Saturday, April 3, 2010

Financial Crisis Was Predictable and Leaves Poor Investment Choices

Steve Keen's has a post that contains a remarkable history of predictions of the housing bubble-induced economic crisis. Reading it makes it clear that the permabulls made no sense. It was in the run-up to the crisis that Dr. Keen registered the URL "". Even as a non-economist, it was obvious to me by summer 2007 that housing was in a depression, autos were in a severe recession, and therefore the domestic economy was in or going into at least a mild recession already, with only exports keeping things afloat. Given how high stocks were, it was an easy decision to sell all I could.

After being long stocks since August 1982 on, the first exit I made was throughout 2000. It was back in but only halfway in spring 2003.

Where now?

The averages: no.

Individual issues in selected asset classes: yes.

The economy will grow until it does not, but stock prices in the aggregate are too high for one year of improved earnings to affect their fundamental overvaluation. Right now, technical and sentiment factors argue for a "correction". Will "they" squeeze some remaining shorts and goose things higher?

Could be. But the S&P 500 could be halved to merely bring its dividend yield equal to the level of the 10-year Treasury. It was only about15 months ago that this equivalence occurred (briefly). The prior time was about 1960.

I anticipate this equivalence to return, but when and at what yield levels are unknowable. Right now one can find stocks with a 6-7% free cash flow "yield" that would be available for dividend payouts. DLTR, ROST, WPI, TEVA and CB are among many issues with that "value" characteristic. In overvalued times, Graham and Dodd just don't work anymore. One day their much more stringent criteria may be useful. For now, free cash flow yield or discount to tangible book value for profitable companies are the best the market offers.

Copyright (C) Long Lake LLC 2010

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