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 Posted: Tue Oct 27, 2009 2:28 pm |
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investors seem more concerned about inflation than deflation, it is
deflation that has been showing its ugly head. The 1929 onset of the
depression shows what deflation can do. This sad period of time came
to be known as a deflationary depression
http://finance.yahoo.com/news/5-Disturbing-Facts-For-The-etfguide-3589885241.html;_ylt=Aoj3845pPB6IqOyBPb1uRfK7YWsA;_ylu=X3oDMTFhc2ZqdWd1BHBvcwMyBHNlYwNzcGVjaWFsRmVhdHVyZXMEc2xrA2FmZXdkaXN0dXJiaQ--?x=0
5 Disturbing Facts For The Bulls
• By Simon Maierhofer
• On 12:55 pm EDT, Friday October 23, 2009
When seventeenth century French dramatist Pierre Corneille said that
'danger breeds best on too much confidence,' he wasn't talking about
the stock market, but that doesn't mean it doesn't have a practical
application for investors.
On Wednesday, October 21, 2009, the Volatility Index, also called the
VIX or 'fear index', fell to levels not seen in well over a year. In
fact, the last time the VIX dropped below Wednesday's reading of 20.10
was on August 28, 2009.
Just a few days later the Dow Jones (DJI: ^DJI), S&P 500 (SNP: ^GSPC),
and Nasdaq (Nasdaq: ^IXIC) recorded mind boggling losses of about 30%
in 30 days. No doubt there is more to investing than just the VIX.
Nevertheless, a look at a composite of indicators shows that the party
on Wall Street is close to an end, or may have ended already.
Disturbing fact no. 1: Buying climaxes
Investors Intelligence (II) tracks buying and selling climaxes on a
weekly basis. Buying climaxes take place when a stock makes a 12-month
high, but closes the week with a loss. They are a sign of distribution
and indicate that stocks are moving from strong hands to weak ones.
According to II, investors who sell into buying climaxes are right
about 80% of the time after four months.
This week, II recorded 253 buying climaxes and just 8 selling
climaxes. The first two weeks of October saw 597 buying climaxes and
only 41 selling climaxes. In total, there have been over 900 buying
climaxes thus far in October, the most since the October 2007 all-time
highs.
Disturbing fact no. 2: Deflation
For good reason, deflation is an economy's worst enemy. Falling prices
create the perception that any goods can be bought cheaper at a future
time. This creates a waiting attitude which stifles spending and
demand, ultimately resulting in a slower economy. A slower economy, on
the other hand, forces consumers to turn every penny twice before
spending it.
In September, the Producer Price Index (PPI) declined 0.6%. Even the
core PPI, which excludes food and energy, was down 0.1%. Even though
investors seem more concerned about inflation than deflation, it is
deflation that has been showing its ugly head. The 1929 onset of the
depression shows what deflation can do. This sad period of time came
to be known as a deflationary depression.
Disturbing fact no. 3: Foreclosures
Foreclosures used to be mainly confined to low income areas. The most
recent figures from Zillow, however, reveals a concerning development.
USNews reports that at the peak of the market, the top third of the
property value spectrum made up just 16% of foreclosures. By July of
this year, this most expensive segment of the market accounted for 30%
of home foreclosures.
Based on future projections, this isn't just a flash in the pan type
problem. Foreclosures are expected to rise from about 2 million
currently, to 6.5 million by 2011. This cancer-like spreading of
foreclosures even into the prior taboo-area of prime mortgages is
directly correlated with a weak job market.
Not only is the 'official' unemployment rate quickly closing in on the
foreboding 10% number, the average length of time unemployed, or
without a job, has just reached an all-time record of 26 weeks or six
months.
It seems like the real estate market is more aware of the seriousness
of the issue than the stock market. While the S&P 500 (NYSEArca: SPY -
News), Dow Jones (NYSEArca: DIA - News) and Nasdaq (Nasdaq: QQQQ -
News) have all reached new highs recently, real estate ETFs like the
Vanguard REIT ETF (NYSEArca: VNQ - News), iShares Cohen & Steers
Reality Majors (NYSEArca: ICF - News), and SPDR Dow Jones REIT ETF
(NYSEArca: RWR - News) are still trading significantly below their
respective September recovery highs.
Disturbing fact no. 4: Oil prices
The performance correlation between stocks and oil is tough to explain
for proponents of the 'business as usual' notion. High oil prices are
usually the scapegoat for a faltering economy, as we saw last year. As
oil (NYSEArca: USO - News) rose to never before seen highs ($147/
barrel), stock prices were plummeting.
Earlier this year in February , however, oil prices were hovering near
lows of $30/barrel. At that time, the average price of gas was below
$2 gallon. CNNMoney asked just recently: 'But how good did you feel
about the economy back then? Fears about a massive wave of big bank
failures and another depression were running rampant. So, cheaper oil
and gas were little consolation.'
At precisely that time, when fears of another depression were running
rampant, the ETF Profit Strategy Newsletter issued a Trend Change
Alert predicting the onset of the most powerful rally since the
October 2007 highs. While many were selling at the worst time, Profit
Strategy subscribers started accumulating high octane leveraged ETFs,
which racked up double and triple digit gains, since.
Earlier in 2008, the ETF Profit Strategy Newsletter introduced the
'red across the board scenario'; a scenario where all asset classes
should move in the same direction. For most of 2008, the direction was
down; beginning in March 2009, the direction was up.
The only economic environment that has the power to link the
performance of various asset classes is a deflationary depression,
such as the Great Depression. Aside from a 50% monster rally from
1929-1930 where all asset classes shot up (sound familiar)
simultaneously, the predominant trend was down, down hard.
Disturbing fact no. 5: (over) Valuation
As a consumer, chances are you're always looking for the best deal.
Why overpay if you can get the same item at a lower price elsewhere,
or later on? Who, for example, would still pay the sticker price for a
gas guzzling SUV like a Chevy Tahoe or Ford Explorer? Nobody! Even if
the car served you well while you owned it, you know that its resale
value would be sub-par at best.
If you wouldn't overpay for a car, why would you overpay for stocks?
Stocks are way overvalued; it just hasn't sunk in yet. Based on actual
reported earnings, the P/E ratio for the S&P 500 is 138. This means
that a stock sells for 138x its actual earnings. Of course, this is
the average for the S&P. Many companies, such as Alcoa, aren't even in
positive earnings territory. The earnings picture today is worse than
it was in the year 2000 when dozens of tech companies (NYSEArca: XLK -
News) with no earnings saw their stock prices soar into triple digits.
Even though stocks still trade 30% below their 2007 levels, dividend
yields are within reach of their all-time lows. Dividends reflect a
company's ability to share its profits with shareholders. Declining
dividends are caused by declining profits. Dividend yields can
increase either by a falling stock price or rising dividends.
In March, dividends for the broad market spiked briefly above 4%, due
to the waterfall decline in stock prices. For a short time, the Select
Sector Financial SPDRs (NYSEArca: XLF - News) offered a juicy yield of
nearly 10%. With rising prices, dividends have dropped back down
towards 2% for the broad market and only 2.52% for XLF.
Investors with an affinity for historical data know that the stock
market has never reached a true bottom unless dividend yields are
driven sky-high by falling prices, and P/E ratios are driven down to
rock-bottom readings, also due to falling 'P' (prices). Once this
valuation reset happens, the market will give a green signal for the
next bull market.
Unfortunately, this reset did not happen at the 2002 lows. It also
didn't happen in March 2009, and we are certainly far away from those
levels with the Dow around 10,000 and P/E ratios of 138.
The October issue of the ETF Profit Strategy Newsletter includes a
detailed analysis of P/E ratios, dividend yields, and two other
indicators; mutual fund cash levels and the Dow measured in the only
true currency - gold (NYSEArca: GLD - News). Since its 1999 peak, the
gold-Dow has spearheaded the decline to new lows. If history's
assessment of valuation is correct, the dollar-Dow will soon follow.
Confidence, reflected by the elevated investor optimism (a contrarian
indicator) does not only breed danger, it also provides opportunities
for savvy investors that know how to interpret the market's very own
signals. |
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