Today's Market
by Dr Invest

Never have markets appeared so confusing. We are being reassured that the economy has never been stronger, that the economy is bounding toward stabilization and growth. Don't stop investing in stocks yet, they say, because there are still months remaining of a bull run in the market.

It is this reassurance that makes me particularly nervous. Two months ago, I listened to Robert Shiller explain why the P/Es were not that high in relation to stocks. (See wikipedia: Shiller PE / CAPE)  Now, even Robert Shiller is concerned about the future of the "bull run". Here is what he is saying:

Robert Shiller, Yale professor and Nobel prize winnner, is "definitely concerned" about the outlook for stocks based on the cyclically adjusted price-to-earnings ratio (CAPE) he created. At 26, the so-called Shiller PE is currently well above its long-term average of 17 and approaching levels that previously presaged doom for equities. Shiller has plotted CAPE going back to 1881 and notes (with some alarm) it has only been higher than current levels three times: In 1929, 2000 and 2007. "It looks to me like a peak, I would think there are people thinking 'it's gone way up since 2009, it's likely to turn down again.' That's what people might plausibly think."

Shiller is quick to note the CAPE is not a market-timing tool and he remains in the market in his personal account. "We don't know what it's going to do," he says. "Realistically, stocks should be in one's portfolio but maybe lighten up."

Shiller acknowledges that in light of low interest rates on bonds, there is really no other place to put your investments other than stocks, but is worried that we are on the edge of a pull-back. (see the video at: http://finance.yahoo.com/blogs/daily-ticker/-it-looks-like-a-peak---robert-shiller-s-cape-is-waving-the-caution-flag-004753218.html)

RE ACCESSING

Nothing has really changed in the markets. Yesterday, the FED had lowered their estimate of growth for the previous quarter almost 3%.  The final assessment was that the economy had shrunk. Facts are not pointing to a growing economy, but a shrinking economy. Still, Yellen, proposed that the economy would continue slowly trending upward toward the end of the year. Yellen's report was rewarded with the stock market climbing even higher. Is it not exuberance, when stocks continue to advance in the light of a declining market.

ECONOMIC DRAG

John makes $48K annually. He could not afford to pay for a healthcare plan and had chosen to take the chance that he would not get sick or injured over the next several years. After paying all of his bills, John  could see an additional $500 monthly of disposable income to be used in purchasing things he wanted. 

Over the past year, John noticed that rent, gas, food, home insurance, car insurance, and utilities had diminished his disposable income to only $250 monthly. Then came the news of Obamacare. John would have to apply or pay a penalty. With such a low income, John received a subsidy for his health insurance. John would only have to pay $248 monthly for his new Obamacare plan. 

John's new reality was a disposable income of $2 monthly. John could only hope that he would have enough credit to purchase new tires to replace the balding tires now on his car.


This story is about economic drag. Where John once had $500 monthly to spend on whatever his wished, he now has only $2 monthly to spend monthly on whatever he wishes. This is important because manufacturing inventories are on the rise, but there is no consumer spending to decrease these inventories. At some moment in time, companies will need to release employees from employment unless consumer spending increases. 

This kind of economic drag hurts the poor first, then the middle class, who are pulled down into poverty. Real change will require a strong economic recovery, but there are discussions of raising federal taxes on gasoline and diesel fuels. These kind of increases on families will continue to reduce their disposable income. 

POSITIONS

My advice is to stay out of stocks and bonds, remaining in cash over the next six to nine month. Wait till the business cycle turns down, dropping 30 to 40%; then return to securities. If you already have stock positions, put a stop-sell on your stocks at what you deem an acceptable loss, changing your stop-sell as the value of your stock increases.

What is key here is that when the stock market begins a firm move downward, the downturn will occur at a lightening speed. Only the first people to get out of the market will succeed in keeping their gains. And, let me reassure you that in today's computerized trading, other people have the same ideas you do. They too, will be trying to get out of the market. When the market turns to panic, selling your stock so as to keep your returns will be almost impossible. 

CLOSING

What you see in the market is not reality. Zero interest and stimulus is the equivalent to "life support" for the market, removal of this "life support" will result in the immediate death of the patient (our economy). All the economic growth, profits, and current rise in stock values are ARTIFICIAL. I can't imagine myself putting money into an investment that I know is manipulated, so why are you?


(note: the above article is for entertainment purposes only and not to be used in any way as investment advice.)