Odds & Ends #6

1.  Sesame Street's Oscar the Grouch is singing a new tune that supposedly teaches kids about self-restraint and resisting temptation.  It's kinda cute.  Only, "stop looking at those cookies, Oscar!  Oh, there you did it, couldn't resist for more than a few minutes, could ya?"

2.  I'll admit it--I've started to take a few health supplements, after shunning them for years.  However I'm aware of excerpts such as this, that assert we Americans usually do not benefit from multi-vitamins, and that some vitamins actually increase the risk of cancer and heart disease.  (A small minority of studies showing a contrary result can sometime result in "publication bias" or, more often, reader selection bias.)  Even anti-oxidants have come under a cloud of suspicion.  More is not always better...so it goes.  It's probably more important what we avoid eating, and I'm not sure even that is anywhere nearly as important as either heredity or the mind-body connection.

3.  A recent article states that China is the largest foreign investor in U.S. firms that are critical to national security.  I guess China figures this is more valuable than our worthless government bonds.  Soon, our gigantic, bloated military and security agencies will be protecting assets that mostly belong to China.   ;-)

4.  Watch this underwater wheelchair lady.  Now ask yourself what it was you thought you couldn't do.  (Reminds me I haven't done any scuba diving in quite a while.  :-)

5.  If you're into scientific stuff (or even if you're not) here are some cool videos.

6.  This guy will hopefully make you more open to classical music and inspire you as well.

7.  Here is a Ted talk playlist on some pretty cool animals.

Economic Recovery or Stock Market Crash?

How much higher can the stock market go before it corrects?

Nobody knows. People predicted the bursting of the housing bubble literally years before it happened. I doubt it will take years before the stock market dips...more likely weeks or months.

In any case, consider these facts. As of this writing (Dec 9, 2013):

Margin buying of stocks is at an all-time high.
Stock indices keep setting record highs.
Rich valuations: The Russell 2000 average P/E = 84.5 (!) compared to 29.1 one year ago.
Consumer confidence is at a 7 month low, and retailers had weak Thanksgiving sales weekend.
VIX (volatility index) is extraordinarily low
Looming debt ceiling fight, theatrics and government dysfunction, Act II.
Looming repeat of "taper" talk. (It may never happen, but that's another story.)
A recent survey showed 57.1% of investors are bulls, only 14.4% are bears (a bearish signal)
Profit growth is not sustainable--it has been fueled by cost cutting, inventory increases and stock buybacks using borrowed money.
Gold and silver have been heading into the toilet.
Global stocks have been on the longest winning streak since 2009, with not even a minor correction.
Pundits are saying "relax; stocks will continue to go up, because they always do in December."

Companies are still pulling shenanigans despite all the empty talk about financial regulation...here's just one tiny example:   IWM, the Russell 2000 etf, is sold by Blackrock, the "worlds most respected and prudent fiduciary."  They advertise a 29.59 average p/e ratio (instead of 84.5). Want to know how they do it? If you read the fine print, they calculate it like this: Each holdings' p/e is the latest closing price divided by the latest 12 months' earnings per share. Negative earnings are excluded, extraordinary items are excluded, and p/e ratio's over 60 are set to 60.

Here's an even more bizarre and shady instance of what can only be labelled as pure evil--and yet something that is not even regulated, and thus not illegal!  Blackstone Group conspired with a client to make a late loan payment so that its own credit default swaps that it owned relating to that client company would pay out $15.6 million to Blackstone.  Incredible...this is analogous to taking out multiple fire insurance policies on your neighbor's house and then making a deal with your neighbor to light it on fire so you can collect.  Since the world is awash in $800 trillion in derivatives such as this (or about 10 times world GDP), this sort of corruption has ominous implications...in addition to the very existence of all these derivatives themselves--but that's another story.

In the interest of fairness and objectivity, there ARE some significant signs of a rebounding economy. The U.S. GDP grew by 3.6% in the 3rd quarter. The U.S. just reported the 4th month of solid job gains. It's possible that real increases in gross income (versus gross margin expansion) may yet happen.

The CAPE (Shiller) P/E's on the major indices (other than the Russell 2000) are still "reasonable" by historical standards, if you consider "reasonable" to be 20.8 versus a historical average of 15.8 for the S&P 500. There are some good reasons to be wary of the well-intentioned but overly-simplistic Shiller P/E. For instance, artificially low interest rates and a huge market fluctuation over the last 10 years make its calculation a bit questionable, although it is still better than using the regular P/E ratio.

So the U.S. stock market might not crash.  Perhaps there will only be a modest correction.  But if it does crash, it probably won't be alone. The Federal Reserve, Bank of Japan, European Central Bank, and Bank of England have all been offering super cheap financing (i.e., "printing money like crazy") and keeping interest rates artificially low. This is influencing investors to become more highly leveraged and increase their risk appetite. It is also fueling bubbles in riskier bond markets and in all types of other investments, all over the world. For instance, more money is now shifting to riskier developing countries and previously shunned countries such as Russia and Greece.  (Yes, that's right, most of the QE stimulus may end up outside the U.S.)

If a major correction is in the cards, I don't know how soon it will happen--it could still be many weeks or months away. But I find it a bit concerning. I don't know how this is all going to end up, but I believe it will be a global phenomena that will leave a lot of social and political turmoil in its wake, including in the U.S. this time around. I suspect prices of everything from stocks to bonds to every other type of financial investment all over the world may go down in unison--but again, this is only speculation on my part. This might be accompanied by dollar debasement or even a dollar collapse, especially if the U.S. starts to lose its reserve currency status due to reckless 30% budget deficits each year (papered over by QE). However, that is a far more ominous subject that is better explained by a plethora of doom-and-gloom prepper-type websites...I'd rather not go there.

Again, there's always the possibility that I'm dead wrong about a major stock market correction being in the works. The U.S. economy could continue to improve, stocks continue to advance, QE winds down in a way that avoids crashing the stock market or the housing market, and--perhaps least likely--Congress starts to get its act together and implements sound fiscal policy while avoiding sending the economy into a tailspin.

Perhaps the most likely scenario is also the most boring: A stagnant, sideways stock market for the next several years.  This would mirror what happened in Japan during their "lost decade".  In fact, from a historical standpoint, the analogy is eerily prescient.

Have a nice day. It's only money.