Investing strategies and secular bear markets

[winner69]

You guys should be putting your recently arrived cash in the BIRMAN DIVIDEND YIELD FUND

Suppose you want me to reply its great collecting all those juicy dividends but not so good when the shareprice goes down and capital losses are more than those juicy dividends

So I will say that Birman

Mind you I still have my RBD from years ago .... good divie there eh .... and shareprice still going up

[BIRMANBOY]

I Know. I know I know W69. However its only a loss if you have to sell. Sofar 90% of my on paper capital losses have resurrected themselves. if I was more active in the process I would consider doing what you all are positioning yourselves to do, i.e. selling before the correction. However I am testing my theory that with a dividend producing portfolio, the SP may/probably will correct but the dividends will remain basically constant. As you all wait for the upward correction with the cash on call ...you will be getting 4-5 % whereas I am theorizing I will still be getting my 9% . Who knows how long the correction may take to occur...could be years. Eventually the correction will come and you will no doubt catch it and as everyone comes back into the market the depressed SP will rise making my theoretical paper losses turn into paper gains. Anyway this is the concept...as I said its a work in progress. Apart form that I'm a lazy investor and have other things to do like watching Wimbledon..dark horse..Dimitrov...may have a few dollars at the TAB.

Suppose you want me to reply its great collecting all those juicy dividends but not so good when the shareprice goes down and capital losses are more than those juicy dividends

So I will say that Birman

Mind you I still have my RBD from years ago .... good divie there eh .... and shareprice still going up

[Hoop]

If I assume earnings keeps rising at the same rate as through history (green line on chart)..and the Secular history repeats itself as it has done many times before....the S&P500 future doesn't look that flash for the Capital Gain investor

At some stage the secular bear market cycle will end..It may seem paradoxical to some but cyclic bears can kill secular bears..If you take the extreme and most unlikely view of the secular bears death happening tomorrow the S&P500 index would be approximately at 850....If it happened in 2018 the S&P 500 would be approx 1100 and so on..(The black index line touching the generalised undervalued PERatio 10 solid up trend green line).

Even if the Secular Bear lived on miraculously and died in 2027 (making it the oldest secular bear in recent history) that point would still see the S&P500 at 2000 a similar area as of today...

There is a misconception about Secular bear market cycles.. contrary to myth, the economy operates equality well under either secular bull or bear..So if the secular bear died in 2027 it is not bad news for the Economy from now until 2027..

The secular market difference is the attitude of the market investor and the time it takes to change their ingrained habits/beliefs...During Secular Bear Market Cycles the investor slowly changes behaviour to a reasoning that they want higher yield rates for their investments..in effect there is an increasing numbers of investors with similar behaviours to that of the Birmaboy and MVT disciplines..they are in the market for the dividends and preservation of their Capital...
The quick capital gain at the expense of yield rate return attitude is a less attractive option within a secular bear market environment ..there is a more sober and responsible attitude to investing with less inclination to speculate....
Under this environment the yield rates slowly increases over time, the PE Ratio decreases and sanity returns as the overvalued market slowly returns to "Fundamental normal" before it carries on towards an undervalued status..thereby giving these investors more yield bang for their buck as this valuation shift gathers pace...The secular bear is their preferred environment..

So far this current Secular Bear has been seen as abnormal..Some have expressed the fact the bear has died....

My chart below takes the view that the Secular bear is still alive but in a hibernation period..

[DarkHorse]

Hi Hoop and Co
thanks for great information.
I've no expertise in charting but I agree that the long-term trends and consistent reversion to the mean are as plain as day.
In his 2005 book "Predicting the Markets of Tomorrow" (off putting title but actually a brilliant book) James O'Shaugnessy notes that, net of inflation, in the US 7% is almost an ironclad average - in fact back as far as 1802! (1802-1870 7.0%, 1871-1925 6.9%, 1926-2004 6.9%).

However he also makes the valuable observation that the 'smallcap premium' has an inverse correlation with large cap returns .
So for example during the severe bear market from 1968 to 1982 we see in the above charts, in the US small caps (200million-2 billion) actually returned almost 4% pa net of inflation, while large caps returned -1%pa in real terms.
Of course this seems consistent with your comments about markets not reflecting economic trends.

So perhaps there are still fish to catch if we're in the right spot

[Bobcat.]

Why the USA (and other debt-laden economies) are Doomed: Interest and Debt

Posted on July 15, 2014 by Charles Hugh Smith (from an American perspective):

Even if the economy were growing at a faster pace, it wouldn’t come close to offsetting the interest payments on our ever-expanding debt. If you want to know why the Status Quo is unsustainable, just look at interest and debt. These are not difficult to understand: debt is a loan that must be paid back or discharged/written off and the loss absorbed by the lender. Interest is paid on the debt to compensate the owner of the money for the risk of loaning it to a borrower.
It’s easy to see what’s happening with debt and the real economy (as measured by GDP, gross domestic product): debt is skyrocketing while real growth is stagnant. Put another way–we have to create a ton of debt to get a pound of growth.

debt-GDP.png
source: Acting Man
The Status Quo has only survived this crushing expansion of debt by dropping interest rates to historic lows. This is a chart of the yield on the 10-year Treasury bond, which reflects the extraordinary decline in interest rates over the past two decades.
The Federal Reserve has pegged rates at essentially 0% for years. That means the strategy of lowering interest rates to enable more debt has run out of oxygen: rates can’t drop any lower, and so they can either stay at current levels or rise.

10-yr-bonds6-14.jpg
Near-zero interest rates for banks borrowing from the Fed doesn’t mean conventional borrowers get near-zero rates: auto loans are around 4%, credit cards are still typically 16% to 25%, garden-variety student loans are around 8% and conventional mortgages are about 4.25% to 4.5% for 30-year fixed-rate home loans.
This decline in interest rates means households can borrow more money while paying the same amount in interest.
So the interest payment on a $30,000 car today is actually less than the payment on a $15,000 auto loan back in 2000.

The monthly payment on a $400,000 home mortgage is roughly the same as the payment at much higher rates on a $200,000 home loan 15 years ago.
So dropping the interest rates has enabled a broad-based expansion of debt across the entire economy. Notice how debt has exploded higher in every segment of the economy: household, finance, government, business.

Attachment 6031
source: The Born Again Debtor
The other half of the debt/interest rate equation is household income: if income is stagnant and declining, the household cannot afford to take on more debt and pay more interest. With real (adjusted for inflation) household income declining for all but the top 10%, households cannot take on more debt unless rates drop significantly.

Now that rates are at historic lows, there is no more room to lower rates further to enable more debt. That gambit has run its course.

Many financial pundits claim private debts can simply be transferred to the government and the problem goes away. Unfortunately, they’re dead-wrong. As economist Michael Pettis explains, bad debt cannot simply be “socialized”:
Remember that the only way debt can be resolved is by assigning the losses, either during the period in which the losses occurred or during the subsequent amortization period. There is no other way to “resolve” bad debt – the loss must be assigned, today or tomorrow, to some sector of the economy. “Socializing” the debt, or transferring the debt from one entity to another, does not change this.There are three sectors to whom the cost can be assigned: households, businesses, or the government.
Earlier losses are still unrecognized and hidden in the country’s various balance sheets. These losses will either be explicitly recognized or they will be implicitly amortized. The only interesting question, as I see it, is which sector will effectively be assigned the losses. This is a political question above all….

In other words, when marginal borrowers–households, students, businesses, local government agencies, etc.–start defaulting, the losses will have to be taken by somebody. This is true of every indebted nation: Japan, the European nations, China and the U.S.
The idea that we can transfer the debt to the government or central bank and the losses magically vanish is simply wrong.
Even if you drop interest rates, if debt keeps soaring the interest soon becomes crushing. Even at historically low rates, the interest on Federal debt will soon double. That means some other spending must be cut or taxes must be increased to pay the higher interest costs. Either action reduces spending and thus growth.
If rates actually normalize, i.e. rise back toward historic norms, interest payments could triple.

fed-interest7-14.jpg
source: Federal Spending by the Numbers, 2013: Government Spending Trends in Graphics, Tables, and

Key Points
Here’s one way to understand how reliance on ever-expanding debt hollows out the economy. Let’s say the average interest on the $60 trillion in total debt is 4%. (Recall that charge-offs for defaulted loans must be included as debt-related expenses. The interest paid to lenders is only one expense in the debt system; the other is the losses taken by lenders for defaulted credit card loans, mortgages, etc.)
That comes to $2.4 trillion annually.
Now take the $16 trillion U.S. economy and reckon that real growth in gross domestic product (GDP), even with questionable hedonic adjustments and understated inflation, is about 1.5% annually. That’s an increase of $240 billion annually.
That means we’re eating over $2 trillion every year of our real wealth, i.e. our seed corn, to support an ever-increasing mountain of debt. That is not sustainable. Even if the economy were growing at a faster pace, it wouldn’t come close to offsetting the interest payments on our ever-expanding debt.
This leaves the entire Status Quo increasingly vulnerable to any sort of credit shock; either rising rates or a decline in the rate of debt expansion will cause the system to implode.

Attachment 6032

...which helps us to understand why the Fed
a) doesn't want to raise interest rates;
b) doesn't really want to taper (but nonetheless likes to give positive vibes about the US recovery not needing it forever - yeah right); and
c) is sh*t scared of inflation.

[Bobcat.]

So what do posters think will happen first -
..inflation and a corresponding rise in interest rates, or
..a significant decline in debt expansion?

Which one will it be that triggers a system implosion? Any sign of both occuring (the perfect storm) and it will be time to go very short on equities.

[Bobcat.]

One other option, BC, they just create some more fiat money to repay debt and problem solved.

Solved? Or merely postponed and heightened?

[BIRMANBOY]

Interesting looking at your chart Hoop...seems that the bear markets are becoming more subdued in the sense that they are nowhere near as pronounced nor as dramatic as in the early examples. Almost look like more of a suspended or non -committed stabilizing breathing period. Simplistically would seem that there is more money in the market and requires much larger events to shift the momentum. When all is said and done the money may come out for a while but then, for lack of a better alternative, goes back in. Maybe the days of the real bear are numbered.?

[Bobcat.]

http://davidstockmanscontracorner.c....mpaign=Mailing List PM Monday

Today’s Mindless Rally: Its Jackson Hole, Stupid!
by David Stockman • August 18, 2014

"There is no reason rooted in the real world for today’s frothy stock market rally. In every single region of the planet, the post-crisis, central bank fueled expansion cycle—-tepid as it was in the global aggregate—is faltering badly.

Japan’s economy is only a hair bigger than 5 quarters ago (0.8%) before Abenomics supercharged the BOJ printing presses. Meanwhile, even as real wages in Japan plummet to modern lows, the BOJ’s balance sheet has now reached 55% of its GDP—–a ratio that would have been unimaginable even a decade ago.

Likewise, notwithstanding Mario Draghi’s “whatever it takes” bluster, the only thing that has happened in perpetually recessionary Europe is a short lived stampede of the fast money into peripheral debt. And that was on the tenuous predicate that the debt issued by basket cases like Italy and Spain can only go up because Mario might be buying it sometime down the road. Soon it will be apparent, however, that the Euro area economy benefited not a wit from Mario’s monetary magic, and that the hedge fund punters can dump their rented bonds as fast as they piled on.

And the schizoid policy of the comrades in Beijing needs no elaboration. Stabilizing China’s tottering tower of $25 trillion in debt is far beyond the pay and grade of people who believe with Mao that power comes out of the barrel of a gun, and with Wall Street Keynesian’s that prosperity comes out of the end of a printing press.

And now the usual Wall Street suspects are also busily marking down their US GDP numbers for Q2 and their outlook for the balance of the year. What was supposed to be the year of 3%+ “escape velocity” is heading for the lowest rate of GDP growth—about 1.5% at best—-since the 2009 bottom. And even that depends upon believing that the Commerce Department’s GDP deflator is actually only running at a 1.4% annual rate. There’s not a chance that’s true for households which consume energy, food, health care, transportation and educational services, not iPads.

So with the global expansion cycle faltering, profit ratios at all-time highs and PE multiples in the nose-bleed section of history—nearly 20X reported earnings for the S&P 500—there is only one thing left for the Wall Street robots to do. Namely, vigorously buy the latest dip because the Fed has yet another new sheriff heading for Jackson Hole purportedly bearing dovish tidings. To wit, after 6 years of pinning money market rates to the economic floorboard at zero, Janet Yellen espies an economy still encumbered by “slack”, and will therefore be inclined to keep Wall Street gamblers in free money for a while longer.

This is just more Keynesian bathtub economics, but the Wall Street Journal does have a pretty cogent take on Yellen’s pending utterances. It seems that after $3.5 trillion of balance sheet expansion, the US economy has not yet achieved the performance metrics—especially in the labour market—that was exhibited during the last central bank fuelled expansion cycle of 2002-2007:

Consensus is that she will likely highlight that the alternative measures of labour market slack in evaluating the ongoing significant under-utilisation of labour resources (eg, duration of employment, quit rate in JOLTS data) have yet to normalise relative to 2002-2007 levels.
Now that is downright insulting! The phony prosperity that the Fed unleashed through the Greenspan housing and credit bubble was the exact cause of the 2008 financial crisis and recessionary spiral which followed hard-upon it. So why in the world would the Fed want to push its money printing campaign to the edges of sanity in order to replicate its last disaster?

The answer is not hard to find. Yellen has no clue that the US economy has stalled out because it has reached a condition of peak debt saturation. Indeed, the 2002-2007 benchmark now being proffered by Yellen was actually fueled by the final blow-off phase of a 30-year national LBO.

Between 2002-2007 credit market debt outstanding—-public and private—soared by the incredible sum of $21 trillion while nominal GDP grew by only $3.5 trillion. And that was the end of the road in terms of the Fed’s patented formula of cheap debt fuelled expansion of domestic consumption and nominal GDP.

Ever since the crisis, in fact, the Fed has been pushing massively on the credit string, but nearly the entire flow of liquidity has never left the canyons of Wall Street. Instead, it is parked in the excess reserve accounts at the New York Fed, having cycled through the money markets and pinned the cost of carry-trade gambling at zero percent.

So the casino is having yet another bullish moment because it expects they new monetary sheriff to keep the gamblers in poker chips for another go-round."

[BIRMANBOY]

Yes I'm about 20% in call a/c's as well. However interesting psychological phenomenon arises, in my case anyway, which I assume is possibly also present in other investors. This is that there is a certain amount of pressure to find something more productive..sooner rather than later. This pressure increases the longer you hold cash etc and the greater the % it is of assets. So one might predict that the income and defensive stocks will be the benefit of this pressure build up not only on an individual but also a global level. So it would seem in a correction the safe/def/income assets drop less which theoretically makes it difficult to pick re-entry points. The further into a correction one waits the possibility of "good buys" could in fact diminish.

Cash is King
http://www.theage.com.au/business/ma...20-1069af.html

I myself am at about 20% cash at present, along with a rotation of capital from growth stocks to income stocks. I think its a good time for a little derisking.