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

Will Markets Move Higher it certainly looks like it...Up 7% since Feb 4 correction.

By: Bob Pisani | CNBC "On-Air Stocks" Editor

A classic relief rally...7-to-1 advancing-to-declining stocks. Cyclicals advancing along with defensive names. Eight of the 10 S&P sectors up more than one percent.Volatility Index (VIX) reverses and drops from 16 to 14 and change, back to its recent trading range.

We are once again at historic intraday highs in the S&P 500, the S&P MidCap, and the small-cap Russell 2000.

When the market moves up this quickly...particularly when it hits new highs...it forces people to act and get in.

There is heavy volume in the Russell 2000 ETF (IWM)...midway through the day, it has already done a full day's volume, and that is significant. This is a huge hedging vehicle for active traders.

What's up? It was always unclear what the scope of the military action in the Ukraine would be. It still is, but an outright invasion of the whole country--with tanks rolling into Kiev--now looks very unlikely. A lot of traders assumed the tension in the Ukraine would go on longer. It still isn't over, but there is certainly a sense that there has been a de-escalation of sorts.

Why? As I pointed out in my TraderTalk note this morning, Putin is likely reacting to economic issues over geopolitical issues. "The economic burden that it can impose on Russia is tremendous," one international trader said to me. "Putin's a smart guy, and he knows his fragile government cannot withstand that economic hit (which gives rise to civil unrest, and often times, revolution) and so he will come quickly to the table."

If this story stays relatively quiet, we will quickly shift to Friday's February Jobs report. Everyone knows the survey week was a bad weather week, so a poor payroll number will likely be discarded quickly, even though it would be the third one in a row.

A stronger report would encourage risk-on.

The market is now up more than seven percent since the February 5th low.

Should I pay attention to market forecasts and predictions? Should I act on them?

I recently talked with a 62-year-old woman who put her $1.8 million inheritance into gold companies based on the advice of a newsletter adviser. That money is now worth less than $400,000.

As it turned out, the "adviser" was actually a con artist. In return for his recommendations, the gold companies gave him options to buy their stock for about 50 cents on the dollar. His newsletter created new demand for the shares, and that let him (and executives in the companies) sell shares for quick, risk-free profits.

As you can probably guess, I don't make market forecasts or predictions. And I don't make recommendations based on what I (or anybody else, for that matter) think is or isn't going to happen in the next month or the next year. All of my recommendations are based on the best historical data I can find from some of the smartest academics in the industry.

My recommendations to investors have not changed substantially for nearly 20 years. They are not based on predictions or current trends. On the contrary, they are based on long-term performance and rigorous academic research.

Therefore, I cannot tell you what is likely to happen this year.

However, if you want to know how I think you should invest right now, I've made it easy to find my recommendations for Vanguard funds and forcommission-free ETFs .

If you care to hear my views on 2013 and 2014,check out my podcast .

Investors have to make many important decisions, among them: Should I pay attention to market forecasts and predictions? Should I act on them?

I believe the answer is simple: No!

Forecasts and predictions are valuable because they show us how easy it is to be wrong. As John Kenneth Galbraith said, "The only function of economic forecasting is to make astrology look respectable."

We just finished a year in which the U.S. stock market turned in its best performance since 1997. I think you would have to agree that fact is important to investors. Surely, the best minds in the business would have seen this coming a year ago, right?

Unfortunately, in many cases the answer was no.

In January 2013 the consensus was that the market in 2013 would be positive, though very few people were predicting a runaway success. Vanguard's best guess was a gain of 6% or 7%.

A year ago, Mario Gabelli said stocks in 2013 would be up by no more than 5%. Investors who took this forecast to heart may have missed all or part of the year's actual gains of 30% to 40% (depending on your choice of benchmark index).

Also a year ago, the time-honored historical record based on presidential terms (2013 was the first year of Barack Obama's second one) indicated a market gain of less than 6% would be normal. That didn't happen, of course. (Incidentally, historically the second year of a presidential term has been worst in the market, the third year the best.)

Last week, David Weidner identified the five worst predictions from a year ago:

1. Jim Rogers, co-founder of the Quantum Fund, predicted an economy so crippled by the Federal Reserve that it would turn into a depression. His prescription: Sell stocks and buy commodities. That turned out to be bad advice. According to Morningstar, the average long-only commodity exchange-traded fund lost over 15%. Managed futures funds made about 1% for the year.

2. Adam Parker, equity strategist for Morgan Stanley, said the best 2013 market scenario he could imagine would be gains in the low single-digit range. His advice a year ago: Hold on to cash and seek dividends. Last year, U.S. stocks paid dividends in the neighborhood of 2%, while cash reserves paid next to nothing. Dividend stock funds did very well, but not because of the dividends; almost all their performance came from capital appreciation.

3. Last February, hedge fund manager Doug Kass, a columnist and president of a firm that specializes in alternative investments (other than stocks, bonds and cash), said he was "as bearish on stocks as I have been in some time."

And what was the fate of alternate investments last year? Here are a few examples: Gold funds lost more than 40%. Gold itself lost 28%. Currency funds gained an average of 0.5%. Bear funds had average losses of 34%.

4. Another hedge-fund manager, Ray Dalio of Bridgewater Associates, said the economy was running out of steam and stocks had little room to grow.

5. Swiss economist Marc Faber steered his followers (and presumably his own assets) clear of stock-market risk last year, saying his priority had shifted to preserving the gains he had made in 2010 through 2012 — when the Standard & Poor's 500 Index was up 14.8 %. It's always nice to take profits (except when you have to pay the tax). But Faber's followers left much bigger profits on the table last year.

Richard Buck contributed to this article.