Yale vs. Penn: Where are stocks headed? – MarketWatch 08-22-14

Salient to Investors:

  • Robert Shiller at Yale said stocks and bonds are highly priced and may be joined by real estate.
  • Jeremy Siegel at Wharton expects the bull market to continue, possibly reaching Dow 18,000 or higher by the end of 2014. Siegel said bull markets climb the wall of worry in a world of uncertainty, and sells when there is no uncertainty.
  • Mitch Tuchman at Rebalance IRA said long-term investors are served by declining markets because steady buying during down cycles is a great way to build wealth over decades – a balanced, low-cost portfolio does not require you to guess correctly the direction of any investment.

Read the full article at http://www.marketwatch.com/story/yale-vs-penn-where-are-stocks-headed-2014-08-22

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Siegel: Dow Heading to 18K, Worry Good for Markets – Bloomberg 01-29-14

Salient to Investors:

Jeremy Siegel at Wharton said:

No bull market rises in a straight line so this is a correction only and typical of a market climbing a wall of worry. Dow headed to 18000 by year-end.

Fair market value is $18000 as the S&P 500 has sold for an average of 16.5-17 times earnings over the past 60 years  but if you take out the period of double interest rates the average P/E has been 18-19, or 10 % higher than today. Analysts are expecting an 8-10% earnings increase so that would be a bonus.

Disappointed that the Fed did not hint that if it sees continued weakness it might slow or stop the tapering temporarily.

Federal minimum wage increase to $10.10 is not a good idea but would not be a disaster and won’t change his forecasts but does not expect it to pass in this an election year. US is best jobs market in world and still creates more jobs than anyone in the world. Only one-third of the minimum wage earners are the primary family breadwinners.  

Myra accounts is not his first preference but anything that increases savings is a good idea as the US saves too little.

Disturbed by the unemployment drop to 6.7% s it was due to a combination of low participation rate and low payroll growth and not robust growth. We don’t need any supply constraints, bottlenecks in labor or products or raw materials which could prematurely end bull market as Fed would really have to tighten. 

Watch the video at http://www.bloomberg.com/video/siegel-dow-heading-to-18k-worry-good-for-markets-n4MXyKXLT_6egloByM1edg.html

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What Ben Bernanke Isn’t Telling Us – Bloomberg 07-17-13

Salient to Investors:

Jeremy Siegel at Wharton said:

  • The start of tapering in September is already baked into bond and stocks prices and won’t stop stocks rising to between Dow 16,000 and 17,000 by year-end and 17,000 or more in 2014 as long as earnings continue to beat expectations at the rate they did in Q2, 2013.
  • Q2 GDP growth will be very weak but Q3 will be 2.5% to 3% as long as jobs remain in the 150,000 to 180,000 range.
  • There have always been disagreements at the FOMC. Bernanke is on the dovish side.
  • We already have over $1.5 trillion of excess reserves which is not being lent out so do we need to add much more?

Adrian Miller at GMP Securities said Q4 will see the start of tapering, and says Q3 GDP is looking good and the economy will pick up in half2.

Mohammed El -Erien at Pimco said Bernanke is giving different signals to perform a very delicate high wire act between the market getting carried away with risk taking and the risk of disrupting the fragile recovery.

Carl Riccadonna at Deutsche Bank said September tapering is hanging by a thread since Bernanke was very dovish. Riccadonna said the Fed is allowing the hawks the leeway to get excited about ending QE but if Q2 GDP is soft then Bernanke will wait to pull trigger.

Watch the video at  http://www.bloomberg.com/video/what-ben-bernanke-isn-t-telling-us-B90d8uI9RkubrSznAnGb9g.html

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Dueling Prisms for Valuing Stocks – New York Times 10-13-12

Salient to Investors:

The cyclically adjusted price-to-earnings ratio – CAPE – correctly signaled frothy markets in 1929, 1999 and 2008. CAPE looks at 10 years of averaged profits so is considered a more conservative gauge.

S&P 500 has a trailing P/E of around 15, which makes the market attractive based on historical levels, and a CAPE of nearly 22 versus the long-term average of around 16.

Professor Jeremy Siegel at Wharton said distortions make CAPE a less useful tool because it includes a 90 percent annual earnings decline in Q1 2009. Siegel says the market is attractive considering how low interest rates are, and expects multiples to rise : meaning domestic stocks could return 10 to 12 percent a year over the next several years, especially if the economy begins to pick up.

James Stack at InvesTech Research says the past 10-years includes two of the worst profit recessions in history. Stack says normalized earnings works in periods that are more normal, unlike the past decade. Stacks says the true valuation picture may have been distorted by corporations using the past decade’s recessions to cleanse their balance sheets.

Professor Robert Shiller at Yale said that the unusually volatile earnings of the past decade is all the more reason to use CAPE. Shiller says that based on more than 140 years of history, the market’s CAPE indicates expected annualized gains of just under 4 percent, accounting for inflation and versus historical average real annual returns of over 6 percent for blue-chip.

Robert Arnott at Research Affiliates agrees that the unusually volatile earnings of the past decade is all the more reason to prefer to use CAPE, saying the Russell 1000 index trades at a trailing P/E ratio of around 16 because of peak earnings. Arnott says the large monetary easing of the past decade has artificially boosted profits – corporate earnings are the largest share of GDP since 1929, and wages are the smallest share of GDP since 1937. Arnott says these trends are unlikely to continue forever, and profit margins will eventually come down as the economy improves and companies start hiring more aggressively. While CAPE of the S&P 500 is historically high, domestic stocks are a better buy than 10-year Treasury notes.

Read the full article at http://www.nytimes.com/2012/10/14/your-money/debating-cape-a-10-year-prism-for-valuing-stocks.html?_r=0