It's the Economy, stupid - Languishing & Lingering after the Great Recession

The S&P 500 PE was 70.89 in 1/2009. It was 22.92 in 1/1999. It is about 19.57 now. But in 1929 it was 17.76. I say the market is always fairly valued. Based on what people are willing to pay for $1 of earnings, tomorrow is a guessing game, what is important is not what people are willing to pay for $1 of earnings but the actual $1 in earning. Having a Fed Chair commenting on the stock market is inappropriate. Her focus should be on pure economic factors like corporate earnings and not subjective measures of what people are willing to pay for those earnings in the stock market.

 

Disagree. The markets are not efficient, meaning some participants will have knowledge or information that other participants do not have. When I enter a transaction, I do not even care what information the other party has, I care about the information that I use to make my decision. I enter the market with the assumption the other party has the same approach. On the other-hand if when you say "efficient" you mean that participants have equal access to information of public record and not subject to fraud - I would agree.

Also, just as a point of additional information, in today's markets there is generally too much information. Much of the information is useless. Decision makers generally make decision absent perfect information. If a decision maker has for example 90% of the information needed, waiting for the final 10% may have very bad results.. Good decisions require knowing what the most important information is and being able to asses the risks of what is not known.

First, because of her position she can dramatically impact the market for specific companies and industries. Again my general view is that government should be neutral.

Second, why is it her business, your business, to care about what I may want to pay for a tulip? If it is my money, it is my decision. Is she suggesting that people who buy into bio-tech, social-tech, etc. at current levels stupid? There are people who have been saying Amazon has been overvalued since its IPO - who has been on the correct side of that assessment. The way an investment fits into one person's investment portfolio may be totally different than how it fits into another's - I strongly dislike the one size fits all mentality of bureaucrats. Let people be free!

If there were a concern about conflict of interest, then I'd get that, but there are laws in place to prevent that. What is the issue? Why is it inappropriate? The position has an impact on the stock market, but she shouldn't comment on it?[/quote]
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The value of government services are not factored into the information cited.

For example, does the inflation number in Canada reflect medical costs, if so in what way? How does that then compare to the actual out of pocket expenses of Canadians? Let say the average HH income in period one is 100, with 10 in government services. In period two the HH income is 102, with 15 in government services. We could show there was a 2% increase in income - it would be true - but misleading. The real gain was over 6%.

 

All the information, is a lot of information. I agree, in principle, on the concepts of market efficiency. From a practical point of view, market efficiency is theoretical and suggests that there is agreement regarding relevant information. There is no agreement regarding relevant information and that is why some can consistently gain an advantage over others - in true efficient markets there could not be that type of an advantage. My premise is that market pricing reflect what market participants agree upon based on the information they find relevant. On that basis, market prices reflect fair value, absent fraud, coercion, deceit or other manipulative unethical acts.

Assuming sophisticated (technical definition) investors, why would a person pay more than what they think is fair value? I would argue, that their valuation may end up being incorrect - but assuming they made an informed calculated decision on what basis are we saying the informed calculated decision is wrong? We do that by being on the opposite side of the transaction or not involved in the transaction. If I want to pay a PE of 50 for Amazon based on information I find relevant and you believe a fair PE to pay is 10 (typically Warren Buffet's standard for stocks) - who arbitrates what a fair transaction price is for a share of stock? During the past 5 years, Amazon's share price is up by a factor of 4X, and had a PE of about 50 five years ago and has been significantly higher at times. If you avoid, sell or short Amazon and I buy, how do you presume to say what is "fair". I don't care about "fair", I care about making money.

I agree. However, one metric that some quantify, is the emotional factors affecting human behaviors in markets. A couple of the more simplistic observations are how some view round numbers and stock splits. If a stock is close to 100, 200, 300, etc. like a magnetic force it will be attracted to those round numbers. A stock splits, same underlying value but the perception is the stock is less expensive. A study of prices is available and anyone can do it, anyone can take advantage of it - suggesting market efficiency - but most do not - suggesting market inefficiency. And so it is with most technical analysis. some are willing to do more work than others, some are better at processing data than others, some are more creative than others - even with the same raw data available. Is this an argument for or against efficient markets? I say against - because someone is taking advantage of processed data (another form of data), that others are unaware of.

Her policy decisions and comments should be based on economic data, i.e. corporate earnings, not what people are willing to pay for those earnings.

What are we saying here? Government controls and caps prices in regard to healthcare - on that basis measured inflation reflects those controls while government pays for and controls healthcare services - but in terms of the value of healthcare services we do not factor in this value when concluding if middle class people are being hurt or helped??? Or is it some other sequence that results in a conclusion that can be misleading. Either way, I suggest the experts actually do the calculations and show us their work. I would do it, but I would want to get paid.

 

I am often confused by how you state your point of view.

If person A (buyer) is doing a fundamental analysis and person B (seller) is doing a fundamental analysis - and they both come to the same conclusion - there would be no transaction. For a transaction to occur there has to be disagreement on some aspect of the transaction. Based on A's analysis A believes he enters into the transaction with a fair price and B feels the same - from the point of view of the market a fair (neither over or undervalued) occurred. Assuming A and B both share the same objective (unlikely) one would be wrong and one would be correct in regard to their analysis, but at the time of the transaction they entered into it based on what they believed was a fair price. Odds are they have different objectives, different priorities, different methods of fundamental analysis as they entered into the transaction - and the same would still be true, that they entered into the transaction with what they considered to be a fair price.

Again, assuming sophisticated market participants (my view is that people should not engage in markets they do not understand), absent fraud, coercision, etc., the market always reflects fair value, neither over or under value. What you write is confusing to me.

I think you assume market participants enter the market with the same objectives. I have done some study of the history of commodities futures markets - which can be a win-win for the producer attempting to minimize risk and manage cash-flow and the investor who attempts to assume a risk adjusted rate of return. Both parties can be equally informed (efficiency) and have their objectives met in a transaction.

I agree, but I think for a different reason. I believe rates of return gravitate to a normalized risk adjusted rate. And that over-time no one method of analysis will consistently over or under perform this normalized risk adjusted rate. Which brings us back to the Fed Chair's comments about certain markets being over valued - the Fed is keeping interest rates artificially low - often investors use US government debt as a benchmark for a risk free return (Or as close as one can get) - the impact of this is to inflate the present value of future cash flows - increasing what people will pay for those cash flows. If the Fed let the rate honestly float there would be less risk of so called market bubbles. Her words and actions do not match.

She did not break a law - I simply believe she should focus on her job. In my opinion the Fed has gone far beyond what the Fed is intended to do. I posted many times about my dislike of quantitative easing, manipulation of interest rates, and social engineering through monetary policy.

I did a search:

National Health Expenditure Trends, 1975 to 2013 | CIHI

In the executive summary there is a chart that basically shows that in 2000 Canada spent about $100 billion on healthcare, in 2013 the amount was over $200 billion, about $6,000 per person about 11% of GDP. My point is that there is value in government service, assuming the data is correct - each Canadian gets the equal to $6,000 in healthcare benefits - the amount has doubled in 13 years - are theses things factored into determinations of how well Canadians are doing. A family of four, is getting on average $24,000 in household value - if that number increases 10% but HH wages are flat - I argue the HH has seen an increase of $2,400. A wealthy person may get the same benefit, but in a progressive tax system or in other way their increase can be offset. I simply suggest that a more detailed analysis is in order. I do not see how anyone can reasonably disagree.

 

There has to be another side to a buy transaction.

I define fair price as the agreed upon price. Why would a sophisticated market participant pay an unfair price? Being wrong is one thing, but we won't know that until some future date.

I have been discussing markets in general. Stock markets operate with buyers and sellers. There is always a buyer and a seller to every transaction. I do not understand your point.

There is too much data and therefore some will always find an advantage. I also believe work makes a difference. Intelligence makes a difference. Discipline makes a difference. There are many factors that can make a difference.

Let's not get issues confused. For example a buy/hold investment in McDonald's about 20 years ago, would today generate about a 15% annual return on the original investment on dividends alone. A 20% average annual return today may be due to work done long ago.

If we base that on living standards, I disagree. We have more and the best of everything now. Generally everyone is doing better than in the past. It seems some focus on whose living standards are improving faster than the living standards of others. My concern is on my life and when and how I choose to help those less fortunate than I am, not the life of those with more wealth than what I have. I believe it must be a miserable existence always worrying about others getting richer. My grandmother lived in a three room house with a tin roof until she died, did not get an indoor bathroom (added on to the back porch) until 1966, toilet and sink) - and she was one of the happiest people I have ever known. She would find today's lifestyles, even of the poor, exorbitant.

 

I gave an example of A being a buyer and B being a seller, you responded by saying based on their fundamental analysis that they both may buy.

MCD's dividend is $.81 per quarter or $3.24 per year.
A person who bought MCD July 1 1994 paid $29.75 - adjusted for dividends and splits the price was $10.21. $3.24/$10.21=.317 or a $31.7% yield. Using the amount not adjusted for splits and dividends - 3.24/29.75=.1089 or a yield of 10.9%.

Buying into dividend growth stocks with a buy and hold strategy pays-off for those who are patient. Re-investing dividends and not selling split shares is even better, assuming one picks the correct stock to invest in from the start. But when people like Warren Buffet consistently achieves market beating returns, look at his portfolio and look at how long he has held some strong dividend growth stocks - which is ironic considering his company refuses to pay a dividend.

This is just one simple example of how a firm may be achieving market beating returns every year. There are many others. It is not based on some ingenious manner of anticipating short-term market price fluctuations.

My argument is that the middle class is better off today than in the past. Do you disagree? I acknowledge that wage growth is lagging, however, there are other factors to consider. All I suggest is that those factors be put on the table and that it can be misleading to only look at one or a few material variables and not all material variables - the value of government services is material. For example, my son is a rising HS senior and we are going through the process, it is rare that a student actually pays the full stated tuition - in some schools over 90% get some form of aid or assistance.

 

Assuming a commercial fishing boat (profit motive) I see no difference - substitute fishing boat with stock, or whatever you want.

 

A fast review of the articles indicate the analysis is superficial. For example if a person invests $100,000 in an education and their parents invested $100,000 in a house - who is better off? The authors put a value on the house but not the education. If a person spends $30,000 on a car with $10,000/year on the car and expenses and another has no car and spends $3,000 on transportation for transportation and takes an annual sabbatical valued at $7,000 - who is better off? The authors would value the asset but not value the sabbatical.

Also, if inheritance has value, why not assign that value to the post 1960 generations?

Seems the authors have a conclusion and then manipulate certain facts to support the conclusion. Again, I simply suggest an honest assessment of the question. I can review these articles in a matter of minutes and I can find all kinds of flaws. I get it, you will believe what you want regardless of legitimate questions and clear flaws in what is supporting your belief. And I know we are all better off now, than during any period in the past. We disagree.
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Your posts are confusing. A transaction is a transaction, it does not matter if it is one share of stock, the one whole company, the one whole boat, or a proportional ownership interest (share) in the boat...

 

We talked about the value of Canadian healthcare. Did you acknowledge that this value is real and is perhaps something to consider when looking at the middle class in addition to wages? Given a family of four the average value of Canadian healthcare can be up to 35% of the median household income in Toronto. Again, I simply suggest doing the math and looking at the issue from a clear and proper perspective.

Oh, and a student who gets $100,000 education at no out of pocket cost, compared to the student who either pays or takes out loans got a tremendous deal. Assuming the education actual has value (and studies show that there is value in a college degree and value in certain universities over others), those who have it have an asset that I would account for when determining if they are better or worse off at a certain age relative to their parents - but that is me. Perhaps it does not matter to you.

I have not looked at Canadian universities, perhaps I should for my son, in the US there are many schools that will cost $100,000 or more. Some sort of finanacial aid is required for most families making less than 6 figures for these schools - in the US and often it is available.

No doubt US economic growth is slow. I am happy to have the opportunity to create wealth in the US. Again, if all people did was compare their situation to someone else's situation, they may conclude the grass is always greener on the otherside of the fence. I believe that is a waste of time and energy - and must make for a miserable life.

To what you have been posting...I disagree with you, call it what you want.