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Posts Tagged ‘Robert Shiller’

Mass Delusion – American Style

Mass Delusion – American Style

Courtesy of Jim Quinn of The Burning Platform

“Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.” – Charles Mackay - Extraordinary Popular Delusions and The Madness of Crowds

 

The American public thinks they are rugged individualists, who come to conclusions based upon sound reason and a rational thought process. The truth is that the vast majority of Americans act like a herd of cattle or a horde of lemmings. Throughout history there have been many instances of mass delusion. They include the South Sea Company bubble, Mississippi Company bubble, Dutch Tulip bubble, and Salem witch trials. It appears that mass delusion has replaced baseball as the national past-time in America. In the space of the last 15 years the American public have fallen for the three whopper delusions:

  1. Buy stocks for the long run
  2. Homes are always a great investment
  3. Globalization will benefit all Americans

Bill Bonner and Lila Rajiva ponder why people have always acted in a herd like manner in their outstanding book Mobs, Messiahs, and Markets: Surviving the Public Spectacle in Finance and Politics:

“Of course, we doubt if many public prescriptions are really intended to solve problems. People certainly believe they are when they propose them. But, like so much of what goes on in a public spectacle, its favorite slogans, too, are delusional – more in the nature of placebos than propositions. People repeat them like Hail Marys because it makes them feel better. Most of our beliefs about the economy – and everything else – are of this nature. They are forms of self medication, superstitious lip service we pay to the powers of the dark, like touching wood….or throwing salt over your shoulder. “Stocks for the long run,” “Globalization is good.” We repeat slogans to ourselves, because everyone else does. It is not so much bad luck we want to avoid as being on our own. Why it is that losing your life savings should be less painful if you have lost it in the company of one million other losers, we don’t know. But mankind is first of all a herd animal and fears nothing more than not being part of the herd.”

Stocks for the


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John Paulson Will Be Wrong This Time

Courtesy of Jim Quinn at The Burning Platform

John Paulson Will Be Wrong This Time

We have arrived at critical juncture in the ongoing financial crisis. Have the government actions of the last year successfully spurred the animal spirits of Americans, resulting in a self-sustaining recovery?

The Obama administration and most of the mainstream media would answer yes. GDP has been positive for the last four quarters. Consumer spending has increased in five consecutive months. Corporate profits have been relatively strong. The country has stopped losing jobs. The missing piece has been a housing recovery.

No need to worry. Famous or infamous (depending on your point of view) $15 billion man John Paulson has assured the world that house prices will rise 8% to 10% in 2011. His basis for this forecast is that California prices have rebounded 8% to 10% in the last year, and this recovery will spread to the rest of the nation.

Maybe Paulson has teamed up with his buddies at Goldman Sachs to develop a product that guarantees a housing recovery. I tend to not believe anything that comes out of the mouth of anyone associated with Wall Street, but let’s assess the facts and see if they point to an impressive housing recovery in 2011.

The man who has been right on housing for the last ten years has been Yale Professor Robert Shiller. His analysis of U.S. housing prices from 1890 until present, which he first published in 2005, unequivocally proved that we were in the midst of the greatest housing bubble in history. At the same time, David Lereah, the chief economist (shill) for the National Association of Realtors, was pronouncing it was the best time to buy. He published his masterpiece of market tops, Are You Missing the Real Estate Boom? at the 2005 housing peak. He called a bottom in January 2007, and the NAR has continued to tell Americans it is the best time to buy for the last five years as prices have dropped 36% nationally.

 

Dr. Shiller continues to be the voice of reason when it comes to the housing market. He is doubtful that the recent “recovery” will continue:

    “Recent polls show that economic forecasters are largely bullish about the housing market for the next year or two. But one wonders about the basis for such a positive forecast. Momentum may be on the forecasts’


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ROBERT SHILLER DISCUSSES THE NEGATIVE PSYCHOLOGY OF THE MARKET

ROBERT SHILLER DISCUSSES THE NEGATIVE PSYCHOLOGY OF THE MARKET

Courtesy of The Pragmatic Capitalist 

Some really interesting thoughts by Robert Shiller on the psychology of the markets and how negative psychology is beginning to compound, creating a snowball effect.  Mr. Shiller is increasingly concerned about the economic outlook and the potential that we are talking ourselves off the edge of the cliff:


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U.S. HOUSING PRICES STILL MORE EXPENSIVE THAN ANY POINT IN LAST 120 YEARS

U.S. HOUSING PRICES STILL MORE EXPENSIVE THAN ANY POINT IN LAST 120 YEARS

Courtesy of The Pragmatic Capitalist 

Today’s chart of the day comes to us courtesy of Robert Shiller at Yale University.  The following is Shiller’s famous inflation adjusted home price index.  Interestingly, despite a 30%+ decline from peak to trough, housing prices are still more expensive than at any other point in the last 120 years when you exclude the recent bubble era.  Some say housing prices have bottomed.  Not unless it’s truly “different this time”.

housing1 U.S. HOUSING PRICES STILL MORE EXPENSIVE THAN ANY POINT IN LAST 120 YEARS 

 


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Housing Headwinds and Baby Boom Demographics

Housing Headwinds and Baby Boom Demographics

Courtesy of Charles Hugh Smith, Of Two Minds 

Bubble valuations and Baby Boom demographics both suggest housing prices have a long way to fall. 

Combine home prices that are still at bubble heights with the demographics of aging baby Boomers dumping McMansions and you get massively rising supply overwhelming declining demand.

A recent story in the S.F. Chronicle Real Estate section neatly illustrates the trajectory of tens of millions of Baby Boomer home buyers and owners: Home Appreciation: Concord home steady, secure during ‘roller coaster’

The couple bought their first home in a modest suburb in the late 1970s for an undisclosed price, then bought a home in another suburb in 1980 for $96,000. In 1987 they sold that residence for $110,000 and bought another one for $135,000. They then sold that house for $400,000 in 2002 and bought their current home for a price "in the $600,000s" (realtor-speak for about $650,000). After peaking in value at the bubble top in 2005-06 at around $1,000,000, the home is now on the market for $637,000 ($600,000 + 6% commission).

To peek under the hood of the larger trends, I’ve laid out each buy/sell along with its inflation adjusted value in current dollars. As always, I use the BLS inflation calculator; though it reflects the flaws of the CPI calculation methodology, it is consistent.

1980 purchase: $96,000
in 2010 dollars: $252,000

1987 sale: $110,000
in 2010 dollars: $210,000

1987 purchase: $135,000
in 2010 dollars: $257,000

2002 sale: $400,000
in 2010 dollars: $482,000

2002 purchase: $650,000
in 2010 dollars: $783,000

2010 sale: (projected) $637,000

These inflation-adjusted "real" numbers are insightfully different from the nominal prices.

To place the 1980 valuations in proper context, we need to recall that the U.S. was suffering from sky-high inflation in the late 70s and extremely high rates of new household formation as the 78 millon Baby Boomers went out and bought houses. Those two factors created a housing boom, both in valuations and homes built.

It took $1.36 in 1980 to buy what $1 had bought a mere three years before in 1977. As people fled the stock market for tangible assets and Boomers started families, real estate soared (as did gold). While I don’t have the numbers for that house bought for $96,000 in 1980, anecdotally I can assure you that homes…
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Robert Shiller in Davos

Robert Shiller in Davos

Courtesy of Tim Iacono at The Mess That Greenspan Made

Some of the world’s smartest and dumbest economists have gathered in Davos, Switzerland to talk about the global banking system and how they’re all hoping that 2010 doesn’t turn out like 2008. CNBC’s Becky Quick grabbed Yale economist Robert Shiller for a quick chat.

Obviously, Shiller is one of the sharper tools in the economic shed, starting this interview by noting of his duller brethren: "The problem with a lot of economic theory is that they have not recognized what drives the economy." Sad, but true. 

 


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Plenty More Downside to Come

Plenty More Downside to Come

Courtesy of Michael Panzner at Financial Armageddon

Relying on the valuation methodology made famous by Yale professor Robert Shiller, author of the prescient bestseller Irrational Exuberance, along with some analysis of his own, Doug Short, publisher of dshort.com, raises the question that many bulls seem to be ignoring (or avoiding): "Is the Stock Market Cheap?":

SP-and-PE10-body

For a more precise view of how today’s P/E10 relates to the past, our chart includes horizontal bands to divide the monthly valuations into quintiles — five groups, each with 20% of the total. Ratios in the top 20% suggest a highly overvalued market, the bottom 20% a highly undervalued market. What can we learn from this analysis? Over the past several months, the decline from the all-time P/E10 high dramatically accelerated toward value territory, with the ratio dropping from the 1st to the upper 4th quintile in March. The price rebound since March has now put the ratio at the top of the 2nd quintile — quite expensive!

A more cautionary observation is that every time the P/E10 has fallen from the first to the fourth quintile, it has ultimately declined to the fifth quintile and bottomed in single digits. Based on the latest 10-year earnings average, to reach a P/E10 in the high single digits would require an S&P 500 price decline below 600. Of course, a happier alternative would be for corporate earnings to make a strong and prolonged surge. When might we see the P/E10 bottom? These secular declines have ranged in length from over 19 years to as few as three. The current decline is now nearing its tenth year.

I would add that the equity market’s low-valuation extremes were hit during what might be described as "turbulent times," including World War I, the Great Depression, World War II, and the stagflation of the late-1970s. Except for the most delusional of permabulls, it would be hard for anyone to argue that the unraveling that began more than two years ago doesn’t also fit that bill.

 


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Lost decade for stocks

Lost decade for stocks

Courtesy of James D. Hamilton at Econbrowser

Why were the aughts so nasty for stocks?

The U.S. ended the decade more or less where it began in terms of total employment.



Source: FRED.
nfp_dec_09.png


The owners of capital fared no better, with the nominal S&P500 stock price index down 20% for the decade. The dividends stockholders collected made up for some of that, but inflation took away even more.



Blue line: Nominal value of S&P500 stock index, January 1980 to December 2009. Red line: value as of January 2000. Data source: Robert Shiller.
s&p_dec_09.gif


One of the reasons stocks did so badly was that real earnings ended the decade 80% lower than they began. Even when you smooth out cyclical variations by taking a decade-long average as in the dashed blue line below, the downturn in earnings at the end of the decade is still pretty significant.



Green line: Real value (in 2009 dollars) of earnings on the S&P500, January 1980 to December 2009. Dashed blue line: arithmetic average of green line for the preceding 10 years. Data source: Robert Shiller.
s&p_earnings_dec_09.gif


But a bigger reason why stocks did so badly was the changed valuation of those earnings. Yale Professor Robert Shiller likes to summarize this by using decade-long averages of real earnings to calculate a price-earnings ratio. In January 2000, this cyclically adjusted P/E ratio was profoundly out of line with the average values we’d seen over the previous century. If you trust the tendency of this series to revert to its long-run average, it means that whenever the blue line is above the red, you should expect stock prices to grow at a slower rate than earnings. If you bought when the blue was as far above the red as it was in January 2000, then I hope there was something else you found to enjoy about the naughty aughts.



Cyclically adjusted P/E over the last century. Blue line: Ratio of real value (in 2009 dollars) of S&P composite index to the arithmetic average value of real earnings over


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Investing With a Time Machine

Investing With a Time Machine

Courtesy of Tim at The Psy-Fi Blog

time machineAn Obvious Approach?

Always and everywhere the market timing argument resurfaces in multifarious forms. The idea is simple: sell high and buy low: what could be more obvious? Well, there’s a problem. It’s not necessarily insurmountable but it’s definitely a bit tricky.

You may need a time machine to implement the concept successfully.

Market Timing

The idea behind market timing is easy to state. Sell stocks when they’re high and buy them when they’re low. It’s the basic idea the lies behind all investment in stocks so it’s hard to see why anyone should object. The difficulty lies in the impossibility of implementing the technique accurately in the timescales generally envisaged. Which, to be precise, tends to mean any timescale you can envisage at all. Mostly we have no idea ahead of time whether any given stock has peaked or troughed. Most guesses – let’s not dignify these with the term “forecast” – turn out to be wrong.

Unfortunately the idea is seductive and apparently easy to implement, in hindsight. Looking back everything seems so obvious that the untrained human brain finds it almost impossible to believe that the future isn’t equally predictable.

Buy and Hold

A recent study from the CFA shows that markets go up twice as much as they go down. Their recommendation, if you have cash to invest, is to invest everything now: the research shows that this will maximise your returns over an investment lifetime.

However, this is a pretty unnerving suggestion: had you thrown your money into the market back in the middle of 2006 you’d be sitting on a very nasty loss. Of course, you’d have been appallingly unlucky to get your timing that wrong, but inevitably some people did and the fact that the odds were against them doing so will be no consolation. The alternative suggested by the authors is to feed your money into the markets gradually – averaging your costs. This is a form of insurance, ensuring that you don’t put all your cash in at the market top or, of course, the market bottom.

However, the research also shows that there’s a limit to the value of averaging. After eighteen months there’s no discernable benefit to spreading the timescale of your investments. The vast majority of the benefit comes


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Some Behavioral Thoughts On Home Buying

Courtesy of Tom Lindman at But Then What?

Some Behavioral Thoughts On Home Buying

Robert Shiller of the infamous Case-Shiller index has a particularly interesting piece in the NYT. Instead of hammering on numbers he takes a look at the psychology of home buyers and sellers and why that might affect home prices for some time to come.

Shiller examines the behavioral biases that lead people to “irrationally” hold onto houses during a period or declining values. The concluding paragraphs are thought provoking:

For this reason, not all economists agree that home price declines are really predictable. Ray Fair, my colleague at Yale, for one, warns that any trend up or down may suddenly be reversed if there is an economic “regime change” — a shift big enough to make people change their thinking.

But market changes that big don’t occur every day. And when they do, there is a coordination problem: people won’t all change their views about homeownership at once. Some will focus on recent price declines, which may seem to belie any improvement in the economy, reinforcing negative attitudes about the housing market.

Even if there is a quick end to the recession, the housing market’s poor performance may linger. After the last home price boom, which ended about the time of the 1990-91 recession, home prices did not start moving upward, even incrementally, until 1997.

I say it’s thought provoking because when you look at the recent frenzy in the lower priced end of the housing markets it’s hard to come up with a theory that squares with Shiller’s ideas. Unless you are of the opinion that the drastic decline in prices constitutes an economic “regime change.” Certainly, there hasn’t been any fundamental shift at all in the general economy that has prevailed in this sudden shift from a buyers to sellers market. So what might be driving it?

The only plausible theory I can come up with is that the buyers perceived an exceptional opportunity to purchase housing at favorable prices. Did they do so on the assumption that prices were about to begin a march back? Is the meme that you can’t lose money long term buying real estate so firmly ingrained that no amount of empirical evidence to the contrary will diminish it or are they simply grabbing an opportunity to buy shelter?

What


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Market Shadows

Releasing CAT

Releasing CAT: Sold Caterpillar on today’s earnings report bounce

By Paul Price of Market Shadows

I am satisfied with the move in Caterpillar because we bought our position during its out-of-favor periods. Here are the dates when we purchased and how much we paid for CAT when it went into our Virtual Value Portfolio .  

   Stock                                                  Ticker              Date             # Shares       Price

...

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Zero Hedge

Exactly Like 7 Years Ago? 2014 Is Turning Out To Be Eerily Similar To 2007

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

Submitted by Michael Snyder of The Economic Collapse blog,

The similarities between 2007 and 2014 continue to pile up.  As you are about to see, U.S. home sales fell dramatically throughout 2007 even as the mainstream media, our politicians and Federal Reserve Chairman Ben Bernanke promised us that everything was going to be just fine and that w...



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Chart School

Real Median Household Income Declines 0.73% in March

Courtesy of Doug Short.

Summary: The Sentier Research monthly median household income data series is now available for March. The nominal median household income was up $285 month-over-month and up only $1,494 year-over-year. Adjusted for inflation, it declined 0.73% MoM but is up 1.3% YoY.

The previous monthly gain was the second largest of the 171 data points in this series since the turn of the century. The latest number erased much of that gain. In real dollar terms, the median annual income is 7.5% lower (about $4,309) than its interim high in January 2008.

The traditional source of household income data is the Census Bureau, which publishes annual household income data in mid-September for the previous year.

Sentier Research, an organization that focuses on income and demographics, offers a more...



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Phil's Favorites

Bill Moyers on the American Oligarchy

Courtesy of Larry Doyle.

Prior to correcting a problem, one needs to identify and expose it. That said, bringing about real change is challenging when the interests of those charged with protecting and promoting the public interest are outweighed by their personal pursuits and willingness to trade their position for payoffs.

Make no mistake, this reality is ultimately a failure of leadership on so many levels. Bill Moyers offers a few minutes of cutting commentary on the growing presence of an American oligarchy.

The quid pro quo system of governance practiced by our elected officials and regulatory executives allows for a host of corruptible practices including a tax structure that does not advance our national interests, economic and otherwise.

Regrettably, though, this is the reality in which we currently live. The corruption, legal and illegal, are a burden on all of ...



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Insider Scoop

Great Lakes Dredge & Dock Sells Demolition Business for $5.3M

Courtesy of Benzinga.

Related GLDD Imperial Capital's Top 8 Investment Opportunities Barron's Recap: Meltdown For 3D Printing?

vGreat Lakes Dredge & Dock Corporation (NASDAQ: GLDD), the largest provider of dredging services in the United States and a major provider of environmental and remediation services, today announced that on April 23, 2014, it completed the sale of NASDI, LLC and Yankee Environmental Services, LLC, its two subsidiaries that comprise ...



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All About Trends

Mid-Day Update

Reminder: David is available to chat with Members, comments are found below each post.

Click here for the full report.




To learn more, sign up for David's free newsletter and receive the free report from All About Trends - "How To Outperform 90% Of Wall Street With Just $500 A Week." Tell David PSW sent you. - Ilene...

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Option Review

Casino Stocks LVS, WYNN On The Run Ahead of Earnings

Shares in Las Vegas Sands Corp. (Ticker: LVS) are up sharply today, gaining as much as 5.7% to touch $80.12 and the highest level since April 4th, mirroring gains in shares of resort casino operator Wynn Resorts Ltd. (Ticker: WYNN). The move in Wynn shares appears, at least in part, to follow a big increase in target price from analysts at CLSA who upped their target on the ‘buy’ rated stock to $350 from $250 a share. CLSA also has a ‘buy’ rating on Las Vegas Sands with a $100 price target according to a note from reporter, Janet Freund, on Bloomberg. Both companies are scheduled to report first-quarter earnings after the closing bell on Thursday.

...

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Sabrient

What the Market Wants: Market Poised to Head Higher: 3 Stocks to Consider

Reminder: Sabrient is available to chat with Members, comments are found below each post.

Courtesy of David Brown, Sabrient Systems and Gradient Analytics

Yesterday, the market continued its winning ways for the fifth consecutive day.  The S&P 500 closed within 1% of its all-time high, and the DJI was even closer to its all-time high.  Healthcare, Energy and Technology led the sectors while Financials, Telecom, and Utilities finished slightly in the red.  All three sectors in the red are typically flight-to-safety stocks, so despite lower than average volume, the market appears poised to make new highs.

Mid-cap Growth led the style/caps last week, up 2.87%, and Small-cap Growth trailed, up 2.22%. This week will bring well over 100 S&P 500 stocks reporting their March quarter earn...



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OpTrader

Swing trading portfolio - Week of April 21st, 2014

Reminder: OpTrader is available to chat with Members, comments are found below each post.

This post is for all our live virtual trade ideas and daily comments. Please click on "comments" below to follow our live discussion. All of our current  trades are listed in the spreadsheet below, with entry price (1/2 in and All in), and exit prices (1/3 out, 2/3 out, and All out).

We also indicate our stop, which is most of the time the "5 day moving average". All trades, unless indicated, are front-month ATM options. 

Please feel free to participate in the discussion and ask any questions you might have about this virtual portfolio, by clicking on the "comments" link right below.

To learn more about the swing trading virtual portfolio (strategy, performance, FAQ, etc.), please click here...



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Stock World Weekly

Stock World Weekly

Newsletter writers are available to chat with Members regarding topics presented in SWW, comments are found below each post.

Here's this week's Stock World Weekly. Click here and sign in with your PSW user name and password, or sign up for a free trial.

...

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Digital Currencies

Facebook Takes Life Seriously and Moves To Create Its Own Virtual Currency, Increases UltraCoin Valuation Significantly

Courtesy of ZeroHedge. View original post here.

Submitted by Reggie Middleton.

The Financial Times reports:

[Facebook] The social network is only weeks away from obtaining regulatory approval in Ireland for a service that would allow its users to store money on Facebook and use it to pay and exchange money with others, according to several people involved in the process. 

The authorisation from Ireland’s central bank to become an “e-money” institution would allow ...



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Promotions

See Live Demo Of This Google-Like Trade Algorithm

I just wanted to be sure you saw this.  There’s a ‘live’ training webinar this Thursday, March 27th at Noon or 9:00 pm ET.

If GOOGLE, the NSA, and Steve Jobs all got together in a room with the task of building a tremendously accurate trading algorithm… it wouldn’t just be any ordinary system… it’d be the greatest trading algorithm in the world.

Well, I hate to break it to you though… they never got around to building it, but my friends at Market Tamer did.

Follow this link to register for their training webinar where they’ll demonstrate the tested and proven Algorithm powered by the same technological principles that have made GOOGLE the #1 search engine on the planet!

And get this…had you done nothing b...



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Pharmboy

Here We Go Again - Pharma & Biotechs 2014

Reminder: Pharmboy is available to chat with Members, comments are found below each post.

Ladies and Gentlemen, hobos and tramps,
Cross-eyed mosquitoes, and Bow-legged ants,
I come before you, To stand behind you,
To tell you something, I know nothing about.

And so the circus begins in Union Square, San Francisco for this weeks JP Morgan Healthcare Conference.  Will the momentum from 2013, which carried the S&P Spider Biotech ETF to all time highs, carry on in 2014?  The Biotech ETF beat the S&P by better than 3 points.

As I noted in my previous post, Biotechs Galore - IPOs and More, biotechs were rushing to IPOs so that venture capitalists could unwind their holdings (funds are usually 5-7 years), as well as take advantage of the opportune moment...



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