Re: The US Economy Thread

[Swanhends]

The cost of compliance is extremely high and that either hurts the compatitivness of mid to small sized businesses businesses and discourages smaller private businesses from ever becoming public. Dilisting has also increased after passing the law.

Hmm...Personally I am a huge supporter of SarbOx

Cost is compliance was highest during the transition period, I think its gone down quite a bit as it becomes more and more ingrained in the corporate world. Even with the cost of compliance, I think that's well worth it for more reliable financial statements and stronger internal controls - can't have things like Enron/Adelphia/WorldComs etc and I think SarbOx goes a long way in helping to achieve that aim

Auditor independence, increased disclosure requirements, and management accountability for financial statements are all indispensable IMO

[zizzle]

I'm not saying that SOX is not needed coz it is but it's just one example of how regulations always end up benefiting the big boys as a result of lobbying and political money.

[Swanhends]

I'm not saying that SOX is not needed coz it is but it's just one example of how regulations always end up benefiting the big boys as a result of lobbying and political money.

I think that depends on how you define benefits though - It does make it more difficult for smaller companies to go public, but I think most large corporations would gladly welcome the increased listing of smaller companies if it meant getting SarbOx and auditors off their backs

Going public can have many benefits for companies under the right circumstances, but I am not of the opinion that it is the right move for everyone...From a management perspective, public investors suck

I think Buffett has the right idea with Berkshire Hathaway and his philosophy of trying to limit stock splits and "choose" quality shareholders so to speak

Here is Warren Buffett's opinion on stock splits, in which some disafvantages of public investors are outlined:

One of Buffett's goal is to sell Berkshire Hathaway (BRK.A)(BRK.B) stock at price related to its intrinsic value. The key to a rational stock price is rational shareholders, both current and prospective. Manic-depressive personalities produce manic-depressive valuations.

It is not easy to obtain high-quality shareholders. They selection cannot be screened for intellectual capacity, emotional stability, moral sensitivity or acceptable dress.

Buffett's team considers that the one way to attract high quality shareholders is to communicate a business and ownership philosophy without conflict. Through this, the team tries to attract investors who will understand their operations, attitudes and expectations. It is widely known that Buffett likes shareholders who think themselves as business owners and invest in companies with the intention of staying a long time. He also wants those who keep their eyes focused on business results, not market prices.

Upgrading a shareholder group that possesses these characteristics is not easy. Should the stock be split or other actions be taken focused on stock price rather than business value, then a class of buyers inferior to the exiting class of sellers would be attracted.

People who buy for non-value reasons are likely to sell for non-value reasons. Their presence in the picture will accentuate erratic price swings unrelated to underlying business developments. At Berkshire, the idea is to attract long-term investors rather than short-term players.

One of the ironies of the stock market is the emphasis on activity. Brokers, using terms such as "marketability" and "liquidity," sing the praises of companies with high share turnover. But investors should understand that what is good for the croupier is not good for the customer. A hyperactive stock market is the pickpocket of enterprise.

For instance, there is a company earning 12% on equity. It has a high turnover rate in its shares; 100% per year. If a purchase and sale of the stock trades at book value, the owners of the company will pay, in aggregate, 2% of the company's net worth annually for the privilege of transferring ownership.

This activity does nothing for the business earnings.

Owners think that the market trading 100 million shares is nothing but a curse. They have to pay more. Hyperactive equity markets subvert rational capital allocation and act as pie shrinkers.

In Berkshire the situation is different. Depending on the size of the transaction, the difference between proceeds received by the seller of Berkshire and cost to the buyer may range downward from 4% to perhaps 1½%. Because most Berkshire shares are traded in fairly large transactions, the spread on all trading probably does not average more than 2%.

At Berkshire, it is considered that splitting the stock would increase the cost, downgrade the quality of shareholder population, and encourage a market price less consistently related to intrinsic business value.

Given the stable appreciation of Berkshire's stock price and its low fluctuations (Beta of .25 ffs) I'd say there is strong evidence to support his philosophy here IMO

[BarrileteCosmico]

I'm willing to concede that in a world entirely left to the free market regulation would not be needed. But if regulations are deemed necessary by the social value they provide, then you can't have half-assed regulations (or regulators, read the horror stories of the mortgage bankers taking regulators out for $200 steak and drinks) and that sometimes means more regulation, and it's not entirely a bad thing.

[BarrileteCosmico]

Btw bhends splits have been going down dramatically since the 80s, since institutional investors purchase stocks on rolls of 100 or higher if the share price is higher they pay lower commissions to achieve the same desired exposure. That being said, there's a relatively well-known phenomena in event driven investing that states that whenever there is a stock split (or reverse splits) the market cap goes up (and this is supported by empirical evidence). Not sure if this still happens as the study is from the 90s, but it would imply that the market approves of them.

Also one of the reasons Berkshire is so stable is that they have announced a buy-back purchase price through their own valuation models (currently 120% of book value). So if the price ever falls below they buy back more shares since they consider it to be cheap. Hence, the price never falls to those levels.

[sportsczy]

Berkshire is a very unique animal in the US capital markets... you can't really use it as a benchmark for anything.

[Swanhends]

Btw bhends splits have been going down dramatically since the 80s, since institutional investors purchase stocks on rolls of 100 or higher if the share price is higher they pay lower commissions to achieve the same desired exposure. That being said, there's a relatively well-known phenomena in event driven investing that states that whenever there is a stock split (or reverse splits) the market cap goes up (and this is supported by empirical evidence). Not sure if this still happens as the study is from the 90s, but it would imply that the market approves of them.

Not arguing against that, I would tend to agree that stock price seems to appreciate post stock split. But my problem with that is that these gains in stock price are not related to an increased ability to generate future cash flows and they aren't related to company performance...Splitting stock has no affect on the profitability of a company's operations, yet the price rises. Essentially (IMO) the appreciation of the stock price post-split is hollow, it is not supported by how the company is actually doing, it's just going up because the increased liquidity opens the door for more speculation (Would be very interested in a study of the affect of a stock split on P/E)

Also one of the reasons Berkshire is so stable is that they have announced a buy-back purchase price through their own valuation models (currently 120% of book value). So if the price ever falls below they buy back more shares since they consider it to be cheap. Hence, the price never falls to those levels.

Was not aware of this, very interesting

[zizzle]

Stock splits tend to increase the market cap mainly because of psychological reasons and the increased liquidity of the cheaper stocks.

[Yuri Yukuv]

Stock splits tend to increase the market cap mainly because of psychological reasons and the increased liquidity of the cheaper stocks.

You always add a liquidity discount to a stock because illiquid stocks will force you to buy at a higher price and sell at a lower price.

Having said that berkshire hathaway is not an actual corporation its a fund, buffet uses the large stock price to dissuade retail investors. And as anyone in the fund business will tell you a dollar from an institutional client is alot more favorable than a dollar from a retail client.

[Yuri Yukuv]

A coup in the federal reserve

Three Fed Presidents Call to Phase Out Mortgage Bond Buys

Three Federal Reserve regional bank presidents called for phasing out the Fed’s monthly purchases of $40 billion in mortgage-backed securities as the housing recovery shows signs of gaining momentum.

Dallas Federal Reserve Bank President Richard Fisher said today buying mortgage bonds risks disrupting the market, while Philadelphia Fed President Charles Plosser said, “it’s not good for the bank to be holding lots of mortgage paper.” Jeffrey Lacker of Richmond said to reporters yesterday the Fed should “get out of the credit allocation business.”

The Federal Open Market Committee said May 1 it will keep up its monthly purchases of mortgage bonds and $45 billion in Treasuries, and is ready to increase or reduce the pace in response to changes in the outlook for inflation and the labor market. Plosser, Lacker and Fisher don’t hold a policy vote this year.

The central bank’s so-called quantitative easing has pushed mortgage rates close to record lows, fueling demand in some housing markets as buyers compete for a tight supply of properties. While values remain well below their peak, 133 of the 150 metropolitan areas tracked by the National Association of Realtors had price increases in the first quarter from a year earlier. Areas such as San Francisco, Atlanta, Phoenix and Reno, Nevada, saw jumps of at least 30 percent.

“When refinancing activity eventually shifts down, the Fed could soon be buying up to 100 percent of MBS issuance if the current purchase program continues,” Fisher said today in a speech in Houston. “Buying such a high share of gross issuance in any security is not only excessive, but also potentially disruptive to the proper functioning of the MBS market.”

‘Reasonable Step’

Lacker said yesterday the central bank should reinvest the principal from its mortgage bond holdings into Treasuries. “That would be a really reasonable step to contemplate at this point given the strength in the housing market right now,” he said to reporters in Baltimore.

Starts of new U.S. homes fell more than forecast in April to a five-month low, indicating a pause in the industry’s progress as builders slowed work on apartments. Building permits surged to an almost five-year high.

Housing starts slumped 16.5 percent, the most since February 2011, to an 853,000 annualized rate after a revised 1.02 million pace in March, the Commerce Department reported today in Washington. The median estimate of 81 economists surveyed by Bloomberg was for a 970,000 rate.

Plosser said today in a Bloomberg Television interview he “would like to see us get out of mortgage-backed securities.”

Outspoken Opponents

Fisher said in response to audience questions he wants to see the central bank’s balance sheet eventually returned to an all-Treasuries portfolio. While Fisher has been one of the most outspoken opponents to bond buying among Fed officials, he said in February he didn’t want to stop purchases “cold turkey,” which could destabilize the market.

“The housing market is on a self-sustaining path and does not need the same impetus we have been giving it,” Fisher said today to the National Association for Business Economics in Houston. With the success of continued buying “questionable,” he said, “I think we can rightly declare victory on the housing front and reel in -- or dial back -- our purchases, with the aim of eliminating them entirely as the year wears on.”

Fisher said he was encouraged by recent economic data and believes growth will probably exceed private economists’ forecasts of 2.4 percent this year. The housing market is on the rebound, banks are easing lending standards and state and local government cutbacks are no longer a major drag on growth, he said.
Downward Trend

The jobs report for April as well as a downward trend in initial claims for unemployment insurance may have signaled an improvement in the labor market as well, the Dallas Fed chief said. Employment picked up more than forecast in April, and the jobless rate unexpectedly declined to a four-year low of 7.5 percent, a Labor Department report showed on May 3. Revisions added a total of 114,000 jobs to the employment count in February and March.

More Americans than projected filed applications for unemployment benefits last week. Jobless claims jumped by 32,000 to 360,000 in the week ended May 11, exceeding all forecasts in a Bloomberg survey of economists and the most since the end of March, Labor Department figures showed today in Washington.

The yield on the 10-year Treasury note dropped six basis points, or 0.06 percentage point, to 1.88 percent at 12:12 p.m. in New York, according to Bloomberg Bond Trader prices. The Standard & Poor’s 500 Index was little changed at 1,658.20.

Unexpectedly Advanced

Sales at U.S. retailers unexpectedly advanced in April, Commerce Department figures showed this week. Fisher called the figures “a nice upside surprise.”
“This indicates that consumers may have digested delayed tax rebates and the increase in payroll taxes and are reaping the benefits of lower gasoline and food prices,” he said. “So the recovery presently appears to be strong enough to propel hopes that employment growth will continue improving over the near term.”
Inflation reports have been benign, with price measures likely to end the year between 1.5 percent and the Fed’s 2 percent goal, Fisher said.

Labor Department figures today showed the cost of living fell in April for a second month, the first back-to-back declines in inflation since late 2008, as fuel prices retreated. The consumer-price index decreased 0.4 percent, the biggest decrease since December 2008, after falling 0.2 percent in March.

Further Decline

Some Fed officials, including St. Louis Fed President James Bullard, said last month that a further decline in inflation that persisted might warrant additional stimulus. Consumer prices rose 1 percent in March from a year earlier, the lowest level since October 2009, according to the Fed’s preferred gauge of inflation.

Inflation that has “persistently” stayed below the Fed’s goal is a concern and may suggest policy hasn’t done enough to support growth, Boston Fed President Eric Rosengren said today.

“The longer we in the U.S. remain so far below our 2 percent target, the greater the risk that inflation expectations could fall and real interest rates rise,” Rosengren said in a speech in Milan. Low inflation and high unemployment “could lead one to argue that policy has not been sufficiently accommodative.”

[BarrileteCosmico]

Minneapolis Federal Reserve Bank President Narayana Kocherlakota stressed the importance of the Fed maintaining low interest rates and a substantial stimulus program as the economy still undergoes what he called a “not-so-great recovery,” in prepared remarks Friday.

In the comments made before a University of Chicago conference, he warned that tightening monetary policy to improve financial stability would yield “tangible and significant” losses for the U.S. economy while providing only “speculative and slight” gains.

Mr. Kocherlakota, who isn’t a voting member this year of the policy-setting Federal Open Market Committee, reiterated his dovish position over the past few months and now is stressing that the central bank keep its accommodative tap open and stimulus flowing to a lackluster economy.

“Financial stability considerations provide little support for reducing accommodation at this time,” Mr. Kocherlakota said.

The remarks were focused on important tests for central bankers. Mr. Kocherlakota said the greatest challenge is the changes in the nature of supply and demand for assets since 2007. He said investors view far fewer assets as safe, with Americans having less confidence in U.S. residential real estate and European sovereign debt.

“Despite its actions, the FOMC has still not lowered the real interest rate sufficiently in light of the changes in asset demand and asset supply,” the central banker said. Because of this, he added, the FOMC only will meet it objectives by continuing to take steps that ensure real interest rates remain unusually low.

Earlier this month, Mr. Kocherlakota said he supports current Fed stimulus policies, including $85 billion-per-month in bond buying, which he said he would like to see remain in place until unemployment falls to 5.5%, lower than what the FOMC currently has set as a threshold, or inflation rises to 2.25%.

The Minneapolis Fed chief has said he is unperturbed by fears of inflation and wants to see the unemployment threshold lowered. The current thresholds “dampens current stimulus,” Mr. Kocherlakota said in an interview released with an annual report from the Minneapolis Fed on May 4, “because people think that times are not going to be as good as they could be if we had more aggressive policy, more stimulative policy.”

Runaway inflation isn’t a problem right now, but slowing inflation is. Consumer prices rose a mere 0.1% in April according to a Wednesday announcement from the Labor Department. Core prices are up 1.7% since last year, the lowest annual rate since June 2011. Although people like Richmond Fed President Jeffrey Lacker has said recent dips in inflation are temporary, a persistent downward pressure on inflation could pressure Fed doves to do even more to stimulate the economy.

While doves like Mr. Kocherlakota vocally support the $85 billion-a-month Fed bond purchases, earlier this week a handful of Fed presidents, including the heads of San Francisco, Richmond and Dallas, said they would like to see bond purchases scaled back.

Philadelphia Fed’s Charles Plosser said he thinks bond purchasing could be scaled back “as soon as our next meeting.” But as Fed policy makers are wont to do, he left himself an escape hatch adding, “unless we see a significant reversal in current trends.”

Next Wednesday, the Fed will release the minutes from its May 1 policy meeting. The next Fed policy meeting is set for June 18-19.

Kocherlakota is something of a Bernanke student. Initially he was a wild card but through months of debate Bernanke was able to convince him and bring him to his side, and now he's quite loyal to him, so I suspect these views closely match those of Bernanke himself.

Any thought of scaling back the purchases with only 1% inflation is crazy and irresponsible. You only have to look at Europe to see what happens when you tighten prematurely.

[Yuri Yukuv]

Obama Oks Gas export terminals This will really help with the current account, and if rumors of one terminal a year being allowed are true then this is very bullish for shale

Obama Administration OKs Second Natural Gas Export Terminal

The Obama administration on Friday approved a second U.S. terminal to export liquefied natural gas (LNG) to non-free trade agreement countries, further expanding the nation's role in international gas trade.
The approval of natural gas exports from Freeport LNG's Quintana Island, Texas, terminal ends nearly a two-year pause in the Energy Department's review of export applications, as the administration sought to address concerns that sending U.S. gas abroad could harm U.S. manufacturers.
"It is an historic moment for the United States," said Phil Flynn, senior market analyst at the Price Futures Group in Chicago. "From a price standpoint this is definitely going to put some upward pressure on prices, further out in 2015 to 2018."
Since the department signed off on exports from Cheniere's Sabine Pass terminal in 2011, a fierce debate over the future of America's natural gas bounty has swept through Washington and elsewhere.
Rapid growth in shale gas output has placed the United States in a position to be major gas exporter, upending years of expectations that the nation would have to rely increasingly on imports of gas.
More than a dozen projects have been proposed to export natural gas, but a vocal contingent led by Dow Chemical have argued that allowing unlimited exports could raise prices and hinder a resurgence in U.S. manufacturing.
Energy Department authorization is required for gas exports to all but a handful of countries with free-trade agreements. Without approval to export to major gas consumers without such agreements, including Japan and India, multi-billion dollar LNG export facilities would likely not be economically feasible.
The department's approval of the Freeport terminal will allow the company to export up to 1.4 billion cubic feet of natural gas a day for 20 years.
The announcement came a day after Ernest Moniz was confirmed by the U.S. Senate as the new Secretary of Energy, replacing Steven Chu. Moniz has not been sworn in.

[kiranr]

What is going on with these IRS and Benghazi scandals? Anything major?

[Yuri Yukuv]

@kiranr

I think its just small time politics trying to score here and there, but the IRS deal has potential to blow up

The Data Have a Market Monetarist's Bias


It almost seems unfair, as if the evidence is biased toward Market Monetarist's views. First it was the better-than-expected employment report last week and now it is the forecast-beating retail sales report. These developments should not be happening, especially now with sequestration, if the fiscal multiplier were large. But they are happening and underscore the case that the monetary policy can offset the drag of fiscal austerity.

This latest evidence for the Sumner Critique--the understanding that fiscal multiplier will be effectively zero when the central bank is stabilizing aggregate demand--should not be surprising since the Fed has been offsetting structural austerity since 2010, a fact lost on many Keynesian-minded folks. This post-2010 period is one of the great macroeconomic natural experiments now unfolding, pitting U.S. monetary policy against U.S. fiscal policy.1

This multi-year natural experiment has not be lost on all observers. Jeff Spross of Think Progress takes note of it:

It hasn’t really made the front pages, but the United States recently began carrying out a massive and nearly unprecedented economic experiment, and 2013 looks to be the year when the results come in. The question is straightforward: When the economy is in a deep slump, and the government makes things worse by cutting spending, how much can monetary policy do to help? The answer could reshape the way we argue about economic policy, with profound implications for progressives’ economic priorities — and big opportunities, if they can seize them.

So far, progressives have tended to side with economists like Paul Krugman and bloggers like Mike Konczal. They argue that monetary policy is severely weakened at the zero lower bound...

But economists like David Beckworth and Scott Sumner countered that the economy’s 2.5 percent growth rate stuck around despite blows from multiple rounds of spending cuts, the European crisis, and worries about China. In fact, as Beckworth pointed out, government spending began shrinking by the start of 2010 — yet the economy just kept puttering along at 2.5 percent.

Other points in Beckworth and Sumner’s favor: Before sequestration, the latest round of across-the-board spending cuts, began, the group Macroeconomic Advisors projected growth for the first quarter below 2.5 percent if sequestration didn’t happen. Then the May 3 jobs report, which came out after Konczal’s piece, was so good it was almost shocking. Matt Yglesias and Ryan Avent, two other fans of monetary policy’s salutary effects, pointed to other data sources that suggest the Fed actually has been able to raise long-term inflation expectations. So this looks like at least a preliminary win for team monetary policy.

In my view, the most important insight from this "radical experiment" is not that monetary policy can effectively make the fiscal multiplier zero, but that it could be doing far more to shore up aggregate demand. The fact that the Fed has successfully offset structural fiscal austerity since 2010--as seen by the stable NGDP growth--suggest it could do far more. The Fed has made big strides with QE3, but has yet to unload both barrels of guns. It is time for a NGDP level target.

From Macro Market Musings

[BarrileteCosmico]

Not really sure that Krugman believes that monetary policy is severely limited at current market conditions, he has endorsed NGDP targeting after all. Another point in favor of monetary offset: compare Europe's austerity to the US'. The US actually had a larger austerity in 2013 but it has affected its growth far less due to the ECB's very tight policy.

[Yuri Yukuv]

@BarrileteCosmico

I think the point he is trying to make is that Krugman believes that fiscal policy should take the front seat while monetary the back seat, that even with NGDP it is limited.

Krugman ofcourse would like this as a fiscal policy outpacing a monetary one or money supply specifically would mean a larger government % wise.

Ill give you a taste of what krugman said when interest rates were still positive at 1%:

"Actually, before I get to the math, some concepts. Nearly every forecast now says that, in the absence of strong policy action, real GDP will fall far below potential output in the near future. In normal times, that would be a reason to cut interest rates. But interest rates can’t be cut in any meaningful sense. Fiscal policy is the only game in town."

This is as compared to Friedman's view:

"Low interest rates are generally a sign that money has been tight, as in Japan; high interest rates, that money has been easy.

After the U.S. experience during the Great Depression, and after inflation and rising interest rates in the 1970s and disinflation and falling interest rates in the 1980s, I thought the fallacy of identifying tight money with high interest rates and easy money with low interest rates was dead. Apparently, old fallacies never die"

As you pointed out with the charts however we can see that managing expectations along with other processes that the fed has been implementing it is not just possible to offset fiscal austerity but also spur more healthy growth.

The question going forward however is what should Ben do about the disinflation stemming from commodities? Will he try to curb it directly, or will he only look at it from perspective of NGDP targeting?

Also it will be very exciting if he would provide more information about what the reasons would be fore " increasing or reducing" MBS purchases, and by what amounts

I think how the fed answers this will reveal if thinking has actually changed at the fed, or if this is just a bunch of coincidences.

[BarrileteCosmico]

Well I'm not surprised Krugman would contradict himself, he's done so many times before. I think one of the problems with him is that he is often very partisan which hurts his credibility significantly.

[BarrileteCosmico]

Boom or Bubble?

With the stock market setting new highs on a nearly daily basis, even as the real economy just slogs along, there seems to be one question on everyone’s mind: are we in the middle of yet another market bubble? For a growing chorus of money managers and market analysts, the answer is yes: the market is a house of cards, held up by easy money and investor delusion, and we are rushing all too blithely toward an inevitable crash. Given that we’ve recently lived through two huge asset bubbles, it’s easy to see why they’re worried. But in this case the delusion is theirs.

Read more: http://www.newyorker.com/talk/financial/2013/05/27/130527ta_talk_surowiecki?currentPage=all

[BarrileteCosmico]

Ben Bernanke's appearances before Congress are usually a parade of clueless questions, but Sen. Amy Klobuchar of Minnesota just asked him a great one. Noting that some members of Congress think the Fed should drop its dual mandate on inflation and unemployment and just focus on price stability, she asked Bernanke to explain what he would do differently if the mandate changed.

Bernanke hemmed and hawed a bit, but the crux of his answer was: nothing.

He seemed to interpret the question as perhaps an attack on his inflation record, but his answer was a damning attack on his growth record. (His answer starts around the 39-minute mark here.) Bernanke noted that "inflation, if anything, is a little bit too low" and said that even though many foreign central banks have a single mandate: "I think our inflation record is as good as really any major central bank, and so there's not really been a sacrifice in that respect."*

That's a huge tell right there. Bernanke can't name a single way in which his policy would change if Congress rescinded his legal mandate to attempt to maximize employment. In other words, he's ignoring that mandate. The Federal Reserve's attitude with respect to price inflation has been identical to what its attitude would be in a world in which it wasn't legally required to care about inflation. And that attitude is hammering the economy. Normally there's no substantial tradeoff between inflation and unemployment, but things are different at the zero bound. Once nominal interest rates reach zero, the most potent way to reduce real interest rates is to raise expectations of future inflation. Lower real rates mean more investment and more durable goods purchases—in other words more jobs. So right now there is an inflation-unemployment tradeoff, and Bernanke is behaving as if he has no employment mandate.

But he does have an employment mandate. Members of Congress should be following up on Klobuchar's groundwork and asking him about this. So far, though, it's been crickets.

Via Slate http://www.slate.com/blogs/moneybox/2013/05/22/klobuchar_asks_the_question_on_the_federal_reserve_and_the_dual_mandate.html

[Yuri Yukuv]

There was no bubble in US markets, its just profit taking after receiving the news.

Yglesias forgets that in the US classic thinking has always been that the philips curve is right all the time




But he makes a few good points there

Congressmen were useless when asking Ben, especially that one congressman who asked ben to validate his views on medicare.

It seems that this is the last hard push for Japan and the US, if they make it through this year velocity speed will be reached.

[zizzle]

Boom or Bubble?

With the stock market setting new highs on a nearly daily basis, even as the real economy just slogs along, there seems to be one question on everyone’s mind: are we in the middle of yet another market bubble? For a growing chorus of money managers and market analysts, the answer is yes: the market is a house of cards, held up by easy money and investor delusion, and we are rushing all too blithely toward an inevitable crash. Given that we’ve recently lived through two huge asset bubbles, it’s easy to see why they’re worried. But in this case the delusion is theirs.

Read more: http://www.newyorker.com/talk/financial/2013/05/27/130527ta_talk_surowiecki?currentPage=all

Personally i believe that this market rally is just a bubble, but then again im a doctor doom myself so i could be wrong. That said today's decline is nothing major, if there's a crash coming its not there yet. One of my professors who also owns a large investment company has been ranting about that lately. Here are some of his twitter posts


"An uneven recovery in the economy and modest sales growth at the corporate level are being brushed aside for now by the power of central bank liquidity." -Financial Times

It is near sickening to witness so many committing financial suicide — making the same mistake they made in 2007 (buying high) and again in 2009 (selling low.) Buying into a bull market is as dumb as selling into a bear.

You have all seemed to forget — a market that goes straight up can also go straight down. Will investors ever learn?

If your portfolio is up as much as the market, there is a good chance you are in BIG trouble.

Asset allocation and modern portfolio theory are not obsolete. They simply require actual intellect and skill to execute properly — rarely seen in today's markets

Why do investors only focus on rate of return? I stopped playing "who has the biggest stick" in grade school!!!

Are we supposed to care about David Beckham???



that last one is my fav

[Swanhends]

The SPDR's P/E is only 14, that doesn't suggest much of a bubble

[zizzle]

as of 5/17/2013 the S&P500 PE ratio was 19.29 (which is cheap) but that's just one part of the picture. Once long term interest rates increase investors will flock to risk free bonds and there could be a massive sell off. There is also the fact that these gains in the stock market are not matched with fundamental growth in the economy. Add to that that we surpassed the records highs of 2008 and if the stock market was bubbling back then why wouldnt it be now when the economy was in a much better shape during the mid 2000s

[Yuri Yukuv]

as of 5/17/2013 the S&P500 PE ratio was 19.29 (which is cheap) but that's just one part of the picture. Once long term interest rates increase investors will flock to risk free bonds and there could be a massive sell off. There is also the fact that these gains in the stock market are not matched with fundamental growth in the economy. Add to that that we surpassed the records highs of 2008 and if the stock market was bubbling back then why wouldnt it be now when the economy was in a much better shape during the mid 2000s

Stock market =/= Economy

Corporate profits of US companies are much higher than in 2007/2008 mainly due to higher margins and higher revenues from abroad

There was a safe haven bubble in places like UST, Cash & Gold. This is reversing and that money is falling into equities and real estate.

In the even of interest rates rising, which will only happen in when the economy gets better (maybe 2014 or 2015) it will be fixed income and gold that are hit hardest. US stocks should be hit, but just it would only happen when the economy is better means that net-net it should not effect equities. If you want to play interest rate rise the only way to do that is banks.

But yeah, I agree with you. If you havent entered the market a while ago (3 or 4 months). Then this is probably not the time to do so, alot of people want to lock in some gains. If market corrects by 5% it should be a good time.

[zizzle]

Higher corporate profits are not a very good indicator seeing how revenues are not growing much. "Cost-cutting and stock buybacks have kept profits moving higher despite sluggish growth". If anything this might be a worrying sign seeing how cost cutting is not good to stimulate the economy.

http://www.usatoday.com/story/money/markets/2013/05/08/revenue-growth-quarterly-2013/2139679/

[Yuri Yukuv]

@Zizzle

You keep jumping back and forth

If you are talking about the stock market then its fairly valued as compared to '08, especially when we take into account that corporate profits are higher per share of S&P. You are buying $1 of stock for a larger amount of profits and much less leverage. Warren buffet has the same view, he uses market cap/GNP as his main metric.

If you are talking about the economy then you are 1000% right, it is not as strong as it was in the mid 2000s. This is for a variety of reasons which include: demographic trends (americans and europeans getting older), tight money supply, less capital expenditure, much more competitive labor overseas especially in asia and technology developing in a way that is more towards cost cutting and less consumption.

Some catalysts for the US market are still there which include growth in the housing market, growth in shale production and commodity prices falling off (more discretionary spending).

[Sponsored content]