The Big Picture | March 2005

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Cheap Gas

Thursday, March 31, 2005 | 06:53 AM

The impact of Oil is unmistakeable -- from crimping consumer spending to affecting major purchase decisions to weighing on equities -- it is neck and neck with interest rates for the most influential market factor lately.

The WSJ notes that high oil prices is crimping SUV sales. The big, inefficient and deadly vehicles (which always seem to be in my way) are Detroit's most profitible cash cow. Don't think the secular bull market in energy over the past few years hasn't contributed to GM's woes.

And yet, Gasoline remains cheap. That's right, it is a relatively inexpensive commodity. It takes 100 million years to create; Then it needs to be explored and found, drilled into and pumped out of the ground, shipped, refined in gasoline, then transported to your local gas station where some guy pumps it into your car for about two and half bucks a gallon -- and thats for high octane premium.

(Sold to me -- I think its a steal).

Hey, its not like you don't have other options. The Journal and Consumer reports put out a chart of "most fuel-efficient vehicles by category." There are lots of hybrid models coming out. You could go pure electric. Or, you can adapt your driving habits to be more fuel efficient (I drive a stick, but not for that reason).

As a kid who grew up loving muscle cars, I assumed that by the time I was 40 gas would be $5 a gallon (which it is in Europe). So I don't complain about gas under $3. I tank up thankfully. Then I turn off the dynamic skid control, lay a patch of rubber and carve up some twisty back roads. That much fun for that little money is a bargain at twice the price.

How cheap is this drilled, transported, refined gasoline? Cheaper than water:

Other "Refined" Products Compared with Gasoline:

Product Unit Cost Price per Gallon

Lipton Ice Tea $1.19/16 oz $9.52 per gallon

Ocean Spray $1.25/16 oz $10.00 per gallon

Gatorade $1.59 /20 oz $10.17 per gallon

Diet Snapple
(preferably Peach) $1.29/16 oz $10.32 per gallon

Evian water $1.49 /9 oz $21.19 per gallon

Whiteout
$1.39 /7 oz $25.42 per gallon

Brake Fluid $3.15/12 oz $33.60 per gallon

Scope $0.99/1.5 oz $84.48 per gallon

Vick's Nyquil $8.35/6 oz $178.13 per gallon

Pepto Bismol $3.85/4 oz $123.20 per gallon

$21.19 for WATER - and the buyers don't even know the source. No wonder Evian spelled backwards is Naive.

Be glad your car doesn't run on Scope, Whiteout, Pepto Bismal or Nyquil.

UPDATE: April 1, 2005 11:45am

Yes, I was being a bit snarky in my description of Gasoline as cheap.

If you are of middle income or higher, than Gas is indeed an inexpensive part of your budget. However, if you are on a tight budget, than its an increasingly burdensome expense lately.

We see this in the same store numbers from Wal Mart and Target -- WMT in particular -- as the stock has made fresh 52 week lows; their clients are much more price sensitive than Target's . . .

Sources:
Rising Gasoline Prices Threaten Viability of Biggest SUVs
Jeffrey Ball And Joseph B. White
The Wall Street Journal
March 22, 2005; Page B1
http://online.wsj.com/article/0,,SB111145802324985959,00.html

Media Appearance: Power Lunch (3/30/05)

Wednesday, March 30, 2005 | 10:45 AM

in Media

I am back on CNBC's Power Lunch with Bill Griffeth and Sue Hererra, between 1pm and 2pm today. We'll be talking about earnings, investing, stocks and the market.

I have to assume some of the discussion will be on Monday's Bearish call. I hope to discuss where investors can hide during a downturn. Once again, I am teamed with big Joe Besecker of Emerald Asset Management. (Its Joe's turn to buy lunch, too!)

UPDATE: March 30, 2005 10:26pm

Whenever I do anything on CNBC, I get the same coupla questions over and over.

The most common one is "What's it like?" So I brought my Exilim Digital Camera and took a few snaps.

Here's what it looks like to stare into the maw of the camera:
click for larger photo

Just a little intimidating . . . (but you get used to it eventually)

>
The new CNBC studios in Englewood Cliffs
click for larger photo

are huge, and the studio offices are just gynormo; behind the white screen is where the sets are.

>
Oh, and the other question I get all the time?

It seems that every other guy on Wall Street has a crush on Becky Quick: "What's she like?"

She's very very nice (and actually does most of here stuff extemporaneously -- no teleprompter)

This is what she is like in real life:
click for larger photo

For future reference, can we come up with more erudite questions . . . ?

New Column up at Real Money (03/30/05)

Wednesday, March 30, 2005 | 10:34 AM

in Media

Tscm

.

The powers that be moved the latest column, Repositioning Before the Coming Selloff, over to the free site.

Source:
Repositioning Before the Coming Selloff
RealMoney.com
3/30/2005 7:18 AM EST
http://www.thestreet.com/_tscrmb/comment/barryritholtz/10215216.html

Mean Reversion

Wednesday, March 30, 2005 | 08:55 AM

in Earnings | Markets

Chart of the Day has yet another fascinating chart. This one looks at inflation-adjusted S&P 500 earnings:

click for larger chart:

COTD:

"Today's chart illustrates that inflation-adjusted S&P 500 earnings have surged since the latter part of 2002 and and currently rest at a level that is very near the highs of 2000. Investors will continue to pay close attention to the upcoming round of quarterly reports to determine if earnings can maintain their recent uptrend and support a further increase in stock prices. Stay tuned..."

This chart suggests quite a few things to me:

Rapid economic reinflation (post crash) fell to the corporate bottom line;
Low interest rates helped companies clean up their balance sheets;
Low wages increased profits;
Tax cuts had a very positive impact on earnings.

I would be remiss if I failed to point out one last thing: As the chart reveals, the last time we saw a surge in profits -- 1999-2000 -- we were near the peak in the market. Its a pretty straight forward analysis: As earnings momentum peaks and then fades, markets are vulnerable to corrections. Not the 15% I called for on Monday, but real, major, ugly crashes.

Also, note that with this post, I have added the category "earnings."

Source:
Chart of the Day
http://www.chartoftheday.com/20050330.htm?t

New Column up at Real Money (02/29/05)

Wednesday, March 30, 2005 | 07:11 AM

in Media

RealMoney

.

My latest Street.com column, "Repositioning Before the Selloff," is up at RM. Its based on our intermediate top call, "The Trap is set: Last Chance to Reposition" from earlier this week.

Here's an excerpt:

"Yesterday morning, I warned clients to use any lift to sell equities. CNBC reported on the call in the afternoon, and many readers have asked for a more detailed explanation.

Last week the market became so oversold that a corrective bounce was due. We saw that move begin in Monday's rally. But don't get too excited yet: I expect this bounce to last a week or so -- two at most -- before the markets start heading south again in a selloff that I expect to last until early summer, and bring the Dow down to the 8,800 to 9,000 level.

As such, I have been advising clients to use any lift as an opportunity to exit most of their long positions. In particular, I have been exhorting managers to sell cyclical, rate-sensitive and high-beta holdings.

I have aggressively sold equities, and I am now about 50% cash. I expect to be in even more cash by next week . . ."

>
.

Source:
Repositioning Before the Selloff
RealMoney.com
3/29/2005 2:15 PM EST
http://www.thestreet.com/p/rmoney/barryritholtz/10215156.html

Recession Predictions

Tuesday, March 29, 2005 | 11:31 AM

in Economy | Markets

Calculated Risk has a nice discussion going on about the difficulty of predicting recessions.

One of the more interesting charts is the SPX, pre-1990-91 Recession. If markets truly had forecasting abilities, then one would presume they would have sold off in advance of the recession.

click for larger graphic

Instead, this chart shows the index rallied right into the start of the contraction. That is hardly predictive. In this instance, the markets acted coincidentally to the recession, instead of predictively. The beginnings and ends of recessions are marked by The National Bureau of Economic Research, and are based on quantitative data.

Calculated Risk declares recession forecasting a "mug's game" -- but also agrees to play. He does not see a recession as imminent. That's consistent with my own expectations for a contraction in 2006/07 time frame.

Other sources have had some success with recession forecasting. As one commentor here noted, ECRI has a good record forecasting economic turns.

Yesterday, I linked to Jim Stack (InvesTech Research) recent recession alert, which was reproduced at Forbes. I've been a subscriber, and I find Stack's research very interesting, his track record good, and its costs relatively inexpensive.

Is There an Upside to Downloading?

Tuesday, March 29, 2005 | 08:55 AM

in Finance | Music

The Grokster case gets heard today in the Supreme Court. One of the tactics the music industry has used is to throw down the plight of the starving working musician. It plays on the emotions, personalizes the impact of piracy, replacing the corporate victim with reconizable face.

Except, of course, that its all a lie. Consider this Congressional testimony:

"Hello, my name is Roger McGuinn. My experience in the music business began in 1960 with my recording of “Tonight In Person” on RCA Records. I played guitar and banjo for the folk group the “Limeliters.” I subsequently recorded two albums with the folk group the “Chad Mitchell Trio.” I toured and recorded with Bobby Darin and was the musical director of Judy Collins’ third album. In each of those situations I was not a royalty artist, but a musician for hire.

My first position as a royalty artist came in 1964 when I signed a recording contract with Columbia Records as the leader of the folk-rock band the “Byrds.” During my tenure with the Byrds I recorded over fifteen albums. In most cases a modest advance against royalties was all the money I received for my participation in these recording projects.

In 1973 my work with the Byrds ended. I embarked on a solo recording career on Columbia Records, and recorded five albums. The only money I’ve received for these albums was the modest advance paid prior to each recording.

In 1977 I recorded three albums for Capitol Records in the group “McGuinn Clark and Hillman.” Even though the song “Don’t You Write Her Off” was a top 40 hit, the only money I received from Capitol Records was in the form of a modest advance.

In 1989 I recorded a solo CD, “Back from Rio”, for Arista Records. This CD sold approximately 500,000 copies worldwide, and aside from a modest advance, I have received no royalties from that project.

The same is true of my 1996 recording of “Live From Mars” for Hollywood Records. In all cases the publicity generated by having recordings available and promoted on radio created an audience for my live performances. My performing work is how I make my living. Even though I’ve recorded over twenty-five records, I cannot support my family on record royalties alone.

In 1994 I began making recordings of traditional folk songs that I’d learned as a young folk singer. I was concerned that these wonderful songs would be lost. The commercial music business hasn’t promoted traditional music for many years. These recording were all available for free download on my website on the Internet.

In 1998 an employee of MP3.com heard the folk recordings that I’d made available at mcguinn.com and invited me to place them on MP3.com. They offered an unheard of, non-exclusive recording contract with a royalty rate of 50% of the gross sales. I was delighted by this youthful and uncommonly fair approach to the recording industry. MP3.com not only allowed me to place these songs on their server, but also offered to make CDs of these songs for sale. They absorbed all the packaging and distribution costs. Not only is MP3.com an on-line record distributor, it is also becoming the new radio of the 21st century!

So far I have made thousands of dollars from the sale of these folk recordings on MP3.com, and I feel privileged to be able to use MP3s and the Internet as a vehicle for my artistic expression. MP3.com has offered me more artistic freedom than any of my previous relationships with mainstream recording companies. I think this avenue of digital music delivery is of great value to young artists, because it’s so difficult for bands to acquire a recording contract. When young bands ask me how to get their music heard, I always recommend MP3.com."

Source:
Before the U.S. Senate Judiciary Committee July 11, 2000
“The Future of Digital Music: Is There an Upside to Downloading?”
Statement of Roger McGuinn
Songwriter and Musician (Formerly with The Byrds)
http://www.ibiblio.org/jimmy/mcguinn/Senate.html

Americans tuning out recorded music

Tuesday, March 29, 2005 | 06:02 AM

in Music

Interesting stat: The average amount of time that Americans spend listening to recorded music annually has dropped significantly over the past 7 years:
>

Graphic courtesy of Yahoo, USA Today

>
From 290 hours per year, down to 195. That's a 32.7% decrease over less than 7 years.

Why? Between surfing the net, playing video games, or watching DVDs, people now spend about one third less of their time just listening to music. Interestingly, those other activities have some degree of music in them: Video Games are a big user of music as are Film Soundtracks and Concert DVDs. The 10 hours or more per week I listen to Streaming Radio simply was not an option pre-broadband.

Gee, I wonder if that significant decrease in recorded music consumption -- concurrent to the explosive rise in Gaming and DVD sales -- might have anything to do with the CD sales slow down?

Let's drill into the details, via the US Census Bureau Report:

>
Number of hours Americans spent using various types of media in 1998 and 2003

Activity	Hours, 1998	Hours, 2003 (proj.)	Change (hours)
TV	1551	1656	+105
Radio	936	1014	+78
Box office	13	13	0
Home video	36	96	+60
Interactive TV	0	3	+3
Recorded music	283	219	-64
Video games	43	90	+47
Consumer Internet	54	174	+120
Daily newspapers	185	173	-12
Consumer books	120	106	-14
Consumer magazines	125	116	-9
Total	3347	3661	+314

(Source: US Census Bureau, Statistical Abstract of the United States: 2003, p. 720.)

The table above, covering the five year period 1998-2003, comes from by Alex Halderman and Ed Felten of "Freedom to Tinker:"

The music industry likes to complain about sales lost to piracy, but figures that show huge sales declines only tell part of the story. Before we blame this trend on infringement, we have to make several assumptions, including that the demand for music (whether purchased or pirated) has remained steady.

Figures available from the US Census bureau suggest otherwise. Data on "Media Usage and Consumer Spending" abstracted from a study by Veronis Suhler Stevenson show the average number of hours spent listening to music by US residents age 12 and older has declined steadily since 1998 (from 283 to a projected 219 in 2003, a 21% decline). Meanwhile, home video, video games, and consumer Internet have seen dramatic gains. This suggests that people are turning to new forms of entertainment (i.e., the Internet, video games, and DVDs) at the expense of recorded music.

>

UPDATE March 29, 2005 10:41am

Rojisan has also been disussing active versus passive music "consumption" (2004), and previously discussed "the attention market." Worth checking out.

>
Source:
USA Today
Sun, Mar 27, 2005
http://news.yahoo.com/news?tmpl=index2&cid=1622&t=1111763220

Recorded Music Being Replaced by Other Media
Alex Halderman and Ed Felten
Freedom to Tinker September 30, 2004
http://www.freedom-to-tinker.com/archives/000691.html

US Census
Statistical Abstract of the United States/Shannon Reilly and Gia Kereselidze
http://www.census.gov/prod/www/statistical-abstract-04.html

Section 26. Arts, Entertainment, and Recreation
2001 1230-1262
2002 1208-1243
2003 1230-1264
2004-05 1224-1261

Devils and Dust

Monday, March 28, 2005 | 07:37 PM

in Music | Web/Tech

Devil_dust
"Before its on the Radio, its on AOL."

Uh, no. That false and embarassing misstatement precedes a marred version of Bruce's new song, Devils and Dust. (You can pre-order the disc from Sony).

If you thought AOL was annoying before, listen to this: Every 30 seconds or so, a voice intones -- right over Bruce -- "AOL Music, First Listen."

I counted at least 5 of these announcements during the course of this song. Really, really god-damned annoying. Like the lousy DJs who talk over the beginnings and ends of songs. Only this was right in the middle of the tune. Repeatedly.

If there goal was to get me to dislike AOL even more, than they succeeded gloriously. I am cancelling our one remaining family AOL account. And, I can no longer own TWX stock, as I have given up on any thoughts of a turnaround in a company that is this dysfunctional, and (lets just blurt it out): stupid.

How completely and totally do they not understand their music customers? Simply astounding . . .

The Trap is set: Last Chance to Reposition

Monday, March 28, 2005 | 11:52 AM

in Investing | Markets

Markets have reached the point where they are so oversold they are due for a corrective bounce. But I expect this bounce to be short. It should be used as an opportunity to exit most long positions, especially those that are cyclical, rate sensitive, or of the high Beta variety.

We suggest using the lift over the next 2 weeks to sell aggressively.

Several factors point to a rally: AAII sentiment shows Bulls at 23%, down from 45% two weeks ago; Bears now measure 41.9%, up from 24.8% over the same time period. Internal measures show moderate short term oversold conditions. NYSE Oversold indicator now measures -58.12 (below -50 is significant). The NYSE McClennan Oscillator reading of –256 oversold (-200 is significant) similarly suggests a pop.

Despite all these oversold signals, we remain concerned about the ongoing deterioration in Market internals and the Macro environment. The Advance/Decline Line continues to soften, as have Nasdaq 52 week Highs/Lows (See chart nearby). Fund Flow is light, and Trend lines have also broken. Upside moves are unable sustain any gains, as Momentum fades.

The Macro-economic environment is also weak: GDP has softened, personal income is not keeping up with prices, just as consumers have lost the ability to do cash out refis. Money Supply has been throttled back, and the Yield Curve has flattened. An oversold market that cannot rally on positive news reveals weakness; The Market’s inability to respond positively to a major upside revision from GE also does not bode well. It also suggests a market lacking leadership, as well as a decreasing appetite for US equities.

We also believe that the counter-trend rallies in the Dollar, Gold and Oil are of a short term, corrective nature. They can run long enough to sucker in lots of traders. Once they resume their prior trends, we will see plenty of players trapped higher, and desperate to stop the pain.

Finally, while everyone suddenly discovered last week that (Horror!) producer AND consumer prices have been going up, we are starting to become increasingly concerned about the macro impact of Derivatives. From Fannie Mae (FNM) to AIG to GE to Bershire Hathaway, too many US companies have turned into heavily camouflaged Hedge Funds. Skipping over the esoteric details, this will end badly.

This is an intermediate top call.

Take advantage of higher prices, as I expect this rally to run out of steam by early April. The Market risk is a sell off into the Summer.

Chart of the Week: Nasdaq Comp: 52 Week Highs/Lows

Monday, March 28, 2005 | 11:40 AM

in Markets

The 10-day MA of new highs-new lows on the NASDAQ (green line) is still trending below the zero line. While it can gauge oversold levels is also suggests that conditions are weak and deteriorating.

Nasdaq Comp: 52 Week Highs/Lows
click for larger chart

Source: Technimentals

Kevin Lane observes “After breaking an accelerated up trend the S&P 500 is probing the January lows (towards 1,160). Some where in and around these levels as the S&P tests a secondary up trend line and support we would suggest the market will try to at the very least make a shortterm bounce.”

Random Items:

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The Dawn of a New Oil Era?

Is Microsoft toast?
Counterpoint: In Secret Hideaway, Bill Gates Ponders Microsoft's Future

Quote of the Day:

"For every complex problem, there is a solution that is simple, neat and wrong.”
-H.L. Mencken

Aussie Home Prices Plunge

Monday, March 28, 2005 | 09:41 AM

in Economy

We've mentioned in the past that US homes are not in a bubble, but are extended as an asset class. We can see a healthy pull back of 25% to 33%.

The Australians are ahead of us in the cycle -- their economy is very much based on Natural Resources -- and they have seen some major price decreases.

So notes Australia's Sun-Herald:

Bargains Galore? Sydney's Best Bargains

table courtesy of The Sun-Herald

UPDATE: March 30, 2005 5:41am
India is still on the expanding side of the Real Estate boom
Real estate boom in India (Bangalore)

Source:
Bargains galore as house prices plunge (Australia)
Hannah Edwards
The Sun-Herald, March 27, 2005
http://www.smh.com.au/news/National/Bargains-galore-as-house-prices-plunge/2005/03/26/1111692684868.html

Ugly Quote of the Day

Monday, March 28, 2005 | 06:30 AM

in Investing | Markets

Here's an ugly quote to start your day:

"Our long-held conviction that the economy can't sustain rapidly rising interest rates remains intact. The main reason for this is the sheer amount of debt in the system and the average consumer's undesirable financial situation ... if the economy starts showing signs of weakness, then the question begins whether the Fed will continue tightening monetary policy. If it stops and we try again to artificially induce growth, then excessive speculation will remain the only game in town, eventually leading to a spectacular collapse of the financial system."

-Elliot Gue, Ivan Martchev and Yiannis Mostrous, WSW

(Why) You Suck at Investing

Sunday, March 27, 2005 | 07:03 AM

in Apprenticed Investor | Investing | Psychology/Sentiment

USA Today had an interesting article this past week (it happens). The discussion was on the fact that Most Americans no good at investing.

A more accurate title would have been "Humans not good at investing." There's a very specific reason for this; It is something I am in the middle of writing up, and will address very soon in print.

Meanwhile, here's an excerpt:

"A study by Hewitt Associates that analyzed the 2003 investment behavior and account activity of 2.5 million employees eligible for 401(k) plans exposes a trove of investment mistakes by average investors:

• Three out of 10 employees eligible for 401(k) plans don't participate, Hewitt says. That means investors are passing up free money in the form of matching contributions from their employers.

• Despite horror stories about employees at scandal-scarred companies such as WorldCom and Enron having their 401(k) accounts wiped out because they had all their money riding on their own company's stock, 27% of 401(k) investors still have more than half of their money in their employer's shares.

• And proving that investors are hardly hands-on, only 17% made 401(k) transfers in 2003.

Another Hewitt study, done in fall 2004 with Harvard University and the Wharton School at the University of Pennsylvania, found that a "non-saving mentality" persists. The study focused largely on "low savers," those who do not stash enough in their 401(k)s to earn the company match. When "low savers" learned they were passing up $1,200 a year in matching contributions, one-third said they intended to raise their savings rate. Only 15% actually did."

This factor, more than any other reason, explains why the President's Social Security Privitization idea has generated so little positive response amongst most Americans.

UPDATE March 27, 2005 9:12 am

Put aside the Social Security issue for a moment. I find the argument that people are not hard wired to be investors is quite fascinating. Wall Street uses a variation of this to suggest "professional management;" indexers use it to argue against active management; discount brokers say if you can do as well as the mediocre pros, then why pay big commissions?

All of these positions miss the bigger picture: Why are Humans Beings so ill suited to investing?

I first came across one of my favorite explanations as to why we simply aren’t hardwired to undertake risk reward analysis in capital markets many years ago; It was from Michael Mauboussin , now Legg Mason Funds chief investment strategist, formerly chief U.S. investment strategist at Credit Suisse First Boston. In a cogent and persuasive manner, Mauboussin explains the reason why: "the mind is better suited for “hunting and gathering” than it is for understanding Bayesian analysis."

Simply put, you just ain't built for it. Mauboussin breaks down the emotional and psychological impediments into 7 subtopics:

· Desire to be part of the crowd.
· Overconfidence.
· Inability to assess probabilities rationally.
· We love a story, especially when it links cause to effect.
· Use of heuristics, or rules of thumb.
· Chance.
· Fitness landscapes and the role of the inductive process.

Each of these are explained in more detail, but the bottom line remains: Most people simply do not posses the counter-intuitive skillset, or the emotional detachment, or the discipline required for long term outperformance in the markets . . .

Been round here long . . . ?

Capital markets have not been around all that long (relatively speaking).

Source:
Most Americans no good at investing
Adam Shell
USA TODAY, Posted 3/23/2005 12:12 AM
Updated 3/23/2005 1:14 PM
http://www.usatoday.com/money/perfi/general/2005-03-23-investing-cover_x.htm

What Have You Learned in the Past 2 Seconds?
Michael Mauboussin
March 12, 1997
http://www.capatcolumbia.com/Articles/FoFinance/Fof2.pdf

Fund Flows

Saturday, March 26, 2005 | 05:30 PM

in Investing | Markets

barrons_online

In the week ended Wednesday, stock funds had net cash inflows of $1.7 billion, according to AMG Data Services. Money-market funds pulled in $7 billion. Taxable bond funds had net outflows of $411 million, but municipal-bond funds gained $42 million. Results include exchange-traded funds.

Note: We've looked at Fund Flow several times over the past few years: Earlier this year on January 26 (A Promising Start, But . . .) and in the beginning of 2004: February 23 (Structural Decay) and February 26 (Reluctant Buyers on Strike at Nasdaq).

Note that at bubble peaks, fund flow gets excessive.

Source:
Cash Keeps Rolling In
Barrons, MONDAY, MARCH 28, 2005
CASH TRACK
http://online.barrons.com/article/SB111179686877590076.html

See also
Trimtabs
http://www.trimtabs.com/main/mffresearch.html

AMG Data Services
http://64.168.92.5/PGHOMEPAGE

Dot-Coms vs. Real Estate

Saturday, March 26, 2005 | 06:15 AM

in Finance | Markets | Psychology/Sentiment

As part of a continuning series of academic fisking, let's have a go at a pair of charts based on data from Yale Prof Robert Shiller in Friday's NYT. The first looks at home prices relative to inflation (but adjusted for "construction quality"), while the 2nd chart looks at the SPX's trailing 10 year P/E, again adjusted for inflation:

(NOTE: The NYT gets the blame for the charts; they are not Prof Shiller's)

click for larger chart

graphic courtesy NYT

Try as I might, I cannot see the value of using these two charts as a method of comparison. They are certainly worthless if the goal is to compare these two separate asset classes -- Real Property and Equities -- in order to draw a conclusion that one or the other is overvalued.

First, these two charts measure totally different things: The Equity chart looks at trailing 10 years earnings, while the Real property chart looks at Home values. That's an Apples & Orange comparo. Wouldn't it make more sense to either 1) compare stock market capitalization to real property values?, or alternately, b) compare earnings with a commensurate graph of real estate rents (the closest thing to corporate revenue)?

Second, why adjust these two charts -- with identical time periods -- for inflation? Its kinda silly, considering that the impact of inflation over the same 100 year period applies to both and is therefore irrelevant.

And if inflation applies differently -- Real Estate prices are driven in part by inflation sensitive interest rates via mortgages, while Equities can find borrowing and/or raw materials more expensive due to inflation -- why adjust both for inflation? Isn't that part and parcel with whether one or the other is cheap or not?

Next, I note the hedonic adjustment for "construction quality." Why? Are new homes in similar price ranges better constructed than older homes? Certianly not in my experience. It became a cliche for a reason: They really don't make 'em like they used to . . . Indeed, many older homes are more desirable than the new McMansions going up everywhere.

Counterpoint: In all fairness, Shiller is a rational observer of all things financial, and generally has a sober, well-informed perspective. His book, Irrational Exuberance, was a timely warning about high stock prices, and came out a few months before the crash. It has stood the test of time (compared with embarrassments like Dow 36,000).

As to the article the chart is from, its a fairly balanced look at the pros and cons of Real Estate these days.

UPDATE: March 26, 2005 7 6:44 am

Before posting, I wrote Prof. Shiller, asking his thoughts about these two charts. He was kind enough to respond to my request about the chart. He writes:

"The data these charts were based on are my data, but these are not my charts. I did not display these two series together in my book.

I can, though, imagine why they might have chosen to display these two charts together. The home price chart is, to the extent possible, the price of a standard home, which does not "reinvest earnings." So, to correct for the uptrend in stocks due to reinvestment of part of earnings, they decided to divide the stock price by ten-year earnings, to make the two series more comparable. Dividing by earnings takes most of the uptrend out of stock prices.

You are right one could argue that inflation might tend to have the same effect on both series.

Homes have gotten larger over the decades, that is a documented fact. It seems that some adjustment is called for."

That makes sense, and also lets the Prof off of the hook for this poor comparison. It does not convince me that the comparison is remotely worthwhile for trying to determine when this particular asset class (real property) is overvalued.

And while homes have gotten larger, so have companies (so have us Americans!).

UPDATE II: March 26, 2005 7 7:29 am

Despite the market being closed Friday, there was a WSJ yesterday (is that a first?). I bring this up to direct your attention to an article titled: "Investors Slim Down as Property Prices Bloat"

"With commercial-real-estate prices hitting records in many markets, some of the shrewdest players are cashing out.

The sellers range from old-line real-estate families to pension funds, insurance companies and other big investors. The buyers are often real-estate investment trusts, whose returns have soared recently; investors shifting money into real estate from the stock market; and eager foreigners taking advantage of a weak dollar.

Among the biggest sellers is Calpers, which often joins with other big investors when it buys real estate. Together with those partners, Calpers has sold $6.5 billion of office buildings and shopping centers in the past three months alone, accounting for half of its real-estate investments. Those properties often sold for record prices, and Calpers has more real estate on the block. It has on the market a $1.4 billion portfolio of industrial buildings it owns with Chicago-based Jones Lang LaSalle Inc.'s LaSalle Investment Management."

Smart. But note (once again): There is a huge difference between selling an overpriced asset, and the non-stop declarations heard that we are in a real estate bubble . . .

Sources:
Real Estate Instead of Dot-Coms
MOTOKO RICH and DAVID LEONHARDT
NYT: March 25, 2005
http://www.nytimes.com/2005/03/25/business/25boom.html

Investors Slim Down as Property Prices Bloat
Sheila Muto
Wall Street Journal, March 25, 2005; Page C1
http://online.wsj.com/article/0,,SB111170550360089201,00.html

Stock Market Extremes and Portfolio Performance

Friday, March 25, 2005 | 06:04 AM

in Investing | Markets

John Kuran points us to a study on Stock Market Extremes and Portfolio Performance.

click for larger graphic

Graphic courtesy Towneley Market Timing Study

While one frequently hears T-Heads mentioning how performance drops if/when investors miss the best periods in the market, one rarely hears mention of missing the worst. I recall Tom Dorsey (of DWA) discussing this some years ago.

Note that same market index performance of 12% per year (discussed prior via Jeremy Siegel) requires a very long duration to assure that level of performance.

Source:
Stock Market Extremes and Portfolio Performance
Professor H. Nejat Seyhun, University of Michigan
(commissioned by Towneley Capital Management)
http://www.towneley.com/html/study.htm

An Excuse for Bad Advice

Thursday, March 24, 2005 | 02:42 PM

in Books | Investing | Markets

This chart has been used primarily as an excuse for bad investment advice:

Source: Marketwatch

Why an excuse? It builds in an out for the advice giver: See, you just have to hold onto stocks long enough . . . then you will outperform other asset classes.

Now all we need to do is figure out how to have a 200 year lifespan.

Why brings this up now? Yesterday, Wharton Prof Jeremy Siegel (whom I have appeared on several shows with and is a genuinely nice fellow) had a WSJ op/ed. The chart above is straight out of Siegel's 1998 book Stocks for the Long Run. It sits on my bookshelf (gently mocking realists with its idealistic platitudes). Siegel's newest book, The Future for Investors, is in my queue.

Both of his books are thoroughly researched, well written -- and of little value to most Humans.

Yes, stocks go higher in the long run, but only if you have enough time -- occasionally decades -- to ride out the normal cyclical shudders. Yes, if you dollar cost averaged post 1929 crash, you might have made money. Of course, without index funds back then, there is a built-in survivorship bias, and it assumes you didn't buy dogs which went belly up. (Recall what happened to most of the original Dow stocks).

And that's before we get to the very Human ~~foible~~ behavior of not buying into the teeth of a miserable Bear market. So that aspect of Siegel's advice is terrific, if you happen to be from Mars. Most of the investing inhabitants of this rock, however, will find it quite uncomfortable to follow. Ask yourself this: How many people dollar cost averaged after 1929? How about after 2000? Except for people who set up an automatic salary w/d, most Humans didn't.

On the above chart, you will note it is in a logarithmic scale. That makes the 1929 and 2000 crashes mere squiggles. I find the scale very misleading -- If you bought in 1929, you did not get back to breakeven until 1954. Lets consider an unlucky 40 year old investor, pre-crash. By the time he hits 65, his retirement investments would have returned back to where he started -- exactly 0% per year (Mazel Tov!).

A similar situation occured in 1966, following the post WWII rally. That's when the Dow first kissed 1,000. This time, it took a mere 16 years to return to breakeven. So our unlucky 40 year old investor had the same 0% annual returns for 16 years -- and he hit breakeven on his 56th birthday, instead of his 65th (post '29 crash).

Now, lets consider someone born in 1960, who put a lot of money to work in early 2000. I suspect that this investor will hit that breakeven point sooner than either of the prior example. Unless he was heavily invested in the Nasdaq. Anyone in the financial business knows all too many investors in that situation.

Siegel is out shilling for his new book, which I am sure is full of terrific advice that human beings will probably not be able to live with. Hence, it will ultimately do more harm than good. (DISCLOSURE: I have skimmed, but not fully read the new book).

That's the difference between profs and traders: Behavioral economics in the real world, versus neat, lovely unrealistic theories in academia . . .

Sources:
The Next Great Wave of Growth
By JEREMY J. SIEGEL
March 23, 2005; Page A14
http://online.wsj.com/article/0,,SB111153988480887131,00.html

Charting the long run
By Peter Brimelow & Edwin S. Rubenstein,
Last Update: 12:01 AM ET April 14, 2003
http://cbs.marketwatch.com/news/story.asp?dist=&param=archive&siteid=mktw&guid=%7B66F978EE%2D329E%2D4FA2%2DACB0%2DA0726D5D5350%7D&garden=&minisite=

Death of Equities II

Thursday, March 24, 2005 | 06:20 AM

in Media

As long as we are talking magazine covers this morn, I am still waiting for someone (anyone) to find this (previously mentioned here) August 13, 1979 Business Week magazine for me:

click for larger graphic

Many thanks to Paul for the photo
(Does this mean you have one?)

The Magazine Cover Indicator Strikes Again!

Thursday, March 24, 2005 | 05:53 AM

in Markets | Media

Here's a (belated) recognition of a contrarian signal: The Magazine Cover indicator

"The Incredible Shrinking Dollar"

Source: Newsweek

I've been meaning to post this for a week, ever since Aaron Task mentioned it in Columnist Conversation -- but I never got to it.

BTW, is it just me, or does this paragraph (from the cover story) strike anyone else as disingenuous?

"There's been plenty of good news of late about the U.S.

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