Earnings-yield on S&P 500 at two decade-high

from ibtimes.com

The earnings yield (EY) on the S&P 500 index is now above 7 percent, which is typically the kind of yield an investors would get from an average junk bond.

EY amounted to 7.09 percent for the S&P 500 as of June 30, 2010 -- the highest quarter-end level in two decades.

This either means that stocks are very cheap (relative to bonds) and might make an attractive buy; or that investors have such a pessimistic view of the economy that they expect earnings growth to slow down over the next few quarters (or even years), given the grim economic backdrop.

Market Gauge - Today's values

S & P 500 Earnings Yield vs. Treasury-Bill Yield

Historically, when the ratio of the T-Bill yield divided by the S&P 500 earnings yield has risen above 1.1 it has been a noteworthy warning that the market was vulnerable to a correction. When this indicator has been below .9 the market has demonstrated a significant upward bias.

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The Upside of Irrationality

In The Upside of Irrationality article, the Investment Advisor author observes "If we rely too heavily on the expectation that people will act rationally, we can end up making mistakes when we design policies and institutions." This is a very thought-provoking article with many good observations that helped connect the psychology to financial behavior.

But is this the problem? It seems that way too many people are taking advantage of this known predictable irrationality for their own gain. Instead of eliminating the conflict of interest, there seems to be a systematic migration to allowing and even encouraging these behaviors. Not only are we moving away from identifiable cash money, everyone - government, corporations, non-profits, financial advisors, kids - is 'generously' spending other people's money (yours and mine).

Is this really the problem or is it just me?

behavioral economics

And where does paternalism end and manipulation begin? Who gets to determine what is the social good of these choices offered? Just asking... :o)

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The problem isn't the idea of universal health care - pretty much everyone agrees that it is shameful that a country that is willing to spend so much money on lavish lifestyles and military deployment beyond its own borders can still have millions of citizens without any health care at any cost. Many Americans think that systems like those in the UK and Canada may not be perfect, but everyone is reasonably well served and nobody goes without access to basic health care.

Some Americans get health care that is the best in the world, and far more health care than they actually want or need. Many people have minimal coverage in case of a catastrophic illness or injury but don't get routine checkups because the out-of-pocket for all the tests and diagnostics and preventative medications are too expensive. Still others depend on hospital emergency services as their only source of medical care.

Many Americans believe that the Obama health care reform will only make matters worse for most people. The level of government regulation, intervention and oversight are major concerns for the libertarians AND the paternalists among us.

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There is so much meddling by governments - federal, state and local, in all areas of the US economy that it is difficult to see how a genuinely free market economy would handle these social and cultural issues.

Health care is a great example. "Willingness to trust the private market" - well, no not really. Government regulation has played a large but largely un-noticed role in defining what health care and coverage is available. Only with government support could the few primary providers control most health care spending by individuals, companies and government.

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As a nutritionist who has been learning about libertarianism, the Austrian school and behavioral economics, this is a really complex problem. Do you solve the symptoms - obesity (big difficult problem) or try to get to the root causes (historic, regulatory and cultural)?

The US used to be about WIN-WIN - everyone was better off if everyone was better off. But the US sugar beet farmers were able to get legislation that kept imported sugar prices high. Then the food industry needed to find cheaper sweeteners and High Fructose Corn Syrup was invented - great for agra business and corn farmers in particular. Now lots of "empty" calories in attractive packaging with an infinite shelf-life cost next to nothing while real food (with actual nutritional value) is expensive and often not available in neighborhoods where obesity is most prevalent.

So where to start to fix this problem...

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interesting reference to Behavioral Economics as it relates to training and education ...

Behavioral Economics is about slight of hand

Behavioral Economics is actually the marriage of economics with psychology and sociology. Some programs use it to “improve the accuracy and empirical reach of economic theory“. One of the main premises of behavioral economics is that humans have bounded rationality – which means the rationality of individuals is dependent on the information they have, the cognitive limitations of their minds, and the finite amount of time they have to make decisions (via wikipedia). This is a field with decades of research to back it up. Maybe a bit complicated to understand and explain, but deserving of a better description than a comparison to a magic trick.

... We’re at a time when the roles that would traditionally defend us against information imposters are being eliminated by the move to digital. What if defense of truth and logic is one of our new responsibilities as elearning and social learning professionals?

http://gminks.edublogs.org/2010/03/27/lets-get-real-about-analysis-starting-with-the-last-ls2010-keynote/

reference to the link above

...Same with "behavioral economics is about slight of hand." If this were true, we'd never know how long to make left-turn lanes (or even whether to make them at all), stores would always run out of stock, and restaurants would have no reason to close between midnight and 6:00 a.m.

http://www.downes.ca/cgi-bin/page.cgi?post=52105

Growth is everything

German economic recovery falters

Germany's recovery from recession faltered in the final quarter of 2009, according to preliminary figures released on Friday.
The German economy failed to grow at all in the last three months of the year, with GDP unchanged compared with the previous quarter.

This preoccupation with growth is part of the problem. Growth at any cost is leading to many of the other social problems that we are having to address. Prompting consumption and borrowing to ensure demand for consumer goods and services is having adverse effects on families and communities. For example, cheap "convenience" food is leading to obesity, poor health and decreases in quality of life and life expectancy. Why on earth is all this energy going into creating so much stuff that is so harmful to so many? Why does everyone seem to think that this is a desirable outcome?
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financial sector

New activity - tracking what is going on in the financial sector. Big players - Bank of America, Sun Trust (regional), BNS (Cdn) and other ETFs for comparison - gold miners, financial sector index, NASDAQ, S&P, government bonds - short and TIPS, and bear fund.

BAC BK OF AMERICA CP 17.33 ind leadr
BNS BANK OF NOVA SCOTIA 44.86 cdn ind leadr
GDX MKT VECT GOLD MNRS 48.69 gold miners
QQQQ PowerShares Exchange-Traded Fun 42.24 nasdaq
SHY ISHARES BRCLY 1-3YR 84.00 short govt 1-3 yr
SPY S&P DEP RECEIPTS 106.61 s&p
STI SUNTRUST BANKS 22.33 regional
TBT PROSHARES TRUST 44.03 bear
TIP ISHARES BARCLAYS TIP 103.32 us govt tips
XLF FINANCIAL SEL SPDR 15.11 financial ind

TBT PROSHARES TRUST - twice the inverse of the daily performance of the Barclays Capital 20+ Year U.S. Treasury index - is this staying roughly in line with what is happening on the bull side. Looking for anomalies in the bull/bear offsets.

BNS BANK OF NOVA SCOTIA - is a big Canadian bank following roughly the same path as the US banks?

All but TBT above both 50d and 200d moving averages.
At or near 52-wk top : BNS , GDX , QQQQ , SPY , TIP

Discussion - the stock market and the financial sector, in particular, are going great guns while there is a total disconnect from the real world where foreclosures, unemployment, out-of-control healthcare costs and government spending are serious concerns for Joe and Jane.

What would Jesse Livermore do? 3 x 20% of total as tests to confirm that trend is going correct direction, acquire remaining 40% then wait for "signal" to exit position. Limit loss to 10%. Allow profit to run.
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week of 5oct09

Reading this week included John Hussman's review of the situation - unemployment, low overtime and temporary work, coming mortgage defaults with the reminder to deal with the present actual information, rather than some every-so-likely future scenario. "How utterly myopic investors can be when there's an uptrend to be played."

Also, to outperform overtime may include some smaller periodic losses - they aren't all going to be winners. This is included in the Jesse Livermore biography as well. Livermore did careful analysis of every situation. With a few notable exceptions that wiped him out, he limited his losses to 10% of his investment. Livermore describes some strategies for entry, profit-taking and exit - things that need further investigation.

First it was China wanting the dollar to be replaced by a new global reserve currency run by the International Monetary Fund. Though denying it, the Gulf States appear to be suggesting a similar move.

I'm reading some of the long list of blogs to determine who to follow as I look for insights, advice and new things to think about so there is a more manageable number.

Some questions that have come up...

• When and how do foreclosures actually show up on banks' balance sheets?
• Signs of intelligent life - is anyone worried about this? Who recognizes the potential dangers and when?
  
• What is Paul Volker saying about all this?
• overbought condition

Reality check - what's normal

• Analysts are forecasting that profit margins will reach almost 8 percent next year and then 9 percent by 2011, far above the long-term average of about 6 percent
• Australian interest rates were raised from 3% to 3.25% and rates could return to "a more normal 5%" in the next year or two.

Indicators

• Hussman Strategic Total Return Fund HSTRX . . 12.22
• NASDAQ Composite . . 2,073.01
• US 10 Yr Bond(%) . . 3.2240%
• Gold . . 1,016.20

Although I don't act on "tips" it is fun to record them and check back periodically

• exploration and production company Anadarko Petroleum (NYSE: APC, $59.73)

Happier and how to get it...

I saw a reference to Credit.com and their personal advice information. The site includes some credit blogs. First up... not what I was expecting but still good advice and made me smile.

A review of a review of the book Happier by Tal Ben-Shahar. Lots of really good suggestions here just in the reviews.

instead of asking, “Should I be happy now or in the future?” she should ask, “How can I be happy now and in the future?”

My personal favorite is

Simplify.. prioritizing, choosing activities that we really, really want to do, while letting go of others.” As Derek Sivers recently wrote on his blog, if an opportunity doesn’t make you say “hell yeah!”, you’re better off saying “no”.
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Recession barely dents 'eco-debt'

Edit: This is just noise because the amounts are so small in the grand scheme of global commerce, but produces great numbers to "report" to make the author's point (and get the public worked up). SO suggests there are simple explanations that make sense in context - hotel chains buy all their toilet paper for Europe from a single supplier...

There are some things that just make no sense. These are listed in an article about eco-debit - this is a new term that I hadn't seen before.

For example, the report says the UK imports 22,000 tonnes of potatoes from Egypt and exports 27,000 tonnes back the other way.

While 5,000 tonnes of toilet paper heads to Germany from the UK, more than 4,000 tonnes is imported back.

Why on earth would Germans want British toilet paper? Shipping flowers and strawberries from where they grow to where they are purchased is extravagant, but this is just nuts.
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indicators revisited

May 17, 2009

• article in SF Chron about +$1 million houses on market for long periods (14 months inventory), short sales and foreclosures in high-end real estate - "a buyers' agent's market", houses under $500K selling well (2 months inventory)
  
• many of the shops in downtown Tiburon are vacant - former high-end women's clothing, antiques and home decorating items
  
• guy telling hair stylist that he doesn't think Obama has lied to him yet, but he thinks there have been some fibs and less than truthful statements
• yacht club now offers full and half portions of some dishes including Cobb salad (Half $8) - my personal favorite
• chatting with a contractor who talked about having to lower his hourly rate from $65 to $45 to stay competitive with the influx of contractors from the South Bay.
• talk about health care reform but no one expects any resolution or improvement
• a recent college grad interviewed about her job search said she wasn't having any success finding a job in her chosen field - entertainment
  

Watch this

Perhaps we will muddle through, but here are somethings that I plan to keep an eye on...

• houses for sale, time on market, empty houses not on market - shadow market, as described by a local realtor - held back so market isn't flooded and prices stay
• going out of business - doggie daycare, specialized personal services
• adult children and their kids, moving in with Mom and Dad
  
• tariffs, currency restrictions
• teflon President - any measures proposed are "the right thing to do"
  
• government financing for corporation with unions
• availability / cost of other corporate funding
• return on 10-yr Treasuries
  
• smaller, cheaper restaurant portions

not your usual financial crisis

I was listening to NPR's Fresh Air host Terry Gross interview Elizabeth Warren. They talked at length about the bailouts, Warren's committee to review TARP disbursements, and the coming round of $2 trillion or so in bailouts for which there is no oversight plan.

Terry asked her about credit card debit. Elizabeth reminded listeners that these were very unusual economic times, unlike any other when a major credit card company - American Express is PAYING customers to close their accounts. What kind of business model is that? Pretty shrewd, apparently.

As she went on to say, either customers could pay, and American Express were losing a good customer and paying to do so. Or, this was a bad customer and American Express was politely but firmly encouraging the customer who couldn't and wouldn't pay to move their account balance elsewhere. Other banks are do this by other means - raising the interest rate on doubtful accounts from 9% to 29% for example.

Who will be the winners after the dust settles? It depends on the regulations that are put in place. Warren hopes that it would not allow for private profits and taxpayer funding of financial loss as is presently the case.

These are interesting times in which we live ...
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learning delayed gratification

Is there a link between the skills associated with accepting delayed gratification and basic money management?

I have been reading some personal money management education and advice sites. All seem to suggest that this isn't very hard. You just have to realize that you need to set aside money for the future and just do it. Yes, there are suggestions like once you pay off the car loan, put the car payment money into your savings account. Others remind you "Don't touch your savings" - it all seems so easy.

Then why do most people have such difficulty with this simple program?

Are there measures for skill in delaying gratification? How well do most people do? Are good savers better at this? Are rich people better players than poor people? Does education or personality type have an influence on delayed gratification skills?

Are there ways to learn these skills? Can they be taught to adults?

I'm willing to bet that most adults today do not possess these skills to any great extent. That's why the economy is such a mess. Many people may have had these skills at some time, but they have been discouraged from using them. Perhaps a great video game or a high profile reality show will generate a lot of interest so everyone will run out to seek their fame and fortune as the next "Top Delayed Gratifier".

In the mean time, I'm looking for a way to measure delayed gratification skills and a game or training program to develop them in adults.
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