Stock Market Top ? : The Q Ratio Indicator Says Watch Out Below

 

If you sold every share of every company in the U.S. and used the money to buy up all the factories, machines and inventory, you’d have some cash left over. That, in a nutshell, is the math behind a bear case on equities that says prices have outrun reality.

The concept is embodied in a measure known as the Q ratio developed by James Tobin, a Nobel Prize-winning economist at Yale University who died in 2002. According to Tobin’s Q, equities in the U.S. are valued about 10 percent above the cost of replacing their underlying assets — higher than any time other than the Internet bubble and the 1929 peak.

Valuation tools are being dusted off around Wall Street as investors assess the staying power of the bull market that is now the second longest in 60 years. To Andrew Smithers, the 77-year-old former head of SG Warburg’s investment arm, the Q ratio is an indicator whose time has come because it illuminates distortions caused by quantitative easing.

“QE is a very dangerous policy, in my view, because it has pushed asset prices up and high asset prices, we know from history, are very dangerous,” Smithers, founder of Smithers & Co. in London, said in a phone interview. “It is very strongly indicated by reliable measures that we’re looking at a stock market which is something like 80 percent over-priced.”

Dissenting Views

Acceptance of Tobin’s theory is at best uneven, with investors such as Laszlo Birinyi saying the ratio is useless as a signal because it would have kept you out of a bull market that has added $17 trillion to share values. Others see its meaning debased in an economy whose reliance on manufacturing is nothing like it used to be.

Futures on the S&P 500 expiring next month slipped 0.1 percent at 9:36 a.m. in London.

To Smithers, the ratio’s doubling since 2009 to 1.10 is a symptom of companies diverting money from their businesses to the stock market, choosing buybacks over capital spending. Six years of zero-percent interest rates have similarly driven investors into riskier things like equities, elevating the paper value of assets over their tangible worth, he said.

Standard & Poor’s 500 Index members last year spent about 95 percent of their profits on buybacks and dividends, with stock repurchases exceeding $2 trillion since 2009, data compiled by S&P Dow Jones Indices show.

In the first four months of this year, almost $400 billion of buybacks were announced, with February, March and April ranking as three of the four busiest months ever, according to data compiled by Birinyi Associates Inc.

Slow Spending

Spending by companies on plants and equipment is lagging behind. While capital investment also rose to a record in 2014, its growth was 11 percent over the last two years, versus 45 percent in buybacks, data compiled by Barclays Plc show.

With equity prices surging and investment growth failing to keep pace, the Q ratio has risen to 58 percent above its average of 0.70 since 1900, according to data compiled by Birinyi and the Federal Reserve on market and asset values for non-financial companies. Readings above 1 are considered by some to be too high and the ratio has exceeded that threshold only 12 percent of the time, mostly between 1995 to 2001.

That’s nothing to be alarmed about because the American economy has become more oriented around services than manufacturing, according to George Pearkes, an analyst at Harrison, New York-based Bespoke Investment Group LLC. Nowadays, companies like Apple Inc. and Facebook Inc. dominate growth, while decades ago, it was railroads and steelmakers, which rely heavily on capital.

Mean Reversion

“Does that necessarily mean that the Q ratio should be as high as it is right now? I don’t know,” Pearkes said by phone. “With those sorts of long-term indicators, they can sometimes mean that the market is overvalued. But the reversion to the mean on them is usually going to take a lot longer than most people’s time frame.”

Any investors who based their investment decisions on the Q ratio would have missed most of the rally since 2009, according to Jeffrey Yale Rubin, director of research at Birinyi’s firm. The measure rose above its historic mean three months into this bull market and since then, the S&P 500 has climbed 131 percent.

“The issue we have with Tobin Q is that it does a very poor job at timing the market,” Rubin said from Westport, Connecticut. “The followers of Tobin Q never told us to buy in 2009, yet now we are warned that we should sell. Our response is sell what? We were never told to buy.”

Bond Yields

Everyone from Janet Yellen to Warren Buffett has spoken cautiously on stock valuations in the past month. Both the Fed chair and chief executive officer of Berkshire Hathaway Inc. said prices are at risk of getting stretched should bond yields increase. The rate on 10-year Treasuries slipped last week to 2.14 percent while the S&P 500 gained 0.3 percent.

“It’s probably a sensible configuration for the stock market to be overvalued because competing investments are so poor,” Robert Brusca, president of Fact & Opinion Economics in New York, said by phone. “As an investor, you’re not just looking at the value of the firm, but the value of the firm relative to other things you can do with your money.”

At 2,260 days, the bull market that began in March 2009 this month exceeded the 1974-1980 rally as the second longest since 1956. While measures such as price-to-earnings ratios are holding just above historical averages, the bull market’s duration is sowing anxiety among professionals who watched the previous two end in catastrophe.

“We’re still close enough to that prior experience and that hold-over effect is still there,” Chris Bouffard, chief investment officer who oversees more than $10 billion at Mutual Fund Store in Overland Park, Kansas, said by phone. “When you start to see prior cycle peaks on the chart like Tobin Q and any other valuation metrics that people are putting up there, it looks dramatic, stark and scary.”

Protect your Portfolio : Read more at http://www.youroffshoremoney.com

Stock Picking For Retirement Success ($tocks vs Bond$ )

We are hot on dividend-payers compared to bonds.

 

This year,we added shares in seven dividend-paying companies: AT&T (NYSE:T), Chevron (NYSE:CVX), Cisco SystemsCoca-Cola , General Electric,McDonald’s and Procter & Gamble. Three of the stocks’ prices have risen in the market  this year, while four have dipped as much as 2%. Together, this year the group has averaged a 1% gain.

But the bigger reward: After Jack A. Bass Managed Accounts  bought their stocks, several companies raised their dividends — a fetching 9.2% average. Retirement accounts now hold 14 dividend payers and may get more this year. “Given the inflation factor, it’s a good strategy to have increasing income,” said the principal of Jack A. Bass and Associates “And as a bonus, you get a more favorable tax treatment on stock dividends than on the interest from bonds.”

 

Clients of Jack A. Bass Managed Accounts (these are models – our clients  are better looking)

His moves seem to buck conventional wisdom — that those planning or in retirement should shift to such “safer” investments as bonds. But amid today’s longer life spans, some market players are embracing a newer view: that retirees should keep sizable stock allocations — tilted toward dividend-payers with their potential for stock price gains and dividend income growth.

 

“There is literally a danger of outliving your money if you can’t generate enough income from your portfolio,” holds investment adviser Laurie Itkin, of Coastwise Capital Group in San Diego, Calif. Indeed, she feels “the typical asset allocation model of 40% bonds, 60% equities is archaic and even dangerous.”

 

Bass likes the dividend-growth story he’s been seeing. Among the shares he bought, Cisco Systems (NASDAQ:CSCO) this year raised its dividend 11.8%, and Coca-Cola (NYSE:KO) boosted its payout 8.9%. He’d bought such stocks for the safety their strong corporate management provides — and for their dividend yields in excess of 3%.

 

Too Rich To Switch?

 

“With dividend payers like these, you think harder about shifting your asset allocation to more heavily favoring bonds, even after interest rates rise,” Bass said.   Overall, fully 1,078 U.S. companies raised their dividend in this year’s first quarter — the highest number for any first quarter, says Howard Silverblatt, senior index analyst at Standard & Poor’s Dow Jones Indices (SPDJI), in New York. Moreover, dividends paid by companies in the S&P 500 stock index could hit a record $350 billion this year, he says. However, dividend-paying stocks weren’t the rage early this year. And dividend cuts are always possible: In July 2009, at the peak of dividend-trimming in the last recession, 83 S&P 500 companies were cutting their dividends, while 26 others were suspending them, according to SPDJI data.

 

For a free evaluation of your portfolio  – no cost or obligation-  please email info@jackbassteam.com or Call Jack direct at 604-858-3202 Pacific Time – Monday – Friday 9:00- 5:00

Modern Portfolio Theory

AMP & Comalco Place

AMP & Comalco Place (Photo credit: mikkelz)

Here , from Moden Portfolio Strategy is the key to long term profits – how many of these five basics are you using ?

The Five Primary market movers:

1) the growth or decay of the Gross National Product and the business cycle

2) Expectations of the direction of  interest rates

3) Consumer Confidence  ( becasue the consumer is 70% of economic activity

4) Short -term inflation

5) Long term inflationary expectation

THE Bottom Line :  Improve your results:  Read the AMP books and plan your portfolio moves.

(If you would like an AMP Seminar in your city write to me at info@jackbassteam.com )

Learn more / earn more for your portfolio :

Product Details

AMP Gold and Precious Metals Portfolio: The Gold Investor’s Handbook by Jack A Bass (Sep 18, 2012)

Available Now at AMAZON.COM ( go to : books )

 

Your Investment Library Will Decide Your Investment Success

Stock Market Magic: Building Your Apprentice Millionaire Portfolio 2012: All you need to succeed in today's stock market

Long Term Themes for The AMP

stock market

stock market (Photo credit: 401(K) 2012)

Nov 12

Long Term Investment  Themes

– governing selections for for both current publications The Apprentice Millionaire Portfolio and    The Gold Investor’s Handbook

AND for both blog sites ( http://www.amp2012.com and  www.ampgoldportfolio.com)

The single most important theme is the long term outlook for interest rates and the supporting policy of central banks around the world.

Markets are ignoring this idea. They do not want to accept a very-low-interest-rate policy for a protracted period of time. Markets are also ignoring the fact that the same policy is in play in nearly all major mature economies of the world

What Will This Low Interest Rate Climate Bring to your AMP Portfolio?

1) Rising stock markets – in general – specifics as per our books

2) Real estate recovery( already underway in SOME locations.

3) Precious metals and other hard assets are an alternative to low rates for the bond market and will attract more attention. Future inflation fears will attract more investment from individuals . Central banks will increase their gold reserves

What Must YOU Do ?

Take action– don’t sit wringing your hands about inflation, the fiscal cliff or the number of homes needing electricity. Study the market opportunities available and build your portfolio.

The Gold Investor’s Handbook – click here for  investment profits and much more detail on the ins and outs of investing in gold 

AND Give The Gift Of Money This Christmas

All You Need To Succeed –

in 500 pages of Investing Strategy

and Selections Available now at Amazon .com

Stock Market Magic: Building Your Apprentice Millionaire Portfolio 2012: All you need to succeed in today’s stock market [Paperback]

Jack A. Bass (Author)

5.0 out of 5 stars  See all reviews (2 customer reviews) | Like 1678

Those who have been wringing their hands about the big inflation, rising interest rates, weakening dollar, fiscal cliff, tax policy and the election rhetoric have missed markets. They now have an entry opportunity if they did not take advantage of it in the past.

Related articles

Thesis / Direction for The Apprentice Millionaire Portfolio

Reverse of U.S. two-dollar bill John Trumbull'...

Reverse of U.S. two-dollar bill John Trumbull’s Declaration of Independence (Photo credit: Wikipedia)

In answer to recent emails I am providing this outline :

October 18

The two AMP books now in print are focused on a disciplined approach :

1) Directional Trading

Meaning directional bets with respect to countries, currencies and interest rates

Opportunities arise from slow moving macro economic trends such as inflation and the decline of the U.S. dollar

This is a top down strategy.

2) Opportunistic

Based on finding opportunities in short term movements .Selling overvalued securities and buying undervalued.

3) Aggressive Growth

Long tem positions based on the assessment of a company having superior growth and management potential.

The extensive company and ETF  analysis in the books allows you to participate by either doing your own due diligence or following the book suggestions to build your  portfolio.

” The Gold Investors Handbook” is available at Amazon.com ( books) as is  ” The Apprentice Millionaire Portfolio ” which has a broad market sectors review  and portfolio suggestions.

Related articles

Bank Of America Warns Markets ” Code Red”

English: Crowd gathering on Wall Street after ...

English: Crowd gathering on Wall Street after the stock market crash of October 1929. (Photo credit: Wikipedia)

 

August 25

 

Yesterday, BofA‘s top North America economist Ethan Harris penned a bearish note on the the U.S. economy, writing that it “is in the eye of the storm” and that a number of troubling headwinds loom on the horizon.

 

BofA strategists Arjun Mehra and Cheryl Rowan have a warning more precisely aimed at the stock market. In a note to clients entitled Code Red, Mehra and Rowan claim there is “limited upside from here” and the “risk of a sell-off is high.”

The strategists point out that stocks have managed to rally even in spite of one of the worst earnings seasons in years and growth slowing in the U.S. and around the world. They think the explanation is the “Bernanke Put;” in other words, investors are expecting more monetary easing in the form of QE3.

But in spite of the dovish language from the Fed this past week, Mehra and Rowan are concerned that the central bank may disappoint.

From the note:

Risk of a sell-off is high

Economist Michael Hanson points out an interesting circular relationship between the stock market and Fed policy. There are some who believe the Fed will not launch QE3 so long as stock prices remain high, yet the stock market is high because it anticipates QE3. Should the Fed disappoint at the September 12-13 FOMC meeting, the risk of a stock sell-off is high. S&P 500 support on a correction is in the 1360-1325 area. Additional support is at 1300-1250. Attention will be on the Jackson Hole symposium next week to get a feel for the Fed’s tone.

Macro catalysts increase the risk of a correction

Our strategists see an unusually high number of macro catalysts over the next 3-6 months that could take markets lower. We expect economic growth to disappoint in the second half of the year in anticipation of the fiscal cliff. This would exacerbate any slowdown from the deepening recession in Europe and decelerating growth in emerging markets. There is also the ongoing tension in the Middle East, the potential for a US credit downgrade and accelerating downward analyst estimate revisions. To top it off, September is seasonally the weakest month of the year for stock price returns.

The BofA strategists conclude that with the VIX at record low levels, those looking to hedge against a correction should buy put options on stocks while they are cheap, echoing a message several Wall Street analysts have relayed on television and in client notes over the past week

New Zealand Energy Alert

August 17

Volume and price moving

Volume twice average .

Drilling news likely known to some – not little me.

Barry Ridholtz – Returns : Stocks vs Bonds vs Gold


Stocks versus Bonds versus Gold (2010-2012)

Posted: 14 Aug 2012 08:30 AM PDT

click for larger chart

Source: Bianco Research

 

Things The Millionaire Next Door Won’t Tell You

Who Wants to Be a Millionaire? (Philippine gam...

Who Wants to Be a Millionaire? (Philippine game show) (Photo credit: Wikipedia)

Although having a million bucks isn’t as impressive as it once was, it’s still nothing to sneeze at. 

In fact, Reuters reports that in 2009 there were 7.8 million millionaires in the United States.

See what your millionaire neighbor won’t tell you >

That’s a lot of people, people.  And the odds are one or two of them are living near you.

Heck, one of them might even be your neighbor.  In fact, the odds are very good that it is your neighbor.

But, Len, you don’t know my neighbor.  That guy doesn’t look anything like a millionaire.

Well, guess what?  Your suburban millionaire neighbor called (oh yeah, we go way back) and the two of us had a nice little chat.

Here’s a few things he shared with me – but apparently doesn’t want to tell you.  (No offense, I’m sure.)

 

He always spends less than he earns

In fact his mantra is, over the long run, you’re better off if you strive to be anonymously rich rather than deceptively poor.

 

From LenPenzo.com

He knows that patience is a virtue

The odds are you won’t become a millionaire overnight.  If you’re like him, your wealth will be accumulated gradually by diligently saving your money over multiple decades.

 

From LenPenzo.com

He serves his guests inexpensive coffee

When you go to his modest three-bed two-bath house, you’re going to be drinking Folgers instead of Starbucks.

 

And if you need a lift, well, you’re going to get a ride in his ten-year-old economy sedan.  And if you think that makes him cheap, ask him if he cares.  (He doesn’t.)

From LenPenzo.com

He pays off his credit cards in full every month

He’s smart enough to understand that if he can’t afford to pay cash for something, then he can’t afford it.

 

From LenPenzo.com

He realized early on that money does not buy happiness

He realized early on that money does not buy happiness

If you’re looking for nirvana, you need to focus on attaining financial freedom.

 

From LenPenzo.com

He knows the power of financial freedom

He never forgets that financial freedom is a state of mind that comes from being debt free. Best of all, it can be attained regardless of your income level.

 

From LenPenzo.com

He knows a thing or two about second jobs

He knows that getting a second job not only increases the size of your bank account quicker but it also keeps you busy – and being busy makes it difficult to spend what you already have.

 

From LenPenzo.com

He knows how to manage his money

He knows how to manage his money

He understands that money is like a toddler; it is incapable of managing itself.  After all, you can’t expect your money to grow and mature as it should without some form of credible money management.

 

From LenPenzo.com

He’s a big believer in paying yourself first

Paying yourself first is an essential tenet of personal finance and a great way to build your savings and instill financial discipline.

 

He knows that failing to plan is the same as planning to fail

He also knows that the few millionaires that reached that milestone without a plan got there only because of dumb luck.

 

It’s not enough to simply declare that you want to be financially free.

From LenPenzo.com

He’s not afraid to think big

He's not afraid to think big

When it came time to set his savings goals, he wasn’t afraid to think big.

 

Financial success demands that you have a vision that is significantly larger than you can currently deliver upon.

From LenPenzo.com

He knows the importance of hard work

Over time, he found out that hard work can often help make up for a lot of financial mistakes – and you will make financial mistakes.

 

From LenPenzo.com

He insures himself against risk

He realizes that stuff happens, that’s why you’re a fool if you don’t insure yourself against risk.

 

Remember that the potential for bankruptcy is always just around the corner and can be triggered from multiple sources: the death of the family’s key bread winner, divorce, or disability that leads to a loss of work.

From LenPenzo.com

Stock Market Magic = Strategy , Selection , Knowledge

Don’t join the herd.

 

What are you doing differently from last year ?

Don’t remain in denial – face your demons and move up to success .

All You Need To Succeed –

in 500 pages of Investing Strategy

and Selections Available now at Amazon.com

Stock Market Magic: Building Your Apprentice Millionaire Portfolio 2012: All you need to succeed in today's stock market

Stock Market Magic: Building Your Apprentice Millionaire Portfolio 2012: All you need to succeed in today’s stock market [Paperback]

Jack A. Bass (Author)

5.0 out of 5 stars  See all reviews (2 customer reviews) | Like 1678

Stock Market Magic = Strategy , Selection , Knowledge

Don’t join the herd.

500 pages of Investing Strategy and Selections – All You Need To Succeed

Posted: August 4, 2012 | Author:  | Filed under: AMP Books and Seminars | Tags:  | 1 Comment »

Are Your Investing Results Mediocre ?

You can make the change :

Ask yourself the hard questions – what are my expectations/ results and what must I do to change if the results aren’t what you want.

You don’t have to have a 500 page plan like that outlined in my book – but no plan is a plan for no success ( pardon the lack of grammar ).

How many books on investing did you read this year ?

What are you doing differently from last year ?

Don’t remain in denial – face your demons and move up to success .

All You Need To Succeed –

in 500 pages of Investing Strategy

and Selections Available now at Amazon .com

Stock Market Magic: Building Your Apprentice Millionaire Portfolio 2012: All you need to succeed in today's stock market

Stock Market Magic: Building Your Apprentice Millionaire Portfolio 2012: All you need to succeed in today’s stock market [Paperback]

Jack A. Bass (Author)

5.0 out of 5 stars  See all reviews (2 customer reviews) | Like 1678

Bob Farrell: Don't join the herd.
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