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The economic crisis has ushered in the end of a generation long bull market.  Most average investors ignore the fact that heavy market volatility is a sign of an unhealthy stock market.  The stock market since the lows reached in 2009 has been on an unstoppable bull run.  Yet the real economy where most Americans work and spend money has not reflected any of this irrational exuberance.  The S&P 500 has rallied 53 percent from the lows reached in early 2009 and that is including the current retracement back.  On Tuesday the stock market pulled back on data showing consumer confidence plunging from what analysts had expected.  Outside of Wall Street the economy is walking on eggshells.

If we look at S&P 500 data we find that we have entered into a new era:

The above chart highlights milestones for the S&P 500 dating back to 1968.  For the S&P 500 to double from 100 to 200, it took a slow 17 years.  From 200 to 400 it took 6 years, an incredibly quick jump.  Another 6 years after that and the S&P 500 was riding high at 800.  From 1997 to 2007 the S&P 500 went from 800 to 1,576 in the intraday high that is now far in the past.  It almost doubled yet again in a 10 year horizon.  Yet that trend has been broken.  The S&P 500 is now back to 1,041 and has pulled back to levels seen in 1998.  Does anyone really see the S&P 500 going to 2,000 any time soon?

“The stock market needs to reflect the underlying health and productivity of the overall economy and not simply the gambling penchant of Wall Street banks.”

Most of America is dealing with the new austerity that is being thrust on them from an unforgiving economy and a government that seems to be preoccupied with helping out the financial industry before setting things right with the average worker.  In other words, the middle class is being thrown to the wolves in this crisis.  The government is serving the interest of big money at the detriment of the middle class.

If we look at the volatility of the S&P 500 over the past 22 years we’ll notice two different stories.  From 1988 to 2000, the stock market enjoyed a once in a lifetime bull run.  There were virtually no negative years and some incredible year over year gains.  Keep in mind that we are looking at a 12 year timeframe on a tiny chart but this is over a decade of mental conditioning here.  If we look from 2000 to our present day, the massive amount of volatility has sent the S&P 500 to levels seen in 1998:

2008 was the worst stock market year since the Great Depression.  That is how bad that one year turned out for investors.  This large amount of volatility simply reflects a weak real economy and the recent stock market run to the peak of the mountain was super charged by taxpayer money going into large investment banks who in return went into the stock market and gambled your hard earned money.  Clearly it hasn’t done much for consumer confidence, aiding in the foreclosure crisis, or bringing jobs back.  What then did all this money really accomplish?

If we look at the VIX which looks at option trading volume and is a good sign of volatility we also see this recent stock market reshuffling:

What we can gather from all this volatility is a new paradigm has arrived.  Most popular financial books that hype compound interest always focus on a convenient 7 to 10 percent annualized gain in the stock market.  That may have been the case from 1968 to 2000 but that isn’t the case anymore.  What are you going to invest in when U.S. Treasuries are barely offering any interest and bank accounts are offering rates of 0.01 percent on savings accounts?  Your mattress would rival some of these rates.

The stock market right now is one large casino.  No real reform has taken place and that is why we see no real changes in the economy yet trillions of dollars funneled into a financial abyss.  Someone got this money but clearly it wasn’t the middle class.  The public was told that money was going to go to shore up the housing market (didn’t happen) and to keep lending to the public going (didn’t happen).  So what did happen was that big investment banks used taxpayer money and gambled to bolster their own profits.  That was basically the smoke and mirrors campaign that we have gone through.

The middle class is largely a casualty of this all.  9 out of the top 10 jobs in this country are in low paying service sector work.  We hear this rhetoric about a double dip but the middle and working class never got out of the first dip to begin with.  Who is this double dip for?  Wall Street gamblers who have funneled taxpayer money into the casino?  Must be nice for their 53 percent rally but sadly none of that is reflected in the real economy.  If we want to be happy about gambling why not talk about the person who just won the lottery last night.   Wall Street certainly won the lottery here at the expense of the taxpayers.  The collapse of consumer confidence is merely a reflection of what most of us already know.  The real economy has never recovered.

This is the end of a generational bull run just like the 1920s came crashing down with the Great Depression.  Unlike that time, we have allowed the banks and Wall Street to continue to pollute our real economy with their gambling schemes.  Can you believe that no real reform has taken place?  No wonder why average Americans are displeased with both political parties and are furious at Wall Street.

My Budget360

Warren Buffett is All Wrong About Goldman – Something is Rotten on Wall Street

Shaun Rein, Forbes.com 

Vanguard’s Jack Bogle: Investors Take Heed… A Financial Crisis Is Imminent

“If we do nothing, we’re headed for a real crisis.” – Jack Bogle

Jack Bogle is 81 years old, but he still doesn’t pull any punches.

I visited him at his headquarters outside Philadelphia – and it didn’t take long before he expressed some strong opinions about Wall Street…

Jack Bogle’s Had “Enough” of Wall Street

For starters, Jack Bogle is madder than hell about the recent troubles on Wall Street. Specifically, that includes excessive compensation at Goldman Sachs (NYSE: GS : 149.32, -0.18) and speculation from the likes of John Paulson, who’s profited from contrived doom-and-gloom investments (for example, on the real estate collapse).

Citing Teddy Roosevelt, Bogle argues that “rank speculation” is bad. “If you’re adding value in society, the sky’s the limit. Bill Gates can earn all he wants, but when John Paulson makes $3 billion shorting the real estate markets, that’s enough.” (Bogle recently wrote a book called Enough.)

Bogle continues: “Wall Street doesn’t lose. Speculation on Wall Street subtracts value from our society. It’s a gamble, like Las Vegas, pitting one investor against another.”

As such, Bogle sees little value in trading or speculating by hedge funds or day-traders. He said the $6 trillion in trading by Wall Streeters every decade is a “real waste of the nation’s resources. It makes no useful contribution to society. When I came into this business in 1950, the turnover on the NYSE was 25%, now it’s 250%.”

And he was critical of Fidelity funds, a competitor, for hyping its returns and encouraging short-term trading.

I countered that speculators and traders offer a vital benefit to Main Street by raising much needed financial capital for new companies (IPOs). But Bogle, known as the “conscience of Wall Street,” would have none of it. His only hero is the long-term investor (Vanguard’s primary customer).

As founder of the Vanguard Group of funds, his investment company is famous for providing low-cost investing (the annual expense ratio of Vanguard funds is only 20 basis points). Established in 1975, the Vanguard S&P 500 Index Fund is also the largest mutual fund in the country, with a combined value of $150 billion. The Vanguard Group as a whole manages over $1.3 trillion.

But the fact that turnover has catapulted so much and the cost of doing business on Wall Street has fallen sharply is arguably something that Vanguard has contributed to. Because of the financial revolution, bid-ask spreads and commissions are at historic lows.

So how should you invest in this new era?

Jack Bogle Says to Keep it Simple… And Invest According to Your Age

Overall, Jack Bogle is optimistic about America. And while he likes President Obama, he’s worried about a looming financial crisis, due to excessive deficits and unfunded liabilities:

“He inherited most of this mess from Bush, but listen, if we do nothing, we’re headed for a real crisis.”

To solve the deficits, he urged “strong medicine” – for example, raising taxes, including a $1 gasoline tax, and reducing benefits.

From an investment standpoint, I asked Bogle about putting money into various asset classes, such as bonds, growth stocks, foreign investments, real estate and gold. Specifically, I mentioned David Swenson’s strategy and Alexander Green’s Gone Fishin’ Portfolio – both of which have proved very successful recently.

Bogle likes the idea of a simple mix of bonds and stocks. He suggested that the percentage of bond holdings should equal your age. For example:

• If you’re 30, then 30% should be in bonds, 70% stocks.
• If you’re 80, then 80% should be bonds, 20% in stocks.

But otherwise, he’s skeptical about adding real estate, gold and other exotic investments to one’s portfolio. “I don’t like the idea of complex investing, other than simple stocks and bonds.”

So if you’re looking for the cheapest way to buy a broad-based index fund, consider:

• The Vanguard S&P 500 Index Investor (VFINX)
• Or the Vanguard Total World Index Investor (VTWSX).

Finally, I asked Jack Bogle about his lasting legacy and lesson in life. He responded quickly: “Character counts. I think I’ve made the world a little bit better for investors.” Indeed, he has.

Is It Time to Go to Cash?  

By Charles Hugh Smith

 
The Wisdom of Crowds: Americans Refusing To Buy Into the Rally

By Charles Hugh Smith

The U.S. stock market has been rallying for over a year, yet “retail” investors are selling, not buying. Is this “the wisdom of crowds” in action?

A funny thing happened on the way to the greatest stock market rally since the 1930s–the “retail” (individual) investor is selling stock mutual funds, not buying. As I noted yesterday, According to BusinessWeek/Bloomberg, U.S. investors dumped $369 billion into bond mutual funds since March of 2009, while according to Reuters, they extracted $26 billion from equity/stock funds. In other words, the great unwashed public isn’t buying into the “return of a new Bull Market” and “the recession is over, we have a V-shaped recovery” stories being relentlessly flogged by “tout TV,” the MSM and inside-the-Beltway hacks and factotums.

Perhaps they are taking note of reality on the ground, and refusing to accept the pearls of wisdom being forced on them by their “betters”?

Analysts and other “experts” are confounded that the public is recalcitrantly refusing to buy into their usual “pump and dump” schemes. In the normal course of events, “experts” pump stocks as the greatest investment opportunity of a generation and that making money in the market is like stealing candy from a baby, etc.

Then, as the “retail” investor/speculator buys into the hype, the insiders sell (distribute) their shares, leaving the “retail” marks holding the bag as the insiders go short and profit from the collapse of stock valuations.

This worked extremely well for the “smart money” in 1998-2002 and again in 2003-2007.

Individuals are shunning stocks like the Devil himself (more than an analogy) while placing their money in “safe” bonds (safe until interest rates rise–see yesterday’s entry) and money market funds, which are holding about $3 trillion in cash.

The “experts” and apparatchiks are drolling over that $3 trillion; they keep hoping the retail investors will finally break down and transfer those trillions into the stock market, and thence into the accounts of the “smart money.”

Remarkably, individual investors seem to have learned the old lesson, of “once burned, twice shy” rather well. Having lost $11 trillion since the global financial meltdown began in earnest in late 2008, “the little guy” no longer believes the stock market is a fair and open market, nor that it is a “wise investment” to “buy and hold” as their “betters” keep insisting.

This raises the interesting possibility that the “crowd” has more insight and wisdom than the “experts” and shills. The notion that groups have a collective wisdom which exceeds that of “experts” was explored in two recent books: The Wisdom of Crowds and Crowdsourcing: Why the Power of the Crowd Is Driving the Future of Business .

“Crowdsourcing” is now a hot buzzword, but in essence any transparent market is form of crowdsourcing. But as we all know, the transparency of the stock market is only a useful illusion–useful to those pulling the strings behind the screen.

The crowd is no longer buying the “the stock market is a transparent, open market” propaganda, which is partly why they’re pulling money out of equity mutual funds.

In other words, the crowd is speaking by staying away in droves.

There is abundant evidence that the “smart money” has melted the market higher by buying and selling to themselves in various forms of high-frequency trading and manipulation of the futures contracts. None of this raises an eyebrow on “the Street” or in Washington; the “smart money” players are benefitting, and the only fly in the ointment is the retail investors’ annoying refusal to jump on board the “Bull market rally” so insiders can sell to them before pulling the plug.

It seems clear that the crowd of individual investors is telling the “smart money” that they can take this rally and shove it. The “experts” continue to cluck and tsk-tsk that the “dumb” individual who is sitting on cash instead of being fully invested in the wonderful stock market is foolishly mssing out on a rally which “has plenty of legs” and “is only moving higher as corporate profits recover” and all the other enticing siren-songs they have long mastered.

Maybe the “smart money” experts are right, and the market will only keep rising essentially forever, as it did from 1982 to 2007. But then maybe the “crowd” has sniffed a rat and is refusing to play the 3-card monte game offered by the “experts.”

Interestingly, corporate insiders are selling at a furious pace. Doesn’t that give the lie to the “smart money” assertions that corporate profits are set to skyrocket and the stock market is the one place you want to be if you want to rake in stupendouly easy gains?

We’ll see who is wiser, the crowd or the “smart money.”

Stock Market Casino Royale – S&P 500 is Overvalued by 100 Percent – Earnings do not Justify Current S&P 500 Levels. Financial Markets Setting up for Another Correction.

Posted by mybudget360

When I look at the S&P 500 like most people do, you would expect that this wide cross-section of companies in the U.S. would reflect an accurate measure of the true health of industries in our economy.  Yet the S&P 500 is fully disconnected from any historical measures of valuations.  It is startling to see people talk about the wild swings in the stock market as if this were somehow standard in a regular market.  The S&P 500 fell by a stunning 58 percent from the peak in summer of 2007 to the low in March of 2009.  But from March of 2009 to February of 2010 the market has rocketed back up by 63 percent.  This kind of massive market volatility is not indicative of a healthy stock market.  This is a symptom of a system that is having a really hard time valuing assets since much of the toxic financial assets are still lurking in the murky black box of many financial institutions.

Let us first look at the S&P 500 price to earnings ratio (adjusted for inflation):

Source:  Robert Shiller, www.multpl.com

130 years of data and each major financial crisis has sent the PE ratio falling between the 5 and 10 range.  This crisis has kept PE ratios elevated to the point that the S&P 500 is still valued at twice of what it should be if we use moderate historical valuations.  And if we measure the bubble via earnings, valuations during this bubble got even more out of line compared to those prior to the Great Depression.  Yet in this crisis, valuations never made it down to a more realistic level.  This is endemic of our current financial system where market alchemy is suddenly supplanting any rational analysis of earnings and actual potential growth.

Take a look at inflation adjusted earnings:

Earnings have collapsed during this market turmoil yet the market is up some 63 percent.  What is the rally based on?  A lot of the rally is based on easy money flowing into financial institutions that are using their black box to make trades and maneuver around accounting rules to make out with billions in profits while the real economy is mired in real fundamental problems.  And this is easy to see since all you need to do is look at how consumer credit has contracted over the crisis:

Now ask yourself the following question; if we are a consumption based society and a large part of our consumption is fueled by debt, doesn’t a massively contracting credit market mean people are spending less?  Of course.  The above chart merely reflects what average Americans are dealing with.  They are adjusting their household budgets to reflect stagnant wages or lost jobs.  They are battling with the reality that their homes are not worth what they once were during the halcyon days of the bubble.  Yet the stock market has rallied as if we are back to the heyday of 2007.

This rally is really something to behold:

The only other time we saw such a sharp drop and rally was during the Great Depression.  Yet the depression dragged on for over a decade and here we are less than one year from the bottom of this market correction and all of a sudden we expect the market to be valued at these levels with no justification from actual earnings?  It just doesn’t make any financial sense.  We are back to seeing bubble like behavior.

Middle class Americans are largely not participating in this rally.  Clearly banks aren’t lending anymore even though they clamored for additional funds to provide credit to Americans.  The home loans banks are making are all backed by the U.S. government which only adds further fuel to the flame.  If you really want to see what sector by and large has benefitted the most from this rally, just look at the financial sector:

While the S&P 500 is up 63 percent and that in itself is stunning, the financial sector index is up a stunning 173 percent in this same period.  Have the banks really gotten that much better?  Is credit really flowing from their doors?  Not really but banks have managed to take taxpayer money and funnel it back into the stock market that is largely becoming more and more like a casino.  The structure is setup for quick profits even if it means long-term destruction for our economy.  Why try giving a boring 30 year fixed mortgage and earn a modest fee, even though the client will be better off in the long run when you can dish out a toxic mortgage with a high commission but will eventually lead the borrower to ruin?  That is the structure of our current financial system and nothing has really changed even though we have seen the most volatility since the Great Depression.

The current stock market valuation tells us that the stock market will hit another correction.  Short of incomes going sky high or earnings doubling each subsequent quarter, at a certain point valuations need to come back down to Earth.  Ironically the low reached in March of 2009 actually reflected a more sensible valuation of the economy.  Right now the S&P 500 is betting that things are back to the good old days but clearly this is not the case.  We should now be absolutely cautious when people try to value stocks or assets on potential values and not what reality is currently reflecting.