Klarman warns of impending asset price bubble

When the markets reverse, everything investors thought they knew will be turned upside down and inside out. ‘Buy the dips’ will be replaced with ‘what was I thinking?’ . . .  Anyone who is poorly positioned and ill-prepared will find there’s a long way to fall. Few, if any, will escape unscathed.”
 
“Any year in which the S&P 500 jumps 32 per cent and the Nasdaq 40 per cent while corporate earnings barely increase should be a cause for concern, not for further exuberance,” Mr Klarman wrote. The Boston-based investor was recently ranked as the fourth best performing hedge fund manager of all time for generating $21.5bn in returns over its history, coming behind George Soros, Ray Dalio and John Paulson.

http://www.ft.com/cms/s/0/6dd806e2-a627-11e3-9818-00144feab7de.html#ixzz2vZBDItDj

Frances Horodelski says...

For those who are worried about equity market valuations (just do an internet search for "stock market bubble" and you'll get the idea), a review from Factset puts valuation into perspective. Based on the history, the S&P 500 is modestly above the 5 year (13.2x) and 10 year (13.8x) P/E averages. However, currently at 15.4x, it remains below the 16x on a 15 year average basis and well below the 25x at the 2000 peak. Keep in mind however, notes Factset, that the earnings used in today's P/E is based on record levels of earnings for quarter of 2013 and the next few quarters expectations are higher than that record.

Another bubble worry is it seems that everyone seems to be short VIX (expecting VIX to fall and stock to rise) although some of that may be related to product (i.e. VIX notes and ETNs rather than the index itself). According to MKM Partners, volatility events have occurred almost exactly at two month intervals over the past 15 months. 

We're five weeks away from the last event and early April could be the next target - so with the short VIX position building and the level falling and stocks rising, it might not be too early to pay attention to protection.  

Having said that, MKM Partners derivatives strategist notes investors should take the opportunity presented in lagging sectors such as financials, autos and industrials. While we're talking about financials, in the U.S. bank stress tests are to be released on March 20 with the comprehensive capital analysis released on the 26. This last analysis will go to the heart of banks such as Citigroup and Bank of America being able to issue dividends.

 www.bnn.ca


SHIRLEY LEUNG Boston
 
 Not All Believe Markets Are About To Crash...

At Tuesday’s close, the Dow was just shy of 16,400, following a year in which it grew by nearly 30 percent. That means you didn’t have to be legendary investor Peter Lynch to figure how to make money in the market.

Put it another way, if you kept investing in the biggest US stocks near the October 2007 market peak through the end of February, $10,000 would have swelled to over $13,800, including dividends, according to a Morningstar analysis of the S&P 500. If you pulled out near the bottom, you would have lost close to $5,000.

Despite eye-popping returns, a lot of cash is still sitting on the sidelines in safe CDs, money markets, and probably under a lot of mattresses. The memories of two big crashes less 10 years apart are seared into our 401(k) portfolios.

That’s one of the reasons some Wall Street gurus don’t think we’re heading into a bubble — the point at which good times suddenly implode. Sure, corporate profits are expected to rise, interest rates remain low, and the nation’s economy is growing, but droves of mom and pop investors have yet to jump into stocks, prompting a new round of buying that would push healthy stock prices even higher.

“Because it is such an unloved bull market,” said Sam Stovall, chief equity strategist at S&P Capital IQ, “the market still has room to move.”

Read Full Article

The market is up 170% since 2009, but are you?

It’s a big birthday for the bulls. But is that really reason to celebrate?

On March 9, 2009, the S&P 500 plummeted to a Great Recession low of 676. Since then, the index has enjoyed a robust run — up more than 170%. But before we cheer the bull market’s fifth anniversary, economists and consumer experts remind us that stock prices are just one measure of prosperity. And the problems that have plagued the U.S. in recent years — declining household income, surging prices for many key goods and services, low interest rates for savings — remain very much in place, they say.

Add to that the fact that many investors started losing faith in recent years — and went to cash at the very time the S&P 500 began its bullish run in 2009 — and an equally scary reality emerges: The market’s average may not reflect what many Americans are seeing in their monthly portfolio statements.

The bottom line: We’re still suffering a crisis in confidence — literally. The Consumer Confidence Index, which translates consumer views on the economy into a numerical formula, remains well off its historic highs. Today, the index stands at 80.7. By contrast, during the peak of the dotcom boom in 2000, the index registered as high as 144.7.

The news is not all bad, of course. The unemployment rate, currently at 6.7%, is well below its past-decade high of 10% in October 2009. And while consumer prices have climbed since October 2007, they have done so at a fairly modest clip. In the past year, for example, prices have increased by 1.6%, according to the Bureau of Labor Statistics.

Plus, many savers have seen respectable increases in their retirement portfolios over the past five years. Vanguard, for example, reports that the average 401(k) account balance rose from $56,000 in 2008 to $102,000 in 2013. And even factoring in contributions, Vanguard research analyst Jean Young reports that one study of 401(k) participants, conducted by the firm, showed an average annual return rate of 12.7% over the same five-year period. Granted, such a yield is nothing to write home about — by comparison, the Dow was up at least 20% in five of the 10 years during the ’90s — but Young adds that it’s a solid figure given the low inflation over the period.

Still, many financial experts say that there’s a reason why the good news doesn’t quite register in the minds of consumers and investors. Call it the Great Disconnect that has followed in the wake of the Great Recession. And it’s a story that experts say can be told in one sobering statistic after another.

Begin with income. On the one hand, wages have basically kept pace with inflation in recent years. But on the other, unemployment and underemployment have affected overall household income to the point that there’s been about a 6% dip since March 2009 to the current median figure of $52,297 (after adjusting for inflation), according to Sentier Research, which tracks income. “It’s not a pretty picture,” says Sentier principal John Coder.

And what about expenses? While the Bureau of Labor Statistics may say prices are in check, some consumer watchdogs say what applies to overall prices may not apply to some key expense categories.

Consider the cost of fuel: A gallon of gas has gone from 2.40 in 2009 to $3.57 in 2013, according to the U.S. Energy Information Administration. Or medical care: The employee’s share of annual premiums for family coverage has increased from $2,412 in 2003 to $4,565 in 2013, according to the Kaiser Family Foundation. Or even a pound of bacon: In just the past two years, the price has increased by 21% to $5.56.

But what about stock market returns offsetting some of this economic stress? The relatively good news on the 401(k) side — at least as reported by Vanguard — does not necessarily jibe with the broader reality that many financial advisers say they’re seeing. They say they’re meeting with many first-time clients who have withdrawn large sums from IRA or traditional brokerage accounts during the past few years and have paid the price in returns as a result. “Almost everyone coming in to me today has tons of cash,” says Lee Munson, founder of Portfolio LLC, a New Mexico-based investment firm.

And there’s some data to back up those adviser claims: In the five-year period through January 2014, the Investment Company Institute reports, outflows from equity mutual funds outpaced inflows in 30 out of the 60 months — meaning money was being withdrawn from the market at a fairly significant rate.

Of course, at one time, “going to cash” wasn’t so bad. In fact, it’s the way a generation of retirees saw themselves through their golden years, living off CDs and other fixed-income investments that paid respectable yields. But therein lies what many financial experts say is the greatest cause for concern over the past several years. A little more than a decade ago, the interest rate on a five-year CD was well above 5%, according to Bankrate.com; today, it’s at .8%.

It’s a sea change that has shaken the traditional model of retirement planning, says Greg McBride, senior financial analyst of Bankrate.com. “The sharp reversal in interest rates has dramatically cut the buying power of retirees and anyone else dependent on a fixed income,” he says.

Still, McBride says that if someone saving for retirement was smart enough to stick with stocks through the past five years, they may be OK, other economic factors aside. But McBride is just not sure how many investors had the wisdom to do so. “The train may be back at the top of the mountain,” says McBride, “but you’re not there unless you stayed on the train.”

Charles Passy covers personal finance, consumer spending and all things food and drink for MarketWatch