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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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Zero Hedge

Why The US Is About To Be Flooded With Record Oil Production Due To Plunging Oil Prices

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

One would think that plunging oil prices and the resulting mothballing (or bankruptcy) of the highest-cost domestic producers would lead to a collapse in US oil production. And sure enough, if looking simply at headline data like the Baker Hughes count of active rigs in the US, then US oil production grinding to a halt would be all but assured. However, what will actually happen, even as the highest-cost producers and those with the weakest balance sheets are taken to their local bankruptcy court, is that as ...



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Phil's Favorites

Spain to Abolish Rent Controls; 20,000 Small Businesses May Close; Good Thing or Not?

Courtesy of Mish.

Abolition of rent controls in Spain this month have prompted some landlords to increase fees by tens of thousands of euros. The Guardian claims Spanish rent changes ‘could close 20,000 small businesses’.

Is this a good thing? Ponder that question for a moment, but also consider a few snips from the article.
Up to 20,000 small Spanish businesses could be forced to close when rent controls are abolished at the end of this month, according to the self-employed workers union. Many of the closures will be emblematic shops that shape the urban landscape in cities such as Madr...



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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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Insider Scoop

Oppenheimer Initiates Coverage On Twitter, Believes Stock Is Appropriately Priced At Current Levels

Courtesy of Benzinga.

Analysts at Oppenheimer initiated coverage of Twitter Inc (NYSE: TWTR) Friday by issuing a Perform rating and setting a $36.00 price target. Twitter is a global social networking platform with over 280 million active users.

The Numbers

While Oppenheimer analysts fully recognize the strength in Twitter as a company, they believe that Twitter’s stock is appropriately priced at current levels. “While TWTR is the best Internet platform for real-time content discovery, we believe that the stock’s current valuation of 10x 2015E sales, a 52% premium to peers, fully reflects future prospects based on current growth rates.”

Insider Dumping

Between November and December 2014, Twitter insiders have sold more than $...



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Chart School

Relief Bounce in Markets

Courtesy of Declan.

Those who took advantage of markets at Fib levels were rewarded.  However, this looked more a 'dead cat' style bounce than a genuine bottom forming low.  This can of course change, and one thing I will want to see is narrow action near today's high. Volume was a little light, but with Christmas fast approaching I would expect this trend to continue.

The S&P inched above 2,009, but I would like to see any subsequent weakness hold the 38.2% Fib level at 1,989.


The Nasdaq offered itself more as a support bounce, with a picture perfect play off its 38.2% Fib level. Unlike the S&P, volume did climb in confirmed accumulation. The next upside c...

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Digital Currencies

Chart o' the Day: Don't "Invest" in Stupid Sh*t

Joshua commented on the QZ article I posted a couple days ago and perfectly summarized the take-home message into an Investing Lesson. 

Chart o’ the Day: Don’t “Invest” in Stupid Sh*t

Courtesy of 

The chart above comes from Matt Phillips at Quartz and is a good reminder of why you shouldn’t invest in s...



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OpTrader

Swing trading portfolio - week of December 15th, 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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Sabrient

Sector Detector: Energy sector rains on bulls' parade, but skies may clear soon

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

Courtesy of Scott Martindale of Sabrient Systems and Gradient Analytics

Stocks have needed a reason to take a breather and pull back in this long-standing ultra-bullish climate, with strong economic data and seasonality providing impressive tailwinds -- and plummeting oil prices certainly have given it to them. But this minor pullback was fully expected and indeed desirable for market health. The future remains bright for the U.S. economy and corporate profits despite the collapse in oil, and now the overbought technical condition has been relieved. While most sectors are gathering fundamental support and our sector rotation model remains bullish, the Energy sector looks fundamentally weak and continues to ran...



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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 user name and password. 

 

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Option Review

SPX Call Spread Eyes Fresh Record Highs By Year End

Stocks got off to a rocky start on the first trading day in December, with the S&P 500 Index slipping just below 2050 on Monday. Based on one large bullish SPX options trade executed on Wednesday, however, such price action is not likely to break the trend of strong gains observed in the benchmark index since mid-October. It looks like one options market participant purchased 25,000 of the 31Dec’14 2105/2115 call spreads at a net premium of $2.70 each. The trade cost $6.75mm to put on, and represents the maximum potential loss on the position should the 2105 calls expire worthless at the end of December. The call spread could reap profits of as much as $7.30 per spread, or $18.25mm, in the event that the SPX ends the year above 2115. The index would need to rally 2.0% over the current level...



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Market Shadows

Official Moves in the Market Shadows' Virtual Portfolio

By Ilene 

I officially bought 250 shares of EZCH at $18.76 and sold 300 shares of IGT at $17.09 in Market Shadows' Virtual Portfolio yesterday (Fri. 11-21).

Click here for Thursday's post where I was thinking about buying EZCH. After further reading, I decided to add it to the virtual portfolio and to sell IGT and several other stocks, which we'll be saying goodbye to next week.

Notes

1. th...



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Pharmboy

Biotechs & Bubbles

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

Well PSW Subscribers....I am still here, barely.  From my last post a few months ago to now, nothing has changed much, but there are a few bargins out there that as investors, should be put on the watch list (again) and if so desired....buy a small amount.

First, the media is on a tear against biotechs/pharma, ripping companies for their drug prices.  Gilead's HepC drug, Sovaldi, is priced at $84K for the 12-week treatment.  Pundits were screaming bloody murder that it was a total rip off, but when one investigates the other drugs out there, and the consequences of not taking Sovaldi vs. another drug combinations, then things become clearer.  For instance, Olysio (JNJ) is about $66,000 for a 12-week treatment, but is approved for fewer types of patients AND...



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Help One Of Our Own PSW Members

"Hello PSW Members –

This is a non-trading topic, but I wanted to post it during trading hours so as many eyes can see it as possible.  Feel free to contact me directly at jennifersurovy@yahoo.com with any questions.

Last fall there was some discussion on the PSW board regarding setting up a YouCaring donation page for a PSW member, Shadowfax. Since then, we have been looking into ways to help get him additional medical services and to pay down his medical debts.  After following those leads, we are ready to move ahead with the YouCaring site. (Link is posted below.)  Any help you can give will be greatly appreciated; not only to help aid in his medical bill debt, but to also show what a great community this group is.

http://www.youcaring.com/medical-fundraiser/help-get-shadowfax-out-from-the-darkness-of-medical-bills-/126743

Thank you for you time!




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