by mannfm11 » Sat Feb 16, 2013 4:42 am
Good work on the stock market numbers John. I have done my own work over the years and your figures are accurate. I might add that the 4.5% you mention as long term growth also includes a 3% inflation component, thus holding the entire stock market provides a gross of 1/2% over the risk free rate of return. There is more missing in these figures, like the companies that go to zero that must be replaced with new money (WCOM, ENE, GM, AIG, C, BS, LEH......). You can go to the S&P site and get the ongoing value of a point, which is the adjusted value of the investment in the index from time to time. After the 2008 crisis, there was over $1 trillion of new money that had to be put into the index to replace what was wheeled out, thus a hidden total loss. I included C and AIG, not because they actually went to zero, but that the pre 2008 ownership was significantly diluted in the aftermath. Also, stock buybacks reduce the divisor and being dividends, even today after bottoming 13 years ago, are at historic low levels. The market won't exhibit 1982 values for at least another 15 years and probably closer to 30, at which time a dollar would have been devalued to 30 cents or so. 1982 valuations had been brought about by a tripling of the CPI between 1966 and 1982 and dividends in 1982 were over 6% on the SPX. The man making those statements should have a jackhammer used on him the next time he goes to the dentist so his words change.
The 1929 top had a dividend rate of 3%. We are 150% of top 1929 value using the only real measure of buy and hold valuation. Though your graph shows a 2.15% dividend, much of that was borrowed money paid out in advance of the tax deal in the last quarter of 2012. Stocks are open ended investments, meaning there is no maturity other than liquidation. You can't compare stocks to 10 year treasuries, because the discount risk on a stock or a portfolio of stocks is massively greater than a security that will mature in 10 years.
Here is the greatest risk in the market. Baron mentions the increase in earnings since 2000. As you stated, he is either lying, delusional or stupid. Well, dividends have roughly doubled since 2000. When you consider the amount of the index made up by CSCO, INTC and MSFT in 2000 and the fact those 3 companies paid no dividend at that time, as in ZERO, it can be assumed much of that growth has been from those 3 companies. INTC and MSFT could have both paid dividends of a decent amount then and along with CSCO, have instead focused their cash on buying back stock. Instead of enriching the remaining shareholders, this policy, more often than not, leaves them eventually holding the bag if not eventually replaced with paying growing dividends. Growth in dividends is the only real valuation component of the current valuation model of a stock, though one could look at liquidation value.
What has increased earnings in stocks? Well, the word is credit bubble and now government debt bubble. Without these 2 bubbles, we could see earnings deflate and not return to current levels for 15 to 20 years. The market was restored after 20 years around 1950 due to massive government spending inflation, not due to real growth. The 29 peak wasn't exceeded until 54 or 55, at which time, the dollar had it value halved. Massive earnings growth through government interference in the 1920's created the 1929 peak. We are seeing the same thing today. Plus, more and more capital is being tied up in the money supply, as it now has to exist.
I am sure we won't see the low levels you mention or Robert Prechters mentions, not because the valuations won't go there. I don't believe they will allow the number to shrink that much, because the very survival of the government depends on inflation. Thus, it might only fall to 6000, but the 6000 won't be worth 500.
Good work on the stock market numbers John. I have done my own work over the years and your figures are accurate. I might add that the 4.5% you mention as long term growth also includes a 3% inflation component, thus holding the entire stock market provides a gross of 1/2% over the risk free rate of return. There is more missing in these figures, like the companies that go to zero that must be replaced with new money (WCOM, ENE, GM, AIG, C, BS, LEH......). You can go to the S&P site and get the ongoing value of a point, which is the adjusted value of the investment in the index from time to time. After the 2008 crisis, there was over $1 trillion of new money that had to be put into the index to replace what was wheeled out, thus a hidden total loss. I included C and AIG, not because they actually went to zero, but that the pre 2008 ownership was significantly diluted in the aftermath. Also, stock buybacks reduce the divisor and being dividends, even today after bottoming 13 years ago, are at historic low levels. The market won't exhibit 1982 values for at least another 15 years and probably closer to 30, at which time a dollar would have been devalued to 30 cents or so. 1982 valuations had been brought about by a tripling of the CPI between 1966 and 1982 and dividends in 1982 were over 6% on the SPX. The man making those statements should have a jackhammer used on him the next time he goes to the dentist so his words change.
The 1929 top had a dividend rate of 3%. We are 150% of top 1929 value using the only real measure of buy and hold valuation. Though your graph shows a 2.15% dividend, much of that was borrowed money paid out in advance of the tax deal in the last quarter of 2012. Stocks are open ended investments, meaning there is no maturity other than liquidation. You can't compare stocks to 10 year treasuries, because the discount risk on a stock or a portfolio of stocks is massively greater than a security that will mature in 10 years.
Here is the greatest risk in the market. Baron mentions the increase in earnings since 2000. As you stated, he is either lying, delusional or stupid. Well, dividends have roughly doubled since 2000. When you consider the amount of the index made up by CSCO, INTC and MSFT in 2000 and the fact those 3 companies paid no dividend at that time, as in ZERO, it can be assumed much of that growth has been from those 3 companies. INTC and MSFT could have both paid dividends of a decent amount then and along with CSCO, have instead focused their cash on buying back stock. Instead of enriching the remaining shareholders, this policy, more often than not, leaves them eventually holding the bag if not eventually replaced with paying growing dividends. Growth in dividends is the only real valuation component of the current valuation model of a stock, though one could look at liquidation value.
What has increased earnings in stocks? Well, the word is credit bubble and now government debt bubble. Without these 2 bubbles, we could see earnings deflate and not return to current levels for 15 to 20 years. The market was restored after 20 years around 1950 due to massive government spending inflation, not due to real growth. The 29 peak wasn't exceeded until 54 or 55, at which time, the dollar had it value halved. Massive earnings growth through government interference in the 1920's created the 1929 peak. We are seeing the same thing today. Plus, more and more capital is being tied up in the money supply, as it now has to exist.
I am sure we won't see the low levels you mention or Robert Prechters mentions, not because the valuations won't go there. I don't believe they will allow the number to shrink that much, because the very survival of the government depends on inflation. Thus, it might only fall to 6000, but the 6000 won't be worth 500.