The Unknown Ideal

The S&P 500 Stock Index today touched 4 year highs, and the high end of what I would call "fair value" level (in terms of its price-to-earnings ratio). And Standard and Poors announced a little good news for shareholders: an increase in the indicated dividend rate for the index.

No need to get too excited just yet, as this represents, at today's level for the 500, an increase in yield of about 10 basis points, from 1.75% to 1.85%.

Still, not to sneeze at it - every bit of yield helps. But I'll continue to try to goose my state-side stock dividend yields with fair helpings of DVY, the Dow Jones Select Dividend Index Fund, at least until I get a good look at Vanguard's forthcoming exchange -traded fund, the Vanguard Dividend Appreciation Index Fund, which I assume will have a lower expense ratio than DVY's 0.40%.

What profiteth it a man to gain in yield and lose in fund expenses?

Posted by The Unknown at 2:02 PM | Permalink

Daniel Altman lends a hand in Why Do Stocks Pay So Much More Than Bonds?

excerpt:

Think about the two types of securities in terms of supply and demand. The market for safe government bonds includes investors who can't buy stocks at all: foreign central banks, other government agencies, some institutional money managers and certain kinds of trusts. Moreover, financial planners may be too eager for their clients to buy safe government bonds. If their paychecks depended solely on whether their clients made or lost money, they might try to avoid losses at all costs.

In other words, it may just be ridiculously easy to raise money for bonds. Or investors' expectations of stock returns may be irrationally low, focused more on crashes than booms. Either way, the equity risk premium wouldn't explain the entire gap in returns.

Yet many financial economists believe that the equity risk premium has been dropping in recent times. "Over the last 20 or 30 years there have been dramatic changes in the financial markets," said John C. Heaton, a professor of finance at the University of Chicago. "Investors have become just more comfortable with the stock market. Part of that is education. The other thing is sort of a classic finance effect, which is that the level of diversification that investors have available to them has increased."

Posted by The Unknown at 10:29 AM | Permalink

Pensions & Investments had a dopey editorial in their January 9th issue lamenting the failure of Bush's idiotic and costly PR campaign to trash Social Security. Actuary David Langer calls the editors on their crap in a February 20 letter::

The truth is [Bush] exercised poor judgement in attempting to substitute an iffy privatization program for the well-established Social Security program. By doing so, he arbitrarily dismissed the positive experience of over 150 million workers and 47 million beneficiaries . . .

You complain, "Most opponents proposed no solution to the looming funding problems of the system." The widely published conclusion of my private actuarial studies is that there are no such problems and therefore nothing needs to be solved. My findings noted the trustees' projections in their reports for each of the years for 1992 to 2001 grossly understated actual 2002 assets and in their 1983 to 2005 reports their asset projections to the same future year (such as 2030) were not as close as one would expect. These projection comparisons raise questions about the credibility of their estimates.

The trustees, who are largely hostile to Social Security (a strange posture for a trustee), control the actuarial output in their reports, and it appears they "cooked" the 2% deficits --- if done slowly, this is easily unobserved.

P&I's editorial page cud chewers, like the Wall Street Journal's Bushbotic pontificators, have a regrettable tendency to ignore their own rag's good reporting (for instance an April 4th report on Robert Shiller's dissection of the Bush privatization scheme as a federalized margin-loan ripoff that would ensure huge deficits in the program) in the service of their infantile, misguided, and predigested pro-Bush opinions.

Posted by The Unknown at 7:34 PM | Permalink | Comments (1)

Poor Merrill Lynch. Seems the judge who kept dismissing investor suits against them for trotting out the likes of Henry Blodget to tout stocks that their investment banking side had heavy interest in died, forcing Merrill to negoitiate a $164 million settlement to close out 23 remaining suits.

Don't you worry about Merrill, though. According to their spokesman the settlement ``doesn't change the fact that it was a record quarter and a record year.'' That's the spirit!

As for Blodget, well he's holding forth over at Slate, still reportedly getting his feelings hurt by the occasional nasty email message, and offering such helpful advice as this:

"when a Wall Street analyst rates a stock "Buy," is he or she advising you to buy it? Actually, no. In most cases, a "Buy" rating—or, for that matter, a "Sell," "Hold," "Outperform," "Accumulate," "Avoid," "A," "D," or other term—is not intended to advise you, a specific investor with specific goals, circumstances, and requirements, to do anything."

Posted by The Unknown at 10:05 AM | Permalink

Charles Biderman's crew over at TrimTabs has interesting news for stock market longs:

"The build-up of cash in M2 savings and large-denomination CDs since 2003 and the recent slowing of the real estate market are bullish for U.S. equities," adds Schnapp. During the first four weeks of January, TrimTabs Savings and Investment Flow totaled $75 billion, which was 82% higher than the total during January 2005.

"We have long tracked the Federal Reserve's money supply data, particularly M2 savings," said Charles Biderman, Chief Executive Officer of TrimTabs Investment Research. "While this data is useful over the long-term, its short-term volatility limits its value. We've developed TrimTabs Savings and Investment Flow to measure consumer cash more fully."

Posted by The Unknown at 6:18 PM | Permalink

Wolfie throws his kibbles 'n' bits in with the money wonks at the Investment Company Institute, the Employee Benefits Research Institute, and the spreadsheet jockeys at Putnam. To get anything out of that 401k, you've got to put something into it.

"My foremost advice to you is to put as much as you possibly can into your master's retirement plan/401K, up to the company's match (but not over the match! say "no" to that!). Or you can approach financial security like me, Wolfie, and find someone else to provide you with food, water and a cushion to sleep on. Good luck, Reader! Namaste!"

No doubt his advice on not exceeding the match serves retirement tax-diversification purposes: go beyond the 401k and chip in to that Roth IRA - no taxes on the Roth when you retire and start withdrawals. Tear the roof off the mothersucker!

We wait with 'bated dog breath for the next installment of The Wolfie Report. More good advice than a Psycho Suze/Dr. Phil mashup with less than 10% of the insanity, and more than 20 times the beauty and trashy celebrity magazines. Write soon, Wolfie, when you get done chillin' in the shack with Sheila E, Jazzy B, and Spoonie G, you little Metropolitician!

Posted by The Unknown at 7:22 PM | Permalink

Posted by The Unknown at 7:07 PM | Permalink

My reader may get tired of the repeated references to Burton Malkiel, Jeremy Siegel, and Robert Shiller, but reading each of these guys fills the foul rag and bone shop of my heart with exuberance, sometimes even the rational kind.

Tonight's tale of Shiller comes from a January 14 story in India's Economic Times wherein J. Bradford Delong revisits Shiller's 1996 prediction that the S&P 500 would be a stinker for returns for the decade to come.

Shiller’s arguments were compelling. They persuaded Alan Greenspan to give his famous “irrational exuberance” speech at the American Enterprise Institute in December 1996. They certainly convinced me, too.But Shiller was wrong. Unless the American stock market collapses before the end of January, the past decade will have seen it offer returns that are slightly higher than the historical averages — and much, much greater than zero. Those who invested and reinvested their money in America’s stock market over the past decade have nearly doubled it, even after taking account of inflation.

Not that Shiller's work is discredited by this failure to predict positive, if substandard, returns, as DeLong is good enough to note; but it's fun to see a guy who has the habit of denouncing the theories and ideas of even some of his most reasonable colleagues as "the greatest disaster in the history of finance," (Shiller's CNBC-ready take on both Burton Malkiel's terrific A Random Walk Down Wall Street and the Glassman/Hassett stinker Dow 36,000) get held to account for some of his own predictions.

What is Shiller saying now? He's still saying the US stock market is overvalued, on the basis of a price-to-earnings ratio for the S&P 500 that uses 10-year trailing "smoothed" earnings as its denominator (he justifies his use of this rather arcane P/E by claiming that Benjamin Graham used such a denominator - not too terribly scientific, but okay, Bob, economics isn't too terribly scientific either). And he's still warning of consequences of inflated real estate prices that he highlighted in the second edition of his enjoyable Irrational Exuberance.

Posted by The Unknown at 5:24 PM | Permalink

So that guy Mark Hulbert was saying the other day that Ford Equity Research thinks that the darned old US stock market is overvalued, based on Ford's Price/Intrinsic Value calculations.

P/E ratios for the S&P 500 certainly do tell a different story. In the valuation spreadsheet, we see that stock price-to-earnings ratios are at or below their historical averages across a host of earnings metrics. Borrowing a page from the old Fed Model, we also see that the 5.86% "earnings yield" of the market is well above the 4.54% yield for the 10-year Treasury Note and that it even beats the composite rate for 10-year AAA-rated corporate bonds.

Perhaps some day I will see the guts of the "Intrinsic Value" model and will be enlightened, but since I am a traditional stock investor who is buying shares of the future earnings of these companies, I will settle for some nasty old P/E ratios, which are now showing the overall market spot on fair value, if not undervalued as the Siegel and Yardeni camps insist.

Posted by The Unknown at 1:56 PM | Permalink

World News Australia reports The White House will boost defence and homeland security spending, while cutting many social programs, if its proposed budget, of US$2.77 trillion (A$3.74 trillion) – the biggest spending proposal in American history - is approved.

President George W Bush's overall budget for the 2007 fiscal year, starting October 1, represents a rise of about 2.2 percent in spending from this fiscal year.

Cutting past the bone on domestic programs, letting our transportation infrastructure crumble further, and savaging what's left of health care funding. How charming.

And junk like $10 billion annually down the Missile Defense rathole continues apace.

Posted by The Unknown at 12:30 PM | Permalink

Paul Farrell at Marketwatch likes what he sees in Mark Hebner's new lavishly illustrated coffee-table book Index Funds, which also comes in a virtual edition.

Among the lessons that Farrell highlights from the book is the old Malkielian maxim, " indexing and simple asset allocation are the best way to win."

Something to browse and slosh your latte on while waiting for the next edition of A Random Walk Down Wall Street, which is due late this year, and which promises new chapters on behavioral finance.

Posted by The Unknown at 10:24 AM | Permalink