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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Nobel laureate: Everyone should have a financial adviser – InvestmentNews 12-05-13

Salient to Investors:

Nobel Laureate Robert Shiller said:

  • People make better decisions with financial advisers.
  • A lack of good financial advice was one of the problems that led to the financial crisis. Many Americans went into unsupportable debt to buy homes, which a good financial adviser would not have let them do.
  • Financial advice is particularly critical for low to moderate income families, on a par with medical advice, and should be made available to those without the resources to pay for it.
  • The government should compensate advisers who help lower-income people with financial problems.
  • Tax deduction for some investment costs subsidizes the wealthy because low-income Americans do not itemize deductions.
  • Investor overconfidence can put advisers in a tough spot because people do not like to be told they are wrong.
  • Financial advisers should pursue a second degree in psychology to better manage behavioral tendencies that lead some clients to make poor financial and investing decisions.

Read the full article at http://www.investmentnews.com/article/20131205/FREE/131209947

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Nobel Laureate Robert Shiller said:

People make better decisions with financial advisers.

A lack of good financial advice was one of the problems that led to the financial crisis. Many Americans went into unsupportable debt to buy homes, which a good financial adviser would not have let them do.

Financial advice is particularly critical for low to moderate income families, on a par with medical advice, and should be made available to those without the resources to pay for it.

The government should compensate advisers who help lower-income people with financial problems.

Tax deduction for some investment costs subsidizes the wealthy because low-income Americans do not itemize deductions.

Investor overconfidence can put advisers in a tough spot because people do not like to be told they are wrong.

Financial advisers should pursue a second degree in psychology to better manage behavioral tendencies that lead some clients to make poor financial and investing decisions.

Shiller Warns of Housing Bubble After 225% Surge: Brazil Credit – Bloomberg 09-05-13

Salient to Investors:

Robert Shiller said a housing bubble is emerging in Brazil as home prices have risen as much as twice the increase in rent prices, and housing bubbles are brewing in emerging markets including China, Taiwan, India, Russia, Colombia, Canada and Hong Kong.

Shiller said Brazil prices doubling in 5 years can only be caused by excitement, and people want to think that this is a stable and steady increase, just like in the US in 2005.  The S&P/Case-Shiller index rose 16.2% in 2004 and 15.5% in 2005, before leveling off in 2006 and crashing in 2007 and 2008, and rising 19% since an 11-year low in March 2012.

The FIPE Zap index shows that since January 2008, home prices in Sao Paulo have risen 181% and 225% in Rio de Janeiro.

The Institute for Applied Economic Research Mortgage says lenders will have to pass on rising borrowing costs to consumers already struggling with record debt by boosting the reference rate linked to mortgages.

Mortgage lending in Brazil has surged eight-fold in the six years ended June 30. The indebtedness of Brazilians as a percentage of their accumulated income over the past 12 months rose to a record high 44.2% in April.

Teotonio Rezende at Caixa said Brazil’s housing price surge is not a bubble, but reflects pent-up demand after years of hyperinflation that plagued the economy in the 1980s and 1990s. Rezende said between 1984 and 2002, real-estate values depreciated. Rezende said mortgage debt rose to 6.5% of GDP in 2012 from 1.3% a decade ago, and could reach 12% by 2015. In 2009, the IMF says the mortgage debt ratio in Chile was 20%, more than 70% in the US, and more than 100% in Holland and Denmark.

Analysts estimate Brazil will grow 2.2% in 2013 versus 0.87% in 2012.

Gustavo Franco at Rio Bravo Investimentos said there is no housing bubble in Brazil, and expects real-estate investment funds to double in 2 years as middle-class Brazilians continue to buy a home. Franco said space is being occupied in emerging economies and asset values can grow a lot in rapid processes of change and transformation.

Adolfo Sachsida at the Institute for Applied Economic Research said it is clear that the huge increase in credit is creating a bubble in the Brazilian real-estate market.

Read the full article at  http://www.bloomberg.com/news/2013-09-05/shiller-warns-of-housing-bubble-after-225-surge-brazil-credit.html

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American Dream Slipping as Homeownership at 18-Year Low – Bloomberg 07-30-13

Salient to Investors:

The US home ownership rate is 65% versus the record high of 69.2 percent in 2004, and back where it was two decades ago.

Anthony Sanders at George Mason University said low down-payment loans coupled with exotic adjustable rate mortgages helped fuel the housing bubble, so do we want to do this again?

Stuart Gabriel at UCLA said the housing crisis was brought on in part by the belief that home ownership could drive the economy and give the middle class access to a relatively safe leveraged investment, combined with the housing industry’s thirst for profits.

The housing market is drained of low-cost listings by private-equity firms building an industry of single-family houses for rent.

The NAR said the median home price rose 13.5 percent in June from a year earlier as 1 in 3 properties were purchased with cash.

Sarah Rosen Wartell at the Urban Institute said buyers in their 20s and early 30s are often at a disadvantage because they have thin credit files and limited assets for down payments.

Isaac Boltansky at Compass Point Research & Trading said legislators are not debating how  much home ownership is a good thing, whether we should be a home ownership society.

Christopher Mayer at Columbia Business School said owning a home that is fully paid off provides stability in retirement and if the US has a greater share of aging renters that could put a strain on taxpayers.

Robert Shiller at Yale said home ownership has been oversold, and our 65 percent home ownership rate may be high compared with Germany’s at 53 percent and Switzerland’s at 35 percent. Shiller said home ownership may inhibit economic growth by limiting the ability of families to move as freely for jobs and the government subsidies could be used for other purposes, and we have seen the consequences of encouraging people to put all their life savings in one investment. Shiller said public support for home ownership will be lower for years to come and expects this boom to be smaller than the last.

Read the full article at  http://www.bloomberg.com/news/2013-07-30/american-dream-erased-as-homeownership-at-18-year-low.html

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Housing-Market Recovery in U.S. Not ‘Resounding,’ Shiller Says – Bloomberg 11-06-12

Salient to Investors:

Robert Shiller at Yale said the housing recovery is fragile and should be spurred by reducing the role of government in the mortgage-finance system. The economy needs further fiscal stimulus to create jobs, with increases in spending offset by higher taxes on the wealthy to avoid enlarging the national debt.

Read the full article at http://www.bloomberg.com/news/2012-11-06/housing-market-recovery-in-u-s-not-resounding-shiller-says.html

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