Monday, November 9, 2009

What a Difference a Year Makes! Twelve Little Months . . .

A year ago-- or 8 months ago-- who could expected the following out of a Bloomberg.com article?

. . . equities rallied around the world on the Group of 20’s agreement to keep stimulating the economy. . .

“There’s nothing much to be fearful of in the short term and the market’s been in a nice uptrend, so it makes sense volatility would taper off,” said Yu-Dee Chang . . .

U.S. stocks extended a global rally after U.K. Chancellor of the Exchequer Alistair Darling, hosting a meeting of finance ministers from G-20 nations, said his colleagues decided to keep interest rates low and maintain record budget deficits until economic recoveries take hold. Commodities climbed, sending gold to a record above $1,100 an ounce. . .

“As soon as the market shows any signs of stability people are willing to sell options,” said Steve Claussen
. . .

Please note that I am going to stop listing the companies the quotees work for as much as I can, to avoid advertising and because the writer is simply finding people to say whatever the writer/Bloomberg wants to push as a theme for the article.

In any case, one year ago, if someone had said that the G20 would be locked limit down in a zero interest-rate world because the economy was so horrible, the idea that the stock market would be surging to well above the level it was at a year ago would have sounded surprising. It was only 9 months ago, after all, that Barack Obama's economists predicted that unemployment would peak at 8.0% after the passage of the ARRA "stimulus" bill. We would already be at 11% if not for all the labor force dropouts.

Speculation in financial markets is back. It is back because leverage is back (or, never really went away). As with the Gold Rush, it is the middlemen who prosper during the leveraged moves. However, in the real world, few people are speculating on a better economy by investing for growth. When that happens in a big way, rates will rise, perhaps rapidly, and asset prices may fall.

The average dividend yield for all S&P 500 stocks is 1.8%; by S&P's calculations it is 2.05% or so (the higher number is weighted, not average, I believe). 140 stocks of the 500 have no dividend yield at all, something that was almost anathema in more conservative times. Stocks such as McDonald's that have decent dividends have virtually no insider buying year after year. When I was growing up and when long-term Treasury rates were also "low", a dividend yield of 3% was considered a sign of a stock market top and 6% the sign of a bottom. These days could well return. In other words, dividend yields could triple and the averages could be exactly where they are today -- in nominal terms.

As PIMCO recently calculated, financial asset prices have been on a long-term tear starting from 1957. Tobin's "q" ratio per Fed data suggests that a fair value for the Dow is around 7000-- around the March lows.

This is the opposite of 25-30 years ago, when labor was arguably overpriced, and as an intern earning less than minimum wage and with tens of thousands of dollars of medical school debts, I was happy when PATCO was slapped down by President Reagan. Things have come full circle. Labor needs work and needs better real wages, and the overfinancialized world needs simplification and prices of financial assets that are legitimately attractive to buyers, including insiders in corporations.

"Money" is "cheap" because the banks and borrowers don't know what to do with it.

Gambling in the markets remains best suited for pros.

Copyright (C) Long Lake LLC 2009

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