Augustine wrote:
- quote -

Using your CPI reference (I used Elle's before), your 12/2008 price
adjusted back to 1965 is only $3.71 [(869.75/35.5) / (210.228/31.8)] for
an annualized return of 3.1%. Just pointing out that for once my math
was OK... I think...

-Will

william dot trice at ngc dot com

Augustine wrote:
- quote -

From a VERY long-term perspective, this confluence of 40+ year performance of
stocks vs. gold turns out to be a historical fluke. In the big scheme of
things, Gold (as well as other strategic commodities) is the hare that was left
in the dust by the tortoise. (Gold can sprint like few others, but it's
notorious for taking extended naps.) Let's open the window and take in the
panorama:

Gold's annualized returns through 2008, using average annual prices, starting
from inflation-adjusted major nadirs:

1814 0.6%
1858 0.4%
1873 0.6%
1920 1.4%
1970 3.2%
2001 10.6%

Importantly, the past 4 decades (and even more so the 7 years ended 2008) vastly
overstate Gold's historical performance potential -- which is a strategic
warning flag.

Gold's returns through 2008, when starting from inflation-adjusted major peaks:

1844 0.2%
1864 0.2%
1896 0.2%
1934 0.9%
1980 -0.2%


Now the same spiel for stocks, using average annual prices adjusted for
dividends, starting from inflation-adjusted major nadirs, through 2008:

1814 6.6%
1858 6.9%
1920 7.1%
1932 7.2%
1942 7.3%
1982 8.1%

Stock returns through 2008, when starting from inflation-adjusted major peaks:

1803 6.2%
1835 6.1%
1906 5.9%
1929 5.6%
1965 4.7%
1999 -1.9%


Apple trees make apples, plum trees make plums ...

On Mar 14, 4:46*pm, Augustine <evan...[at]mailinator.com> wrote:
- quote -

For the record, correcting for inflation (ftp://ftp.bls.gov/pub/
special.requests/cpi/cpiai.txt):

Gold 12/1965: 1.00
Gold 12/2008: 4.14

Or 3.4% per year.

Tortoise wrote:
- quote -

One point of clarification/correction: The US stock market is currently
undervalued by almost 42%, which would require a rally of 70% (adjusted for
dividends and inflation) to return to "fair value."

Strategically, the current global recession is working in America's favor in
that the menacing gallop of China's economy has been slowed to the extent that
it has bought us perhaps an additional 10-20 years (on top of our current lead)
before China has a chance of catching up to us. Add to that the fact that an
economy's growth slows as it matures, America may well remain the leader of the
pack into the latter part of this century ... whoat a cohntry!

Paraphrasing a dictum from someone whose market analysis has taught me much: "A
free market system rewards those products and services which are both useful and
scarce and penalizes those which are not." What our economy needs at present
(and what seems to be in scarce supply at the moment) is clear heads, trust in
what is deserving of trust, and purposeful action. Just as the present mess was
the inevitable lesson of "you reap the foolishness you sow," planting well in
spring time lays the foundation for a decent harvest down the road. Consider
the courage and faith a farmer must have ... year in, year out.

Prost,
Frank

Tortoise <nos...[at]sunshine.com> wrote:
- quote -

This is your guess. Mine is: I will not bet on what short-term (one-
day to ten-years) earnings will do. I think my guess on long-term (15
years or more) earnings will prove more accurate: I expect long-term
earnings to rise, as a fact of economies.

Perhaps we do agree on the conventional wisdom: Do not buy stocks
unless you can stay invested for the long term.

honda.lioness[at]gmail.com wrote:
- quote -

.... 1932-33, 1942-43, 1948-49? I see how you might gain that impression, but
those commas (not dashes) were there for a reason. "Season" here is figurative,
each "season" being comprised of variable stretches of months, including 1-month
"seasons": 3 single months, 1 2-months, 2 3-months, 1 5-months, 1 6-months.
Mid-1948 through mid-1949 might be viewed as one single "season" interrupted by
3 discrete bouts of > 4% performance, but other than that there were no
cross-year stretches. Be that as it may, the main point had nothing to do with
seasonal minutia but was simply: dire long-term performances of <4% real total
return (such as the 43-year period just ended) have been exceptionally rare in
US stock market history -- they occurred less than 1% of the time and were
always followed by real total returns (10 years and out) not less than the stock
market's long-term performance average, and typically substantially better than
that average.

(For the sake of accuracy ... I cited 1943 in error, all months in that year
clocked in above 4% ... oops.)

- quote -

Someone once said, "It's not what they don't know that's dangerous... it's what
they know for sure that just ain't so."

I don't consider earnings at all (past or future) when saying that the current
market is 70% undervalued. Value has nothing to do with price BTW. Indeed, I
don't expect the market to revert to its historical mean until the 2020's or
later. In other words, I think it will remain undervalued for quite some time,
which incidentally will not prevent it from performing quite well over the next
decade.

But to humor your insistence on earnings ... let's consider: the latest SP500
earnings figures show 2008 trailing earnings clocking in at a level which in
nominal terms takes us back to 1987 (bad enough), but in real terms all the way
back to 1948! Current estimates for Q1-09 earnings are 45% below that dismal
result, taking us in real terms back to 1934!! The low point is currently
expected for Q3-09, which in real terms will be an all-time low since earnings
records were kept starting in 1871!!! Did that sink in? Real trailing earnings
are expected this fall to plunge below the lowest levels recorded in the 1800's!
(I don't recall ever having used this many exclamation marks in one paragraph
before.)

Implications of the above: Dec-08 P/E 59.8 (prior all-time high was 46.5 in
2001, which was itself the mark of unparalleled overextension at the time);
current P/E (Mar-09, based on Q1-09 estimates) is 90.7! If you were to assume
share prices later this year will be approximately where they're today, the
trailing P/E will skyrocket this fall to over 200! If instead you think the P/E
will go back to Dec-08 levels by then, the SP500 would plunge below 200.

What then do you expect the earnings figures to tell you about valuations?
Since earnings-based valuation metrics are presently headed from the troposphere
to the stratosphere, it would be more coherent for you to conclude (based on
your emphasis on the significance of earnings) that the market is currently
overvalued like it has never been before, rather than for you to say "it's okay
to buy now." When you're talking about "wild guesses about future earnings,"
you must be hanging your hat on the hope that 2009 earnings will rise sharply
from current estimates, just for the market to be able to keep pace with the
record valuations of late 2008. That's not a reason for optimism, but doubt.

The real problem is in placing too much emphasis on near-term earnings. If
earnings were that critical, there should have been a steeper plunge in stock
prices from the late 1910's through the early 1920's than during the Great
Depression.

Frank

On 2009-03-16, honda.lioness[at]gmail.com <honda.lioness[at]gmail.com> wrote:
- quote -

The amount of "actual risk' in owning stocks, is inversely
proportional to the "risk premium".

The less "risk premium", the more risk, the more risk premium, the
less risk.

(risk premium is the excess of corporate earnings per invested dollar,
compared to return of Treasuries per invested dollar).

Now that risk premium is back to being relatively high, stocks are
becoming safe again.

The longer stocks will stay low, the higher would be the return over
that 15 year timeframe. 15 years is close to when I want to retire
personally.

--
Due to extreme spam originating from Google Groups, and their inattention
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"rick++" <rick303[at]hotmail.com> wrote in message
news:cf57ed18-6518-4256-9c89-bb3a7d370678[at]o36g2000yqh.googlegroups.com...
- quote -

Morgan Stanley China A Share Fund (CAF)
It's up about 40% year to date and I think it has much further to go.
http://www.econbrowser.com/archives/...se_growth.html
They still have a 7% (approx) growth rate and the people are believing in
their markets.
As far as I know, CAF is the only China fund that invests in A shares. All
of the other funds are down year to date but they are starting to rise.

Tortoise <nos...[at]sunshine.com> wrote:
- quote -

ISTM these are not seasons but tend instead towards reflecting a
single season.

I do not think one can talk about the market being undervalued or
overvalued, at this moment in time, without wild guesses about future
earnings. They are particularly prone to being poor guesses because
the credit crisis has reduced transparency.

I think it is okay to buy now, as long as one has a 15+ year timeframe
and can psychologically bear another 30% decline or so in the S&P 500
etc.

Bill Woessner wrote:
- quote -

?? Yahoo adjusts individual stocks and mutual funds for dividends, not indices
such as the SP500 ... but in view of everything else you said, I reckon you knew
that :-)

- quote -

My results vary somewhat from yours (which I suspect may be due to slightly
differing data going into the calculations), but for the sake of staying on
topic -- yes (more or less).

- quote -

Your conclusion is not only correct, but more importantly, it is so for the
right reason :-)

- quote -

Extend your regression to the entire stock market history -- you will find that
your erstwhile assessment (based on the past 43 years) is low-balling the
market's current degree of undervaluation by roughly 20%! The long-term outlook
is even better than you stated :-)

Times when the stock market was similarly undervalued (roughly 2 standard
deviations below the historical mean) were rare: 1865-67, 1920-22, 1941-42,
1947-49, and 1980-82. On two occasions, the market slightly breached the lower
3-standard deviation boundary: 1857, and 1932; those who argue the SP500 may
drop to 500 basically think 2009 will join that exclusive "blood in the streets"
club. I strongly doubt that, but even if that should happen history shows that
the market did not linger at those depths for more than 2 months, each time
followed by a swift 1-standard deviation rally.

To round out the big picture, the upper 2-standard deviation boundary was only
breached two times: 1929, and 1999-2000. This makes it a no-brainer, when
attempting to compare the present market to the Great Depression (if must be),
to line up 1929 not with 2007 but with 1999, which in turn highlights salient
similarities and differences in terms of both prelude and aftermath.

Finally, consider how the current dismal trailing 43-year stock performance
stacks up against the historical record. There have only been 22 months in
history with a 43-year real total return below 4%: 1932, 1933, 1942, 1943,
1948, 1949 (plus the first 3 months of 2009). From these rare historical
seasons of gloom, the future real total return of stocks was decidedly positive.
The lowest levels of subsequent returns were: 10 yrs 7.1%, 20 yrs 9.7%, 30
yrs 6.9%, 40 yrs 6.4%. On average: 10 yrs 14.0%, 20 yrs 12.0%, 30 yrs 9.0%, 40
yrs 7.9%. The highest levels obviously even better than these, but why pile it on.

This is the time to have courage.

Take care,
Frank

Augustine wrote:
- quote -

Or 3.08% per year adjusted for inflation (always be sure to check my
math...).

-Will

william dot trice at ngc dot com

SOUNDS LIKE A BUY SIGNAL TO ME :-)

I guess its competitive entertainment now to discover
the gloomiest economic story.
But that doesnt have much bearing on the best place
to invest at the current moment.

On Mar 14, 4:46*pm, Augustine <evan...[at]mailinator.com> wrote:
- quote -

That's better than crude oil that went from $3.01 in 1965 to $32.94 in
Dec, 2008.

--
Ron

On Mar 14, 8:51*am, Bill Woessner <woess...[at]gmail.com> wrote:
- quote -

Just for kicks:

Gold 12/1965: $35.50
Gold 12/2008: $869.75

Or 7.4% per year.

On Mar 14, 12:32*pm, Igor Chudov <ichu...[at]algebra.com> wrote:
- quote -

Yes, but some people are interested in apples and some people are
interested in oranges. You're only considering the scenario where you
have the money to begin with. What if you started saving for
retirement in 1966? You'd put away some money every month or every 2
weeks or something like that. That's dollar cost averaging, perhaps
not in the strictest sense, but more or less, it is.

- quote -

Just take Shiller's data and simulate dollar cost averaging with it.
In the end, you'll have to solve a transcendental equation. I can
send you a spreadsheet detailing all this, if you like.

- quote -

Regression toward the mean?

--Bill

On 2009-03-14, Bill Woessner <woessner[at]gmail.com> wrote:
- quote -

Which pretty much was the dividend yield.

Note, however, that dividends have always been taxed, so the return to
a taxable investor was considerably less than 3.5%

- quote -

This compares apples to oranges.

If you were to retire in 1966, with one million dollars, and invested
it, you would have almost the same amount of money from capital
appreciation (adjusted for inflation) plus you would get dividends.

Conversely, If you started off with one million dollars in 1966, and
were "dollar cost averaging" that million, investing portions of it
year after year, so that you would have your cash invested by 2009 (a
contrived scenario) your after inflation return would be far below the
return on money fully invested in 1966.

I would also like to know where you got that 4.12% number.

"Dollar cost averaging" means that you were investing small amounts of
money at various points of time, as opposed to investing all money in
1966. This is not at all a valid comparison with market return from
1966.

- quote -

It does not suggest that at all. I cannot see how it could suggest
that.

However, it likely is undervalued, for other reasons, having to do
with price, and not with past returns.

i

- quote -


--
Due to extreme spam originating from Google Groups, and their inattention
to spammers, I and many others block all articles originating
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Igor Chudov <ichu...[at]algebra.com> wrote:
snip; no meaningful dispute
For the reader's reference, Shiller data may be accessed via
http://www.econ.yale.edu/~shiller/data.htm
- quote -

A.k.a "annual return before dividends and after inflation."

- quote -

As I noted, the annual dividend yield on the S&P 500 has averaged
around 3.5% from 1966 to the present.

But also, isn't merely keeping up with inflation a pretty decent
advantage all by itself?

On Mar 13, 6:45*pm, honda.lion...[at]gmail.com wrote:
- quote -

The most obvious problem is that the Dow only includes 30 companies.
I like Shiller's data, but I wish he would adjust the closing prices
for dividends like Yahoo does. Fortunately, it's pretty easy to do,
oneself. Adjusted for inflation AND dividends, I get:

March 1966: $154.68
March 2009: $696.33

That doesn't include dividends for the past 3 months, but I can't
imagine they would make a huge difference. The annualized, real
return is ln(696.33 / 154.68) / 43 = 3.5%

However, that's assuming you only bought in March 1966. If you
practiced dollar-cost-averaging over the past 43 years, your IRR would
be 4.12%. And if you did a least squares fit, your model would have
an interest rate 6.71%. Does that suggest the stock market is
currently undervalued? By as much as 50%?

"All models are wrong, but some are useful." - George Box

--Bill

On 2009-03-13, honda.lioness[at]gmail.com <honda.lioness[at]gmail.com> wrote:
- quote -

Let me see if I understand correctly. The prices rose by 211/31 = 6.8
times. Right?

At the same time, S&P rose by 756/93 = 8.12 times. Right?

Therefore, the after inflation number is that without inflation, S&P
rose by 8.12/6.8 times, or by 19%, and that is from 1966 to 2009.

This gives approximately 0.44% capital appreciation per year after
inflation.

With dividends considered, the picture will be a little prettier, but
not much prettier, perhaps the total after inflation return would be
1-3% per year?

--
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honda.lion...[at]gmail.com wrote:
Shiller and others use the S&P 500. By my
- quote -

Average inflation rate = 4.5%.
Stock return after inflation = about 4%