5 Things To Ponder: Markets, Valuations & Investing

Tyler Durden's picture

Submitted by Lance Roberts of STA Wealth Management,

In yesterday's post, I showed several charts that "Market Bulls Should Consider" as the mainstream media, analysts and economists continue to become more ebullient as we enter the new year.  This weekend's "Things To Ponder" follows along with this contrarian thought process particularly as it appears that virtually all "bears" have now been forced into hibernation.

David Rosenberg recently penned a piece for the Financial Post discussing his views on why the market in 2014 still has room to run.  While his arguments of stronger economic growth via increased fixed capital investment (discussed in detail here), a steep yield curve and rising leading economic indicators (LEI) are certainly compelling; it is worth noting that the last two arguments have been directly impacted, to a large degree, by the interventions of the Federal Reserve.  The article is well worth reading as it provides the context behind today's missive.


1) The US Is The Most Expensive Developed Market In The World via Zero Hedge

"The chart speaks for itself, but for those greatly rotating their 'cash on the sidelines' into stocks; JPMorgan points out that US equities are 2 standard deviations rich to their average valuation and are in fact the most expensive in the developed world..."



[Note:  The reference to "cash on the sidelines" is part of Cliff Asness' 10 Pet Peeves which is a must read for any investor.]

For more charts from JP Morgan on market valuation go here.


2) The Biggest Redistribution Of Wealth From The Poor To The Rich by Shane Obata-Marusic (@sobata416)

While the current administration has continued to promote the "war on poverty" the reality is that, as stated by Robert Rector, it has been less than successful.

"Fifty years and $20 trillion later, LBJ's goal to help the poor become self-supporting has failed."

Shane's most recent study discusses the ongoing impact of the Federal Reserve's "quantitative easing" programs as a wealth transfer mechanism from the poor and middle class to the rich.  The implications of this transfer effect, as shown in the chart below, on an economy that is nearly 70% driven by personal consumption expenditures suggests that the real "wealth effect" of the Fed's interventions has been a negative rather than a positive.



3) 5 Questions On The Economy To Be Answered In 2014 via The Wall Street Journal

Economic forecasters are counting on 2014 to be a breakout year. But whether the economy finally moves past its sluggish growth will rest on several forces playing out differently than they have since the recovery began. Some of the key questions that must be answered in the coming year are:

  • Will businesses finally shed their caution?
  • Will Washington's tentative truce continue?
  • Will the Fed's path out of the bond buying get bumpy?
  • Will housing adjust easily to higher interest rates?
  • Will the rest of the world cooperate?

While the WSJ gives their assessment the importance of the questions, and how you personally answer them, are critical as to how you structure your current asset allocation.


4) How To Lose Money In A Hurry by Mark Hulbert; WSJ MarketWatch

Mark Hulbert wrote a great piece discussing the most often forgotten phrase by investors; "Past performance is no guarantee of future results."  As he states:

"'This phrase, ubiquitous in the small print of financial products, often falls on deaf ears,' according to Adam Reed, a finance professor at the University of North Carolina at Chapel Hill. 'Investors have a tendency to rush into those funds that are at the top of the previous year's performance rankings,' he says, citing numerous studies.


They shouldn't. The evidence is that last year's top performers will lag the market in 2014 — if not lose a lot of money."

This is clearly shown in the following periodic table of returns by Callan.  While it is entirely possible that chasing the stock market in 2014 could yield a positive return, it is also likely that an unloved asset class like "bonds" could just as well rise to the surface.  Just food for thought.

Callan Periodic Table of Investment Returns-2012-notated


5) The Death Of Long Term Thinking (1800-2013) an Obituary by Morgan Housel

I have written and articulated many times in the past that the "long term investor" is dead.  In a market driven by artificial interventions, high frequency and program trading and a "casino" mentality by individuals the age old axioms of "buy cheap and sell dear" have all but been forgotten.  This idea was brilliantly opined in this obituary of "Long Term Thinking."

"Long-Term Thinking died on Tuesday. His last true friend, Vanguard founder Jack Bogle, was at his side. He was 213 years old.


Long-Term Thinking lived an illustrious life since the start of the Industrial Revolution, when for the first time, people could think about more than their next meal. But poor incentives and the rise of 24/7 media chipped away at his health. The final blow came Monday, when a trader on CNBC warned that a 10% market pullback -- which has occurred on average every 11 months over the last century -- could be 'devastating' for investors. 'That's it,' Long-Term Thinking whispered from his hospital bed. 'There's no more room for me here.' He died soon after Bloomberg published its daily tally of how much the net worths of the world's billionaires changed in the previous 24 hours."

And on that sad note I leave you to ponder the risk in your portfolio, the potential for 2014 and how the "evolution of cats explains why they are grumpy."

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Payable on Death's picture

Went to a lunch with my professional association today. Speaker was from the Fed. He gave a very elementary, dull talk and then took Q&A. The questions to this NYU Phd were rather challenging, nearing confrontational. Afterward, he sat next to me for lunch. Chit chat ensued. Then I said that the reason I came today was so that he could tell his superiors he met a crazy man out in the wild that thinks Ben or Janet, nor any human, should be endowed with that kind of power. No person, or committee of persons, is smart enough to run the economy. “Hmmm please tell me more. I am always interested in hearing criticism and suggestions.” I went on: set aside that the Fed is incented to simply serve their banker owners, I wish that the mandate was not dual. I can perhaps endorse price stability, but full employment is just an excuse to meddle—an excuse that can be bent to any means or end. He asked what I thought the biggest mistake of the Fed was. I said it was serial bubbles—tech, housing, and now stock / assets. Also, ZIRP has allowed the politicians to run deficits without the constraint of interest rates. I said, “I wonder what the world would be like without central banks.” He nearly spit his cheesecake, which is something since this guy is a reserved Asian. He then asked me if I was seeking the gold standard. There was a hint of a smirk. I could tell if I said, “yes”, he really would class me with the crazies. So, I didn’t give him the satisfaction. I said I wasn’t smart enough to know about the gold standard, but reiterated that I think the whole premise of unaccountable experts with power is fatally flawed. It was then time to leave. His last words: “Please tell me your name again.”

Boris Alatovkrap's picture

You are give name, say to member of bankster class, "Ira Derpisonyu"

NotApplicable's picture

I always give Ron Paul's answer to the "Gold Standard" question.

"Let the market decide."

That is, unless I want to deconstruct their false monetary crank premise, then I ask, "Do you mean the classical standard, or the gold exchange standard? And, are you also including bi-bimetallism standard as part of it?"

Then they shut up and run away quickly before their ignorance is put on full display.

BuddyEffed's picture

When he asked for your name, it may have been his attempt to satisfy the criteria for half of the more famous dual mandate "Kicking ass and taking names"  Suggest you watch your ass now that he has your name.

Because maybe he will "Kick you so hard you'll be wearing your ass for a hat" -- Another quote from The Outlaw Josey Wales

Max Damage's picture

Todays price action based on corporate results, and economic figures simply shows how utterly screwed up the markets have become. Misallocation of capital with EU periphery rallying hard, only means a bigger round of losses next time round. We have gone beyond the point of no return, and the future looks frightening

LawsofPhysics's picture

Stop it, I can't laugh that hard for that long.  "Markets", "Valuations"?  Bah ha ha ha, this language implies a mechanism for true price discovery, please, we haven't had that for quite some time...

ArkansasAngie's picture

I refuse to use the term markets to describe what's going on.

The JPY was defended vigorously at the 104 level ... from another article.  By whom?  Investors?  Not this one.

ArkansasAngie's picture

I'm sticking to 2014 might not be a plesant year for the economy.  

People are beginning to catch on that this recovery is actually hurting them ... personally.  

Careful out there boys and girls

TheRideNeverEnds's picture

Anyone hurt by this recovery clearly did not buy enough e-minis.



ebworthen's picture

In one word:  PONZI!

moneybots's picture

The reference to "cash on the sidelines"

Money in the stock market is cash on the sidelines, just as much as it is in anything else. Cash on the sidelines is a silly term.

max2205's picture

Ben is now going to write a book: 'Buy this Book or I'll buy You!'

Musashi Miyamoto's picture

"Fifty years and $20 trillion later, LBJ's goal to help the poor become self-supporting has failed."

Nope, Everything went exactly as planned...