beliavsky[at]aol.com wrote:

- quote -

As always, you've come up with some interesting references. These are
close to Graham's point, but none of these use high-quality corporate
bonds as the object of comparison to the stock market. Keep in mind, I
am not advocating Graham's methodology here. Even Graham did not have
faith in his ability to time the market and he advocated that even
defensive investors should never have less than 25% or their portfolio
in equities, no matter what the market was doing. I was merely pointing
out that Graham was being misrepresented in this thread.

-Will

Will Trice wrote:
- quote -


Some researchers believe that it is wrong to value stocks by comparing
the earnings yield, E/P, with bond yields, because (quoting the
following paper) "it compares a real number to a nominal number,
ignoring the fact that over the long-term companies' nominal earnings
should, and generally do, move in tandem with inflation." I have not
reached a conclusion on this. Here are some references.

http://papers.ssrn.com/sol3/papers.c...ract_id=381480
Fight the Fed Model: The Relationship Between Stock Market Yields, Bond
Market Yields, and Future Returns
CLIFFORD S. ASNESS
AQR Capital Management, LLC
December 2002
Abstract:
The "Fed Model" has become a very popular yardstick for judging whether
the U.S. stock market is fairly valued. The Fed Model compares the
stock market's earnings yield (E/P) to the yield on long-term
government bonds. In contrast, traditional methods evaluate the stock
market purely on its own without regard to the level of interest rates.
My goal is to examine the theoretical soundness, and empirical power
for forecasting stock returns, of both the "Fed Model" and the
"Traditional Model". The logic most often cited in support of the Fed
Model is that stocks should yield less and cost more when bond yields
are low, as stocks and bonds are competing assets. Unfortunately, this
reasoning compares a real number to a nominal number, ignoring the fact
that over the long-term companies' nominal earnings should, and
generally do, move in tandem with inflation. In other words, while it
is a very popular metric, there are serious theoretical flaws in the
Fed Model. Empirical results support this conclusion. The crucible for
testing a valuation indicator is how well it forecasts long-term
returns, and the Fed Model fails this test, while the Traditional Model
has strong forecasting power. Long-term expected real stock returns are
low when starting P/Es are high and vice versa, regardless of starting
nominal interest rates.

http://www.frbsf.org/publications/ec...el2004-30.html
FRBSF Economic Letter
2004-30; October 29, 2004
Inflation-Induced Valuation Errors in the Stock Market
A recent front-page article in the Wall Street Journal documented an
increasing tendency among economists to move away from theories of
efficient stock market valuation in favor of "behavioral" models that
emphasize the role of irrational investors (see Hilsenrath 2004). The
long-run rate of return on stocks is ultimately determined by the
stream of corporate earnings distributions (cash flows) that accrue to
shareholders. In assigning prices to stocks, efficient valuation theory
says that rational investors should discount real cash flows using real
interest rates or discount nominal cash flows using nominal interest
rates. Twenty-five years ago, Modigliani and Cohn (1979) put forth the
hypothesis that investors may irrationally discount real cash flows
using nominal interest rates-a behavioral trait that would lead to
inflation-induced valuation errors. This Economic Letter examines some
recent research that finds support for the Modigliani-Cohn hypothesis.
In particular, studies show that the Standard & Poor's (S&P) 500 stock
index tends to be undervalued during periods of high expected inflation
(such as the late 1970s and early 1980s) and overvalued during periods
of low expected inflation (such as the late 1990s and early 2000s).
This result implies that the long bull market that began in 1982 can be
partially attributed to the stock market's shift from a state of
undervaluation to one of overvaluation. Going forward, the return on
stocks could be influenced by a shift in the opposite direction.

http://www.kellogg.nwu.edu/faculty/p...earch/work.htm
Money illusion in the stock market: The Modigliani-Cohn hypothesis
Randolph B. Cohen, Christopher Polk, and Tuomo Vuolteenaho
ABSTRACT: Modigliani and Cohn [1979] hypothesize that the stock market
suffers from money illusion, discounting real cash flows at nominal
discount rates. While previous research has focused on the pricing of
the aggregate stock market relative to Treasury bills, the
money-illusion hypothesis also has implications for the pricing of
risky stocks relative to safe stocks. Simultaneously examining the
pricing of Treasury bills, safe stocks, and risky stocks allows us to
distinguish money illusion from any change in the attitudes of
investors towards risk. Our empirical results support the hypothesis
that the stock market suffers from money illusion.

"Rich Carreiro" <rlcarr[at]animato.arlington.ma.us> wrote in message
news:m3mzsn4m4p.fsf[at]animato.home.lan...
- quote -

Except for VIPERs.

"The potential downside to the Viper structure is the requirement that
mutual funds distribute capital gains across all share classes. [VIPERs are
just another share class of Vanguard open-end index funds.] While this
theoretically creates an exposure to capital gains generated from other
shareholder activity, Vanguard's management intends to use the
creation/redemption process to distribute out capital gains. This potential
exposure does not exist with the other forms of ETFs."

http://advisor.morningstar.com/advis...2,3827,00.html
--
Mark Freeland
nBeOwXs[at]pacbell.net

"Rich Carreiro" <rlcarr[at]animato.arlington.ma.us> wrote in message
news:m3acon40d5.fsf[at]animato.home.lan...
- quote -

It's also worth noting that the components of the Dow change periodically.
Only one company, GE, has been in the Dow since is inception. As I recall,
the most recent additions to the Dow were Microsoft and Intel. Does anyone
remember which 2 companies they replaced? (And do I recall correctly?)

Elizabeth Richardson

Douglas Johnson <johnson[at]classtech.NOTPARTOFADDRESS.com> writes:

- quote -

Looking at the raw numbers are meaningless. The DJIA (like the SP500)
are price-only indexes, not total return indexes. So saying it took
25 years to "return to that level" vastly overstates how long it took
people to get even, since it ignores dividends.

--
Rich Carreiro rlcarr[at]animato.arlington.ma.us

Michael E Craney wrote:

- quote -

Actually, Graham recommended not investing in securities selling over 20
times earnings. He also measured the valuation of the market by
comparing the average S&P stock earnings power (the inverse of P/E) to
the average yield on high-quality corporate bonds. Glancing at a yield
chart, it looks like the average investment grade bond yield is about
4.5% right now, which Graham would take to mean that a fairly valued
market would have a P/E of 22. This seems inline with the current market.

- quote -

In my readings of Graham I have not come across this advice. Graham
does say that he wants to see a continuous dividend history over many
years, but historical raising of dividends did not appear to be
important to his investing decisions.

-Will

james92c[at]gmail.com wrote:
- quote -

The stock markets of Argentina and Ghana are doing quite well today.
I'm not sure why you're holding these up as examples of how "markets
eventually collapse and disappear".

-Will

BreadWithSpam[at]fractious.net wrote:


- quote -

Of course, there are a lot of ways to slice this data. You can go by raw
indices, include dividends, taxes, inflation, transaction costs, and so forth.

Dividends do make a difference. This article discusses it:
http://www.globalfindata.com/article...r_barrons.html

"The 1920s bull market topped out on Sept. 7, 1929. If some late-arriving bull
had invested money in the stock market on that day, how long would he have had
to wait to get his money back? Using the price index, the answer would be
September 1954, but on a total-return basis, this unluckiest of investors would
have broken even in April 1945 -- nine years earlier"

Even so, that's 16 years before you break even. Total inflation over that
period was only 5%. http://data.bls.gov/cgi-bin/cpicalc.pl.

Inflation is more interesting during the second period I cited: 1966-82. More
from the Barron's article:
"Between 1966 and 1982, when the Dow Jones Industrial Average struggled to move
above 1000, consumer prices tripled. Adjusted for inflation, the DJIA declined
by two thirds."

The Barron's article also addresses taxes. It is kind of long to quote here.
Basically, taxes were low in the 20's and 30's, sky high in the 40's and 50's,
then more moderate since.

-- Doug

Elizabeth Richardson wrote:
- quote -

Dividends were high enough to result in a positive return. For calendar
year data I think only 1928 and 1929 buyers had net losses from
large-cap US stocks, ten years later.

But looking again at calendar years, there were 10-year losses about a
dozen times since 1926, if you look at real returns. And if you're
cashing out stocks to buy stuff and pay rent, real returns are probably
more of interest.

Point being, there have been 10-year periods where stocks didn't do so
hot. More important point: bonds had many more periods when they didn't
do so hot. Most important point: the gain/loss limits shown by 80 years
of history should never be considered the "worst case" of what might
happen in the future. Or the best case, for that matter.

-Tad

"anoop" <ghanwani[at]gmail.com> writes:

- quote -

[snip]

- quote -

This is why I have switched over from open-end index funds to ETFs. I
don't want to be (because of paper gains in a proprietary index fund)
"locked in" to staying at a particular brokerage.

Another advantage of ETFs (which they share with their pure
closed-ended cousins) is that redemptions don't have the potential to
cause capital gain distributions as redemptions of open-end funds can.

--
Rich Carreiro rlcarr[at]animato.arlington.ma.us

"anoop" <ghanwani[at]gmail.com> writes:

- quote -

The total return on a TIPS includes inflation adjustments,
plus a "real" interest rate. If interest rates go up,
including that "real" rate, principal goes down. The
principal on TIPS is protected from inflation if one
holds to maturity. It is *not* protected from interest
rate movements or lack of demand in the secondary market.

Here - read the sixth paragraph on this handy page:
<http://www.pimco.com/LeftNav/Product...ics+Aug+04.htm
I don't know specifically how the fidelity fund in question
is performing, nor, necessarily, even which fund you actually
mean), but the thing is that TIPS are not guaranteed to
not lose money. (Except inasmuch as if one holds it
directly and to maturity).

Note, too, that TIPS have some unfortunate tax treatment
which makes their inflation protection less worthwhile
outside of retirement accounts.

--
Are you posting responses that are easy for others to follow?
http://www.greenend.org.uk/rjk/2000/06/14/quoting

james92c[at]gmail.com writes:

- quote -

As is American household wealth. In fact, household savings
is *growing* faster than both consumer debt *and* foreign
investments in the US.

Per David Malpass's op-ed piece in the 3/28/05 WSJ:

Household net worth reached $48.5 *trillion* in 2004.
Time deposits and savings reached $4.3 *trillion*.
Credit card debt: $800 billion.

It's a very interesting piece and, unfortunately,
the WSJ's website won't let one get at it without
a subscription. But if you can get your hands on
a copy, read it.


--
Plain Bread alone for e-mail, thanks. The rest gets trashed.
No HTML in E-Mail! -- http://www.expita.com/nomime.html
Are you posting responses that are easy for others to follow?
http://www.greenend.org.uk/rjk/2000/06/14/quoting

Douglas Johnson <johnson[at]classtech.NOTPARTOFADDRESS.com> writes:
- quote -

The 10 years number sounds too short. But I believe you
are incorrect in your reading of the Dow from '29 to '54,
inasmuch as looking at the index alone doesn't show one
the whole picture. Particularly back then - when dividends
played a huge role in one's total return.

Nowadays, dividend yields are a lot lower, but if one
included dividends in the return on the Dow from '29
forwards, one breaks even and comes out ahead quite a
bit sooner than '54.

- quote -

Yahoo's great, but it doesn't show dividend data on the
index over ther period in question.


--
Plain Bread alone for e-mail, thanks. The rest gets trashed.
No HTML in E-Mail! -- http://www.expita.com/nomime.html
Are you posting responses that are easy for others to follow?
http://www.greenend.org.uk/rjk/2000/06/14/quoting

"Elizabeth Richardson" <erichktn[at]worldnet.att.net> wrote
- quote -

I was wondering about this too. The best I turned up quickly yesterday was
the following:

"Historically, since World War II, dividend yields for the S&P 500 have
ranged from a low of 2.63% (set in January 1994) to a high of 8.64%. Over
the past 30 years, the average has been about 4%. Typically, a yield of 5%
to 6% has represented an undervalued market, while a yield of 3% or less has
an indicated an overvalued market."

General Electric's dividend yield was about 3% in 1976. Right now, GE's
yield (2.45%) is higher than the S&P's (1.7%).

Since the average yield over the last 30 years has been about 4%, then
assuming 4% for circa 1970s is likely erring on the low side.

With compounding from 1968-1978, we get an overall appreciation of about
1.48 ( = 1.04^10).

So maybe the first guy who mentioned a gain in any 10-year period for the
S&P 500 is making a fair point.

- quote -


I think I may disagree (respectfully ).
For the most part it is correct, but there are exceptions. These exceptions
seem to occur more often at times when pe ratios are higher than historical
averages, and/or when dividend yields are historically below average.

This page makes the point about pe ratios and bull and bear markets very
well. It also gives a easy understanding to the average duration of bull
and bear cycles.

Regards,
John

"Douglas Johnson" > In December 1968, the S&P 500 reached a high of 109.37. In December 1978,
it
- quote -

What dividends were paid during that interval?

Elizabeth Richardson

"mark (sixstringtheoryDOTcom)" <mark2741[at]no_chance_spammers_verizon.net> wrote:

- quote -

In December 1968, the S&P 500 reached a high of 109.37. In December 1978, it
reached a high of 98.58.

-- Doug

"mark (sixstringtheoryDOTcom)" <mark2741[at]no_chance_spammers_verizon.net> wrote:

- quote -

Value of the S&P 500 index on November 25, 1968: 108.37
Value of the S&P 500 index on November 27, 1978: 96.28

?

The end points for the period between 1968-1982 essentially remained
unchanged.

--Ram

In article <XPA1e.5935$H06.4182[at]newsread3.news.pas.earthlink.net> ,
elle_navorski[at]nospam.earthlink.net says...
- quote -

Yes, but if you study the Fiscal Impbalance studies by Gokhale that he
references all during his latest book, you'll see the challenge the US
goverment has in addressing those challenges, and respond accordingly.

Mike



======================================= MODERATOR'S COMMENT:
Possters are requested to remember that this is a financial planning newsgroup.

mark (sixstringtheoryDOTcom) wrote:
- quote -

The S&P500 goes back only to 1957 and I couldn't find historical
data for it. With what is available on Yahoo, if you compare the
Dow and the S&P over that period, the Dow is actually ahead of
the S&P. This is just an observation, not disagreeing with what
was said.

Anoop


======================================= MODERATOR'S COMMENT:
Please trim the post to which you are responding. "Trim" means that except for a few lines to add context, the previous post is deleted.