Thursday, October 09, 2008

The market will not be denied

Marvel at what we have witnessed:
  • A $700 billion bailout
  • Countless "liquidity injections"
  • Bans on short selling
  • Multiple interest rate cuts
  • Nationalizing mortgages (Freddie Mac and Fannie Mae)
  • Nationalizing insurance (AIG)
  • Nationalizing banks (potentially)
None of it made squat bit of difference when it came to the prices of stocks. Buyback-inflated prices are inflated prices no matter how much money gets passed around from the taxpayer to the Treasury to the Fed to a mortgage-strapped bank. I'm convinced that one reason I was able to foresee this huge stock market drop - even though I wasn't yet aware of the magnitude of the mortgage meltdown - was because I realized that stocks were overvalued relative to the good old boring dividend yield. The facades of buybacks, low yields, and P/E ratios over 15 are finally crumbling before our eyes. Good riddance!

I want to calculate the amount of money wasted on buybacks over the years, but the market keeps dropping and expanding the time range over which the wasted buybacks were made, so I'll just wait for the first bottom to form.

Right now the S&P 500 is lower than it was on July 3, 1997, and is also approaching the vicinity of the absolute bear market lows of 2002-2003. If the market keeps dropping, then average stock yields could rise to the historical upper range of 6%, or even the rare level of 10% not seen since the Great Depression. If that happens, then you won't need me or any other guru to tell you what to do; for the first time in 25 years, stocks will be good investments that you can buy and hold and forget. We're not there yet, however, so market-timing is still the way to go for now. I've been in bear funds and cash ever since my January forecast, so I've fared better than most so far this year.


adventurerneil said...

Congrats on heralding in the big fat bear! I was skeptical of your predictions, I'll admit, but it looks as if you were in the right.

Now, to see if you're only semi-prescient... ;)

Tim said...

Good job at keeping you powder dry and making some money at the same time. What is the dividend yield now for stocks? Are you factoring in that the banks dividends will at the very least go to zero?

Jody said...

Thank you, gentlemen.

The latest data I can find has the S&P 500 yield at 2.8%, and the Dow yield at 3.8%, so it's pretty much back home in the 3% to 6% range where it's supposed to be.

Eli Burke said...

After stumbling across your blog last July I shifted my existing 401k balances to a money market fund. There have been times I regretted it, but now when I am sitting at -2%, instead of -40%, I'm pretty dang happy.

Jody said...

Congratulations for sticking with the program!