Effor.com

From a story on Yahoo News.

A rising savings rate and an improved housing market, while not completely healed, point to brighter times ahead in the U.S. economy, O’Shaughnessy told Reuters in an interview.

“I do think that as all that coalesces, you see a good chance for the S&P 500 (at) 900 out of the year. What are we right now? 713? That could be a very nice rally,” he said, in reference to Wednesday’s closing level for the S&P 500.

Does he realize that we started this year at 931?  And while I agree with him that we could have “a very nice rally” I don’t think this is the time to be buying.  There’s too much downside risk that isn’t priced into the market.

For example as I detailed a few days ago, Standard and Poors is still estimating 2009 earnings for the S&P 500 to come in at $64.37 – a whopping 31% increase over the 2008 earnings of $49.04.  I just don’t see that happening, so stock prices will adjust lower as the earnings estimates are eventually lowered.

I also disagree with his premise that we’re seeing “an improved housing market”.  Foreclosures have been held down artificially for the past few months as Fannie and Freddie had a foreclosure moratorium in place, as did some states and banks.  Those programs will be ending, and we’ll see the foreclosure rate skyrocket as Obama’s housing bill turns out to be ineffective.

I say it’ll be ineffective because the only thing that will heal the housing market is a bottom being established on prices. And that can not, and will not happen until foreclosures are allowed to go through to establish the true value of houses in each area.  Any government program is bound to fail, because they’re seeking to establish another artificial boom.  And that’s what caused this mess in the first place.

A rising savings rate IS a good thing, but that doesn’t “stimulate” the economy as fast as someone purchasing a new car or remodeling their home.  Savings bear fruit in years, not months.

“The problem with today is everybody’s fighting the ‘Where’s the bottom?’ fight. If you try to keep a relatively longer-term perspective, which is three to five years, you get shouted out … From our point of view the market is even more compelling than it was when we spoke at the beginning of the year.

“Yeah, we could go down some more here in the short term, but it only makes the ultimate valuation more and more compelling.

No doubt about it, “you get shouted out” if you talk about a 3 to 5 year time frame – because it’s wrong.  If you bought and held stocks anytime since 1997, you’ve lost money.  In many cases, a lot of money.  And that’s not an investment.

“The market is even more compelling than it was when we spoke at the beginning of the year.”  He is 100% correct on this – but anyone who listened to his self serving BS at the beginning of the year has lost more than 25% of their money.  Not a brilliant move, no matter how “compelling” the market appeared at the time.

As to making “the ultimate valuation more compelling” he’s correct – but that’s been the case forever.  Look back at the beginning of this blog, where I said Doug Kass was wrong when he said “Buy the Financials. Yes Buy.” back in January of 2008.   The S&P Financial index (XLF) was over $27 back then, and he said it was a good deal with good valuations.  Today XLF closed at $6.24.  That’s definitely a more compelling valuation, but you would’ve lost 77% of you money if you bought XLF because of it’s “compelling valuation” in January 2008.

Long term investors shouldn’t be trying to pick the bottom – leave that to day traders.  Long term (I’ll use the same 3 to 5 year time frame as O’Shaughnessy) you simply buy when the 75 day EMA crosses over the 200 day EMA.  And you sell when the 75 day crosses back below the 200 day.  It’s easy.  And virtually foolproof.

Check out a chart of the S&P 500 with these EMA’s here.  When the red line (the 75 day EMA) is higher than the green line (the 200 day EMA) stocks are trending higher.  You buy as soon as possible after that happens.  The reverse is true in a down trend like we’re in today.  And the distance between the 2 lines is not getting smaller yet, so long term investors shouldn’t be anywhere close to buying back in.

In short, if the earnings are down, the market will follow eventually.  And when earnings rise, the stock market will also eventually rise.  But that ain’t happening now, so stay on the sidelines.

gk

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I listen to the Dave Ramsey show everyday – well, as much of it as I can while driving home from work.  Dave is a smart, common sense guy, and he says a ton of stuff that I agree with wholeheartedly.  You will not go wrong if you follow his advice, and I strongly urge you to listen to him (podcast available on website) and to check out his website at DaveRamsey.com.

Let me put it this way, if more people had listened to Dave and followed his advice, this current financial crisis would not have happened.  The current crisis (I keep saying “current crisis” because the government ALWAYS has some crisis – it’s the way they convince you to go along with stupid ideas that you’d normally spit on) was caused by government policies which encouraged people to borrow too much money.  Period.

Dave has always encouraged (and encouraged is too mild of term!) people to get out of debt.  All debt.  No exceptions.  And he gives great practical advice  on how to do it.  His plan works, and it will also eliminate those fights about money with your spouse.  I know from experience, because my wife and I get along much better since we started following a written budget.

Go to his site, download the podcasts, listen to him live, whatever works for you.  But you need to listen to him and follow his advice.

After having said all of that, there are two things he says with which I disagree.  This is not meant to antagonize anyone, but simply to say that I don’t think Dave is 100% right on his advice.

1. Dave is a Christian, and he encourages people to tithe literally.  10% off the top to your church.  (I’m a benevolent Atheist, who thinks that religion is one of mankind’s greatest vices.  But that’s my opinion, you are free to practice whatever faith you wish.)
2. Buy and hold investing.  (See my previous post Bye-bye to buy and hold for the basics of why I disagree with that philosophy.)

The point of this post is not to point out the area’s with which I disagree with Dave, but to talk about something he posted on his website today.  He posted a link to a report called “The Wisdom of Great Investors” which supports his long term buy and hold advice.  (I assume it’s all about buy and hold from skimming through it.  If it is what it looks like, I’ll post again and tell you why I think they are wrong.)

On a side note, I admire Dave Ramsey for “practicing what he preaches”.  The report is free, and neither he nor the company who allowed him to distribute it are making any money off of giving it away.  Dave said that he doesn’t have any relationship with the company, and I believe him.

In case it’s only on his site for a limited time, you can also read the report here.  The Wisdom of Great Investors.  (Since they’re distributing it free, I assume this is ok.  If Davis Advisors asks, I will remove this link since it is their report.)

But I’m going to read the report later and not simply tell you what I think is wrong in it, but why I think it’s wrong.  After all, if I simply state an opinion, so what?

But if I can explain the reasoning behind my opinion to you, maybe I’ll convince you that I’m right and change your attitude and behavior regarding investing.  And that will lead you to change your attitude and reasoning towards money, which will lead you to change whatever monetary theory (if any) you currently hold, and perhaps I’ll eventually convince enough people that we can change the government back to something approximating what the Founders intended it to be.

I know it’s a long shot, but I have to try.  One step at a time, I hope to get people to think rationally, and not simply instinctively react to what happens.

gk

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As if the past few years haven’t been proof enough, the recent plunge in stock prices may finally shut up the chorus of buy and hold investing proponents.  I’ve been saying it for a long time, but maybe hitting people in the pocketbook is the only way to make them understand.

Buy and hold is dead.  It has been dead since the tech bubble popped in 2000, but people just didn’t realize it because Alan Greenspan created the real estate bubble to replace it.

When the S&P 500 index peaked at 1527 in March of 2000, it took until May of 2007 to see those levels again.  7 years of “experts” preaching “buy and hold”, “stay in stocks for the long term”, “you need to be fully invested in stocks if you’re a long term investor”, etc, etc, etc.

The amazing part is that people listened to the “experts” – and followed their advice for 7 years of negative returns on their money.  I’ll put it another way.  If you put $1000 into the stock market in 2000, you didn’t break even until 2007.  0% return.

If you put $1000 into the stock market before or after 2000, you might have had some return on your money depending on when you invested, but you didn’t have much.

With the market close today, you’ve lost money if you bought into the stock market at anytime since April of 1997.  I’m no math wizard, but I know this is February, 2009, and April 1997 was 12 years ago.  That’s a long time to wait just to break even.

Since the late 80’s, I’ve followed a simple strategy that the “experts” kept saying was a losing strategy – I buy when the 75 day EMA crosses above to 200 day EMA, and I sell when the 75 day EMA goes under to 200 day EMA.

It’s an extremely simple strategy for long term investments like 401k’s and other IRA’s.  You don’t move in and out of the market very often, but you’re in the market when stocks are rising, and you’re out when they’re falling.

As a result of following this strategy, I got out of stocks in January of 2008 when the S&P 500 was still over 1300.  I didn’t get faked out by the false bottoms during 2008, and I’m still in cash and bonds.  My money is just setting there, waiting until the 75 day EMA turns back up and crosses over the 200 day EMA.

This strategy will beat the snot out of buy and hold, and it’s extremely easy to follow.  You can check out a chart of it here on Yahoo Finance.

Maybe the “experts” will finally shut up – or better yet – maybe people will learn to make their own decisions about investments.  When you do, don’t be surprised if you start realizing that the “experts” also don’t understand capitalism and free markets.  Read other posts in this blog if you’re curious about those subjects.

gk

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I posted this in a MarketWatch.com comment a bit ago and decided it was worth putting here.  This post was in response to another comment about the importance of having a long term (10 years) time horizon when investing.  I disagreed. 

Here’s the post:

So if you put $100,000 into the S&P 500 10 years ago (which is the timeframe you give) how much would it be worth today? On Jan 11th, 1999 the S&P 500 was at 1243.26. Today (10 years later) it closed at 870.26. You’d have about $70,000 left.

That’s a 30% loss over the past 10 years for “investors”!

I have read everything that Warren Buffett has written or said publicly. I read everything Ben Stein writes. I listen to Dave Ramsey daily. I understand where you’re coming from when you talk about investing vs trading. But you are living in the past.

Buy and hold only works when you’re in a bull market. Period. If you read Buffett in the late 90’s, he was right to keep billions in cash instead of “investing” in tech. He should have listened to his own advice. Because he was wrong (and lost billions of Berkshire wealth) when he bought into Citi and GE last year. I said so publicly at the time, and I’m still saying it.

I’m simply saying that buy and hold is dead. It has been dead since the peak in 2000. Those of you you disagree are down at least 30% since then, while those of us who move in and out based on long term trends are up at least 30% since 2000.

This may turn out to be a great buying opportunity – but I don’t think so. the S&P 500 earnings estimates for 2009 are still way too high at $81.80. In other words, S&P is STILL estimating that 2009 earnings will come in $16 HIGHER than 2008!

Anyone wanna bet that 2009 comes in closer to $40 than $81?

This aint rocket surgery.

gk

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I had posted an article late Friday night/Saturday regarding the “expert” opinions staying to stay fully invested in the stock market.  I’m not sure what happened to it, but it gives a not found error now.

Suffice it to say that all the major sites (CNN, FoxNews, NY Times, Marketwatch, etc) said pretty much the same thing.  “Don’t sell – now is a great time to buy!” (or words to that effect.)

They may be right, but they’ve been saying the same things since the market started falling last year.  If you listened to them and followed their advice, you’re down about 20% as of today. 

Speaking of today, CNN has another article advising everyone to stay in the market posted today.  Here’s a quote: “We took the opportunity to buy a few things in the financial sector last week,” said Ted Parrish, co-manager of the Henssler Equity fund. “Even with all the negativity, there are some values. The writedowns may continue but we think the worst of them may be over.”

How’s that working for you Ted?   And I’ve been reading the “the worst of the writedowns may be over” since last fall.  They haven’t stopped yet.  The time to buy (unless you’re made of money and don’t mind more losses) is when the writedowns stop.  Let’s see a quarter from Lehman or Bank of America with no more writedowns, let’s see a quarter from Goldman Sachs with no writedowns – I’ll buy back in then. 

Right now you’re urging investors to “catch a falling knife” and that’s never a good idea.

gk

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