Word for the week is productivity.
"The number one benefit of information technology is that it empowers people to do what they want to do. It lets people be creative. It lets people be productive. It lets people learn things they didn't think they could learn before, and so in a sense it is all about potential." Steve Ballmer
"The bottom line is, when people are crystal clear about the most important priorities of the organization and team they work with and prioritized their work around those top priorities, not only are they many times more productive, they discover they have the time they need to have a whole life." Stephen Covey
"The more generous we are, the more joyous we become. The more cooperative we are, the more valuable we become. The more enthusiastic we are, the more productive we become. The more serving we are, the more prosperous we become." William Arthur Ward
"So that the record of history is absolutely crystal clear. That there is no alternative way, so far discovered, of improving the lot of the ordinary people that can hold a candle to the productive activities that are unleashed by a free enterprise system." Milton Friedman
Marrs Wealth Management appeared again this past month in the Wealth Management monthly Advisor Confidence Index.
I am on the monthly Advisor Panel that fills out a survey on the markets and economy each month for Wealth Management Magazine publications.
Last month I stated, "markets may move sideways with a lot of volatility over the next several months."
That was after a mini crash in October.
This month my comment was "Look out below"! It is a long way down from these lofty heights".
Yes I do believe the heights of the US stock market are in for a correction.
The long range forecast of three sources tell us historically a correction is well over due.
The Shiller PE is forecasting 10 year future returns on US Equities at below 2% annually, the GMO 7 year forecast for US Large Cap Stocks is at a negative 1.5% annually and Research Affiliates forecasts ten year returns in stocks at around 2.5% annually.
This makes very clear sense when you look at historical long term returns of the S and P 500 index at somewhere between 6.5% and 7.5% annualized.
It is very clear that 1995 to 2010 was not the norm, market returns were inflated by Central Bank policy making and speculation. We could say the same of (2003 to 2007) and (2009 to 2014).
These periods are not the norm they are outlier periods fed by artificially low interest rates and speculative investing based on margin debt.
That is unless this time is different?
"The four most dangerous words in investing are: 'this time it's different.'" Sir John Templeton
US Stocks may continue the steep climb into early next year but it will only be fluff on top and an eventually deeper drop or a longer term string of mediocre return years.
We are remaining widely diversified and underweight equities.
In a recent interview with Jim Grant, Steve Forbes asked some very important questions?
Forbes: Tell us, what is going on? We've had the worst recovery from a sharp downturn in U.S. history. Yet the monetary base has exploded far in excess of what it did in the '70s and yet we haven't had an explosion, at least in the Consumer Price Index. Gold is down from its highs of three years ago. Stocks are at a record high. What you call the taper tantrum, now the markets are in seeming calm about that. So what in the world is happening?
Grant: Well, I think first and foremost the patient is overmedicated. That is, the economic patient. Stimulus, by the bottleful, by the prescription fill, gradually and by degree are (and I guess not so gradually) the Federal Reserve has moved to substitute price administration for price discovery. And it seems to me that the Fed's kind of full-court pressed (to switch metaphors) on financial markets and pricing thereof has induced a deep complacency with respect to financial assets and has also introduced a sharp degree of optimism or what we might call even inflation in the financial markets.
Forbes: Stocks. How much of that is a distortion? People would say some sectors are kind of dicey. But PEs overall, not too out of line.
Grant: Yes. There is such a thing in analysis called the dividend discount model. And it says that the value of an equity is the value of its projected cash flows discounted by a suitable rate of interest. And there's more to it than that, of course.
But if the rate of interest one uses to discount cash flows is itself unsuitable or if it's suppressed, that means the cash flows are exaggerated or inflated. And the price is higher than it would otherwise be. And I think that's the risk in the stock market generally. I understand that many areas of the stock market are not certainly in the neighborhood of valuation where they were in 1999. But that doesn't mean that things are fairly valued. And also I think more broadly, more fundamentally, we are all doing business in a kind of valuation hall of mirrors on account of the suppression of interest rates and the general body English that our federal masters are giving the stock market. They want it higher for the so-called wealth effect. Wealth effect, mind you.
In a recent Seeking Alpha post the following chart shows that we are just below the high in 2000 and above the peak in 2007 looking at Market Capitalization related to overall GDP.
Also corporate profits as a percentage of GDP are very elevated.
Notice the major peak in 1966 was the end of the Federal Reserve's first experiment in Quantitative Easing!
Then came nearly 20 years of sideways markets.
Dave Stockman writes in a blog on Seeking Alpha, "Well, now. Here we are nearing the end of 2014 and the nation's once and mighty "jobs machine" is fixing to utilize no more labor hours this year than it did way back at the end of the 20th century."
"And, no, that completely unsung fact does not reflect some anomalous quirk owing to the Great Recession. We are now 64 months from the June 2009 bottom and the index of total labor hours in the non-farm business economy stands at about 108--the same level first recorded in Q3 1999. This means that during the 21st century to date the US economy has been bicycling up-and-down an essentially constant amount of labor during the intervals between the serial financial market booms and busts engineered by our monetary politburo."
Production of goods is still well below the pace of 2000. Lower lows and lower highs!
Unemployment numbers continue to improve, but job creation lags. Lower lows and lower highs!
The Dow Jones World Index trended up last week +.54%
The 10 year Treasury Yield index trended up last week.
The US Dollar index trended down last week. -.05%
The CRB Commodities index trended down last week. - 1.43%
The Gold Index trended up last week +.59%
Inflation Linked Bonds trended up last week +.63%
US Aggregate Bond Index trended down last week -.10%
The International Aggregate Bond Index trended down last week - .34%
The NCREIF Index is aggregated and reported quarterly and is a total return broad representation including rents and appraisal of non-traded Commercial Real Estate.
2014 1st qtr + 2.74%
2014 2nd qtr + 2.91%
2014 3rd qtr + 2.63%
Stocks lead along with Real Estate.
Another Cautionary Sign
U.S. Sector Returns Year to Date
Defensive Sectors (Healthcare, Utilities, Consumer Staples) and Technology Lead
It pays to stay diversified and not chase prior winners!
Many investors take the wrong approach looking primarily at recent return.
Overall risk measures and managing downside risk play an increasing role in end results.
Investors instead should be focused on managing Dynamic Beta exposure, evaluation of Active Share, Sharpe ratios, Treynor ratios, Sortino ratios and Alpha.
The above is for informational purposes only and not an offer or recommendation to buy or sell. Past performance is no guarantee of future return. Decisions on making any investment should be made only subsequent to a thorough professional analysis of the overall individual financial picture and the goal for the investments.
Please forward this on to anyone who you think may be interested.
The above is for informational purposes only and not an offer or recommendation to buy or sell. Past performance is no guarantee of future return. All decisions about investments should be made within parameters of risk, time frame, financial position and overall asset allocation.