: After soaring since 2009, are stocks overly loved right now? For your answer, take a look at this chart. It shows the 10-year annualized return on stocks (after inflation).

You can see the peaks were around the Roaring Twenties, and the dot-com boom. You can see the busts around the Great Depression and the inflationary 1970s. The important thing to look at is where we are today…

Take a look:
So, where are we in this cycle? Are stocks overly loved, like they were in 1929 or 1999? Or are they overly hated, like they were in the Great Depression or the 1970s?

Based on this simple chart, we are somewhere in the middle… Stocks aren’t overly hated, or overly loved. Based on history, we are somewhere in the middle of this cycle.

I will admit, this is not the most statistically robust way to look at things… After all, there are only three of these major cycles to look at over the past 100 years. How can we say for sure that stocks will peak in the same place they peaked the last three times? We can’t.

This is simply a rough look at history. I believe it’s about right, though…

I think we’re not at the bottom, and we’re not at the top either.

I think we have a couple more innings left in this great bull market. And based on history, the last inning often delivers some of the biggest gains.

So, in short, yes, stocks have moved up a lot since 2009. But based on the last three cycles over the past 100 years, there’s still plenty of room to run…

Good investing.

Do Retirees Need Long-term Care Insurance?

retired personMy Comments: As a financial planner with thinning grey hair, my clients tend to be already retired or soon to be retired. A major worry we all face is the chance that we will slow down to the point where we need help to get from one day to the next.

Sure, family members will help, but this puts a heavy burden on them since medical science has a way of keeping us alive much longer than was the case 100 years ago. Then, the idea of being taken care of by our children was different since there was little chance of us living into our 90’s and more than likely they lived next door.

The following facts are sobering.

Rodney Brooks, USA TODAY September 10, 2014

Health care costs are a big concern for people going into retirement, but the costs of long-term care can still be a shock.

Here are a few facts:
• 70% of people over 65 will need some form of long-term care at some point.
• For married couples, the chance that one spouse will need long-term care rises to 91%, says Byron Udell, CEO and founder of AccuQuote.com.
• People living alone are more likely to need some sort of home health care.
• Women outlive men, and thus, are more likely to live alone and need some sort of home health care.

So, while some financial planners previously were on the fence about long-term care insurance, they were still encouraging people to at least have a plan for long-term care.

“For Baby Boomers, long-term care insurance is a must,” says Manhattan attorney Ann-Margaret Carrozza. “We can no longer rely upon Medicaid to cover custodial type care. We see over the course of the past few years that eligibility for Medicaid has gotten tougher. In 2006 the so-called look-back period was extended from three years to five years,” she says. During that period, the government can check, or look back, to see if you have sheltered or given away assets — and if you have, it triggers a penalty period when you’re ineligible for government aid.

“There are now proposals in Congress to increase it to 10 years,” Carrozza says. And, she warns, Medicare only covers up to 100 days of rehabilitation following hospitalization. “Beyond that — nothing!”

The Employee Benefit Research Institute says the average retirement shortfall for Baby Boomers and Gen Xers is nearly $50,000. But that rises dramatically when expenses for home health care or nursing homes are added: for married households by $25,317; single males, an average increase of $32,433; and by $46,425 for single females.

No wonder so many people are worried that they won’t have enough money to even cover health care costs in retirement, let alone make it through retirement in the lifestyle they are accustomed to.

Let’s start with the basics. Long-term care is the service, both medical and non-medical, for people with a prolonged physical illness, chronic disease or disability. That care can be administered in-home, or in an institution like a nursing home or an assisted living facility.

“Custodial care will cost an average of $200 to $300 a day,” says Udell. “In-home care is somewhat less. In smaller (cities) it’s less. Most long-term claims are actually for in-home care.”

He said the cost depends on a lot of variables, whether the care is 24 hours a day, whether a caregiver comes and goes. He said a relative has a live-in caregiver who is paid $1,200 a week, plus meals.

Meanwhile, Genworth Life Insurance Co., a leading provider of long-term-care insurance, says the average length of a long-term care insurance claim is 2.9 years for a nursing facility and three to four years for all claims, including in-home care, based on reimbursement claims data from December 1974 through December 2013.

“I think the overarching theme for us is that you have to deal with that issue (long-term care), whether you have the money to self-fund or whether you buy long-term insurance,” says David Richmond, president of Richmond Brothers, a financial and retirement planning firm in Jackson, Mich.

“It’s a really big number,” Richmond says. “Retirees are getting an idea because they are dealing with their parents. That care is not cheap and insurance will not pay for it. Once you have exhausted your 100 days, Medicare will not pay. You must plan what you will do and what it will do to your portfolio and your family.”

That said, the question is: Is long-term care insurance the answer?

Financial advisers used to be mixed on the option. But they seem to be increasingly supportive of including the insurance as part of their financial plans.

“Long-term care stays on average two and a half years,” says Joe Heider, managing principal of the Ohio region for Rehmann Financial. “That can quickly eat into estates.”

Still, he says, long-term-care insurance is not for everyone. “Some people can’t afford it. They have to take risk they will not use it or that their assets will be spent down and they will be able to use a government-assistance program.”

John Sweeney, vice president at Fidelity Investments, says provisions for health care are essential in retirement plans Fidelity creates with its clients. “Long-term care is a very personal decision,” he says. “Many people we speak to who are going into retirement expect they will cover long-term care on their own.”

Sweeney says in a recent survey of children of retirees, 45% of the children expect to take care of their parents. “If you don’t have children, a long-term care plan might make sense,” he says.

“Long-term care provides the elderly with the opportunity to stay in their home, which is where they want to be,” says George Hunter III of Hunter Capital in Columbia, Md. “Long-term-care insurance allows for that. It gives them flexibility and gives them choices. It lets them keep their lifestyle the way they want it.”
“The biggest risk is if you are married,” says Richmond. “If one of you gets sick, it can be catastrophic to the family financially.” Say you need $4,000 a month to live on and you have a family member with early-onset dementia. It costs $5,000 a month for care. “All of a sudden, what you take out of your retirement savings just doubled. There are not many plans that you can double what you take out for three or four years and still be viable,” he says.

“Talk to your lawyer, accountant, financial adviser and say if the unthinkable happens to us, what will happen, and what will we do?” Richmond says. “You are talking about what could be hundreds of thousands of dollars.”

Several things were working against the broad appeal of long-term-care insurance over the years. One is the expense. Also, the industry saw some dramatic rate increases in the past several years. And several providers got out of the business entirely.

But the issue for many potential customers was that you could pay the premium for years, and never need it.

“Historically, the big turn-off with long-term-care insurance was that all premiums paid were lost in the event policy benefits were not used,” says Carrozza. “Now, we are seeing more flexible products built around a life insurance model.”

Steve Cain, principal and national sales leader of NFP Long Term Care in Los Angeles says the average annual premium for a traditional long term care policy is $2,332. But a growing trend is the single premium life insurance policy with a long-term-care rider.

That’s exactly what Udell says he and his wife have — on life insurance policies of $1 million. “If I don’t ever need it, my family gets the million,” he says.

4 Reasons Why Not To Go Long The S&P

global investingMy Comments: Some of my responsibility as an investment advisor is to provide warning if I think there are pending changes in market direction. But since I have no idea what I may eat for lunch today, telling folks about the next crash will happen is pure speculation. But…

I compensate for this inability by having as much of their money as possible in accounts that have historically moved away from the markets and into cash and short positions when the signals are strong that a downturn is happening.

I’ve included only one chart from the article here. To the extent you want to see the rest, this link should take you to my source article: http://seekingalpha.com/article/2466765-4-reasons-why-not-to-go-long-the-s-and-p

Jack Foley, Sep. 3, 2014 2:43

• Many large cap stocks are not making new highs like the SPY. This is a worrying sign.
• Interest rates have to rise in the future which will put downward pressure on the stock market. Veteran trader Steve Jakobsen believes we could drop 30% from here.
• Oil seems to have bottomed and oil has the potential to make the whole commodity sector rally along with it.

The S&P 500 (NYSEARCA:SPY) has broken through the physiological number of 2000, and commentators and speculators alike are predicting higher highs from here. I am ultra short on this market but it is becoming increasingly hard to predict when this market will roll over in earnest. Investors who are short the market are really hurting right now, and it takes a brave investor to stay short in this environment. Nevertheless, the risk is all to the downside so an investor must stay extremely nimble if profits are to be made. Let’s explain why.

First of all, even though the market is making new highs, there are many large cap stocks that are not participating in this move. Look at the General Electric Company (NYSE:GE) to see how far it is below its all-time highs.
14-9-16 General ElectricAlso because we have extremely low interest rates, corporate earnings are inflated. Bonds and stocks have rallied hard for the last few years as these markets have been the benefactors of the US’s low interest rate environment.

Nevertheless, interest rates one day will have to rise. When they do, investors will start shifting their money back into fixed term savings accounts. Bonds trade inversely to interest rates so when rates rise, bonds will come under pressure. The problem with low interest rate environments is that they can create asset bubbles. I believe we have one forming in stocks, in bonds and in certain real estate markets globally. In London, for example, property prices may rise by 30% this year which is unprecedented in a struggling global economy we have nowadays.

Veteran trader Steve Jakobsen believes that we could see a 30% drop in the S&P 500 from these levels. Jakobsen believes that equities is the only asset class that hasn’t been really affected from this ongoing global financial crisis.

Therefore, he believes one day the S&P 500 will revert to the mean which could be as much as 30% lower than where we are now.

Finally, I like the movement oil is making at the moment and I think we have finally found a bottom. Tthe spot price of light crude oil has gone from $108 in June to a rising $95 at the moment. The bottom seems to be in and if oil can rally from here, I believe it will put pressure on the stock market as funds will start to leak into the commodity markets. Oil has the potential to take the whole commodity complex with it when it’s in bull mode, so depressed agricultural commodities such as Corn and Sugar should also benefit. As you can see from the chart below, commodities have struggled as a whole in the last few years as equities have rallied hard.

Yes, equities and oil can rally together and have done so up to January 2013 since 2008 (practically everything rallied once the Fed ran their printing presses) but since January 2013 oil has not participated in the move. Once the Federal Reserve eventually ends all stimulus programs (either voluntarily or by demand), I have no doubt capital will start leaking into the commodity markets and oil. Also if geopolitical tensions in Iraq and the Ukraine escalate, oil will spike and the world stock markets will decline sharply.

To sum up, there are enough warning signals to warrant not being long here in the US stock market. If you still think the rally is not finished, I would advise scaling down your position size.

Being a Stock-Market Bull Just Got a Lot Harder

question-markMy Comments: For over a year now, I’ve been warning my clients that a reversal is coming in the stock market. As a result, we’ve slowly moved into investments that have reacted positively and made money during downturns. Only it hasn’t happened yet.

Consequently, some of them are frustrated and angry with me because while the market has grown considerably in the last eighteen months, their accounts have not kept up, and look rather anemic.

Having been through this kind of thing before, and somehow survived, I continue to promote ideas that have made money for clients, especially 2007-2009 when the last crash happened. While I don’t expect the next one to be as big, it will still be painful. Unless…

By Mark Hurlburt – September 9, 2014

London (MarketWatch) — Making the bullish case is getting a lot harder.

Let’s say that you want to wriggle out from underneath the bearish conclusions of the cyclically adjusted price-to-earnings ratio (CAPE), which for some time now has been very bearish. Sidestepping that conclusion turns out to be a lot harder than you think.

The CAPE is the version of the traditional P/E ratio that has been championed by Yale University finance professor (and recent Nobel laureate) Robert Shiller. Currently, for example, the CAPE stands at 25.69, which is 55% higher than its average back to the late 1800s of 16.55 and 61% higher than the ratio’s median level of 15.95. In fact, there have been only three times since the 1880s when the CAPE has been higher than where it stands today: 1929, 2000 and 2007 — all three of which, of course, coincided with major market highs.

The CAPE isn’t a perfect indicator, as Shiller himself will tell you. There are legitimate reasons to question its approach to market valuation. In addition, the bulls have shamelessly come up with myriad other “reasons” not to pay attention to it.

But Mebane Faber, chief investment officer at Cambria Investment Management, has this to say to all these so-called CAPE haters: “Fine, don’t use it. Let’s substitute in book and cash flows, two totally different metrics.”

Unfortunately for the bulls, the conclusion of looking at the market from those alternate perspectives is almost identically bearish.

Courtesy of data from Ned Davis Research, Faber ranked 43 countries’ stock markets around the world according to their relative valuations according to the CAPE as well as to cyclically adjusted ratios of price-to-book, price-to-cash flow, and price-to-dividend. When ranked according to the CAPE, for example, with top ranking going to the most undervalued country’s stock market, the U.S. is in 41st place. Only two countries are more overvalued according to this indicator.

CAPE = 41
Cyclically-adjusted price-to-book ratio = 37
Cyclically-adjusted price-to-dividend ratio = 39
Cycilcally-adjusted price-to-cash-flows ratio = 36

To argue that the U.S. stock market isn’t overvalued, in other words, the bulls not only have to dismiss the CAPE but also argue why the U.S. market should be priced so richly relative to book value, cash flows and dividends.

That’s not necessarily impossible. But it is clear that the bulls have a lot more work cut out for them.

Furthermore, even if the bearish conclusions of these diverse indicators turn out to be right, you should know that they are long-term indicators, telling you very little about the market’s near-term direction. My favorite analogy to describe the situation comes from Ben Inker, co-head of the asset-allocation team at Boston-based money management firm GMO.

He likens the market to a leaf in a hurricane: “You have no idea where the leaf will be a minute or an hour from now,” he says. “But eventually gravity will win out and it will land on the ground.”

Bernanke Says 2008 Worse Than Great Depression

FDRMy Comments: Ben Bernancke is no longer Chairman of the Federal Reserve. However, before he became chairman he was widely recognized as a world class economist and an expert of the Great Depression. It was that expertise that gave him so much credibility as he maneuvered the Fed through 2008-2009 until earlier this year.

There is no question that many of us are still hurting. The gap between the haves and the have nots is increasing. The ability of many of us to spend money like we used to is limited, which to some degree keeps recovery uncertain.

There is blame to go around, but not because anyone or sector of the economy was and is evil. That presumes a conspiracy involving thousands of people which is enough to debunk that idea. Bad things happen from time to time. There is little point in worrying about the past; we can only influence the future, but an understanding of the dynamics that led to the mess may be helpful.

Brian Gilmartin, CFA, Aug. 28, 2014


The above link was copied and pasted from a Real Time Economics Wall Street Journal tweet yesterday (8/26), after Gentle Ben testified in the AIG litigation recently.

I think former Fed Chair Bernanke was right in concluding that 2008′s recession, if left to run its course, would have been a far greater calamity for the US economy than the Great Depression, but for different reasons:

1.) The money markets and the commercial paper market was at real risk of failure, which means S&P 500 companies couldn’t have rolled short-term high quality CP;

2.) Far more Americans through 401(k)s and pensions, had exposure to the stock and bond markets than Americans had in the late 1920′s and early 1930′s;

3.) A 70 year bull market in home prices came to a crashing halt, the first national real estate depressions since the 1930′s. While the US economy was thought to be a primarily agrarian economy during the Great Depression, single-family homes as a percentage of household net worth, would have been far greater in 2007 – 2008 than in the 1930′s;

4.) The truly shocking action for me wasn’t the Lehman default or even the Bear Stearns default, but the drop in Northern Trust’s and State Street’s stock in late September, early October, 2008. Northern Trust traded up to $88 in September ’08 only to collapse to $33 within a two week time frame. NTRS and STT are “global custodian” banks and thus are huge custodians (recordkeepers) for corporate pension plans and such, with far bigger assets in custody and administration than assets under management. If The Reserve Fund had broken the buck, there would have been true calamity in the Street and although it is simply a guess, I would have thought that the US unemployment rate would have seen 50% easily, at least over the near term;

5.) The Reserve Fund was, at that time (I believe) in 2008, one of the world’s largest money market funds, and if the Reserve Fund had “broken the buck” which means that if the Reserve Fund’s NAV had moved below $1 per share, it could have resulted in a run on money markets that would have made the bank run and the Bailey Building & Loan run (“It’s A Wonderful Life”) look like a day in the park. (The aftermath of what happened with the Reserve Fund in 2008 is that today, the SEC is contemplating and is close to letting money market fund NAVs (net asset values) float. The thought is that the $1 money market price creates a “moral hazard” and what I told a client recently is that what retail investors will likely wind up with is whole array of “ultra-short” bond funds as money market funds, which do fluctuate minimally in price.)

6.) Although some of the fiscal policy has been horrid since 2008, I do think that one of the root issues in the economic recovery following 2008 has been the true “shock” of the drop in real estate and household wealth. Remember consumption is 2/3rd’s of GDP and with the capital markets and the real estate markets, being two of the greatest wealth-creation vehicles post WWII (not to mention the value of an education), it is taking years for the consumer to restore their savings and confidence.

7.) The fact that “disinflation” (a declining rate of inflation) and deflation continue to be an issue 5 years after the stock market low and the substantial economic recovery, is indicative of lingering overcapacity. Part of that is due to the life-cycle of technology which has dramatically accelerated productivity and shortened tech product cycles (not to mention kept a lid on inflation) and part could be demographics and the Aging of America (it is a bigger debate);

8.) The Great Mistake in the 1930′s by the Federal Reserve is that they actually withdrew liquidity sometime in 1935 – 1936, which resulted in another downturn in the US economy in the late 1930′s just prior to WWII. In other words, Fed policy errors actually exacerbated the Great Depression, rather than shorten it. Both Janet Yellen (I’m sure), just like Ben Bernanke are / were both aware of the Fed’s policy mistakes and are obviously loathe to make the same mistake. The fact that there isn’t a meaningful inflation today just makes the Fed’s ability to maintain ZIRP (zero interest rate policy) and low rates that much easier. However it will end at some point, and we will get some inflation, I would suspect.

Most intelligent investors blame leverage on the 2008 collapse, but I think it was far more involved than that. It just wasn’t that simple.

In client meetings the last few years, I’ve been telling clients that there is less than a 5% chance that they will see the 2008 confluence of events happen again in their lifetime (probably less).

Certainly I could be wrong, but I continue to think the US economy, and the US stock market, particularly the S&P 500 is in a perfect glide slope of healthy, albeit subdued growth, low inflation, and a healthy respect for stock volatility and negative sentiment on the part of retail investors.

One commentator from PIMCO called it the “Goldilocks economy” and the metaphor seems appropriate.
We will see S&P 500 corrections over time, but I will bet in 10 years that we will look back and see this period of time as similar to post WWII economic stability and growth. Perhaps that conclusion is somewhat of a stretch given the demographics of the US economy today, but we’ll see.

Thanks for reading today. We’ve been contemplating this commentary on 2008 for some time. Watching NTRS and STT trade in late September, early October, 2008 was one of the few times, I’ve felt true fear watching the stock market. The potential collapse of the money market as was being telegraphed by the global custodian banks, would have been a horrific scenario to conceive, let alone experience.

When all the books are written about the “near Great Collapse of 2008″ after 20 – 30 years of hindsight, I do think Ben Bernanke, then Treasury-Secretary Hank Paulson, and Tim Geithner will be due a huge debt of gratitude.
For a few days/weeks, educated American’s had a brief look into the abyss. It won’t be forgotten by those of us that sat through it.