Saturday, February 9, 2013

Good-Bye to The Daily Capitalist, and Why the Stock Market Is Not Close to a New Real High

Now that The Daily Capitalist has unfortunately closed, I welcome any regular readers of that blog.  We will see what evolves here.  Jeff Harding set a high standard.  Perhaps it will make sense for some of his contributors to post here.  We shall see what technical or other consideration will be required.
"Working" at TDC made me a better writer and allowed me to learn more about economics and finance, and more important things as well.

Meanwhile, naturally the MSM is cheering the achievement of the major stock market averages equaling or exceeding their pre-crisis highs.

So, ever the realist, I wondered what deflator to put on today's averages.  The S&P 500 and DJIA are roughly where they were in mid-July, 2007.  So I went back and looked at what the two most "core" forms of wealth/money for the long run in America and the world are.  One is gold.  The other, with a shorter duration than gold but still long, is the 30-year Treasury bond.  In order to be comparable to gold and to eliminate the reinvestment problem, this should be a zero-coupon bond.

It turns out that, without fine-tuning the compound interest numbers, gold has returned roughly 18% per year since then, and the T-bond has returned about 16% per year.  Meanwhile, stocks have returned only their dividends.  This explains, at least teleologically, why the Russell 2000 has gone to a new high-- it has lower dividend payouts than the more mature Dow.

In other words, the stock market has dropped by about half relative to gold and T-bonds since July 2007, even including dividends.  Hold the applause.

The above said, I look at the stock-bond cycle as follows.  In Y2K, bonds yielded about 6.5%, with a flat yield curve.  Stock dividends were well under 2%.  Bonds were the overwhelmingly better choice.  Buy 2007, bonds were still better, yielding 5.25% at their high, also with a flat yield curve.  Stocks were less overvalued than in 2000, though.  Now, after the second stock crash, bonds and stocks finally have about equal yields/dividend payouts.  There is finally a level playing field.  Thus I am going to go back to my roots and focus more on stocks, believing that more than 30 years of generally successful individual stock-picking can provide insights that will allow a patient investor to actually beat the market.  I will have more to say on this.  Of course, all stock-pickers say they can beat the market, but then they/we become the market, LOL, and beating the market becomes impossible.  That said, until I left stocks between 2007 and 2009, and then went back only grudgingly, I regularly beat the market by 15% yearly, year after year, never with a down year.  That includes 2001 and 2002.  So we shall see.

I am going to submit articles on various matters to Seeking Alpha (SA).  Some have been published there.  I am going to comment periodically on matters I have been researching.

I mentioned RyanAir (RYAAY) in the last post.  In researching it, I see that it trades 15-20% higher in price in the U.S. ADR's than in Europe.  That's a red flag.  It's a great company but if bought, a correction would be the time.

The other company I have looked into and know from my combined experiences as a physician, pharmaceutical industry executive and entrepreneur, and consumer is CVS Caremark (CVS).  This stock is a clear long-term buy and hold.  They are really good- a free cash flow machine, almost all of which goes straight back to shareholders.  That's a much fairer strategy than Apple's cash-hoarding habit.  I will get a piece up on that company within the week, personal events permitting-- either here or on SA.

Over and out for now.

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