Well, stocks are now down more than 10% from their recent peak--an official "correction."
So what does that mean?
Is it a "buying opportunity"? Are stocks cheap?
Not necessarily.
Over the short-term, the market could certainly snap back. And if the carnage keeps up, Ben Bernanke might announce some huge new quantitative easing program in addition to his zero-percent-interest-rates-forever policy. Or Congress might panic about the elections and suddenly address "Taxmageddon" and the fiscal cliff. Or Europe might suddenly bail out all its banks and kick the can down the road for a while.
And those initiatives might boost stocks.
On the other hand, stocks could now keep dropping until they enter a "bear market" (20% decline), or worse.
On that score, the bigger valuation picture is still not that encouraging, at least for long-term returns. Even after the recent pullback, stocks are still about 20% overvalued when measured on Professor Robert Shiller's "normalized" earnings--earnings adjusted to normalize profit margins. This is is one of the only valuation measures that actually bears some correlation to long-term future returns. (PEs based on a single year of earnings can often be highly misleading).
Specifically, even after the pullback, stocks are still trading at 20X cyclically adjusted earnings. As we can see in the following chart from Professor Shiller, over the past century, stocks have averaged about 16X those earnings. So we're still about 20% above "normal."
Importantly, though, 20X is a lot closer to normal than the ~24X recent peak. Stocks certainly aren't "cheap," but they're also not wildly overvalued anymore.
Wait, what are "normalized" earnings? Aren't stocks now astoundingly "cheap"?
In recent months, eager to suggest that stocks are cheap, most analysts have talked about the market P/E ratio relative to next year's projected earnings. And relative to those earnings, stocks do seem modestly "cheap" (12X, or something).
Unfortunately, measuring stock values against next year's projected earnings has a couple of flaws. First, no one knows whether those projections will materialize. Second, and more important, those projected earnings assume that today's record-high profit margins (see below) will persist.
St. Louis Fed
Corporate profit margins have now hit record highs. If they don't regress to the mean, it will be the first time in history that they haven't.
Over history, corporate profit margins have been one of the most reliably "mean-reverting" metrics in the economy. When margins get extended to super-high (today) or super low (2009) levels, they generally revert toward the mean. This radically changes the PE ratio.
Using single-year earnings often provides a very misleading impression of how "cheap" or "expensive" stocks are. When profit margins are abnormally high, as they are now, the PE seems misleadingly low. And when profit margins are abnormally low, as they were in 2009, the PE seems misleadingly high. The "normalized" PE ratio provides a much more meaningful view.
And measured on average profit margins, not today's super-high margins, the stock market is still a bit expensive. (We discuss this in detail here).
Sadly, this doesn't tell you anything about what the market will do next. As you can see in Professor Shiller's chart, the market has spent decades above and below the average.
What this PE ratio does tell you is that stocks still have lots of room to fall--20%, just to get back to normal, much more than that if they "overshoot."
And it also tells you that long-term returns are still likely to be sub-par. Through history, one of the most reliable predictors of next-10-year returns is the valuation level at the beginning of the period. Today's valuation level is not as high as yesterday's. But it's still higher than average.
But we're getting closer to "fair value." And that's good news for long-term investors who want a compelling long-term return. And bonds are now so expensive that stocks are highly likely to produce better returns than bonds over the next decade, even if the stock returns are sub-par.
See Also: ALBERT EDWARDS: The Stock Market Will Collapse To New Lows And All Hope Will Be Crushed
Money and passports: Is George Zimmerman's plight racial? - HULIQ.com
Shouts of injustice may calm some down now that Travyon Martin’s shooter George Zimmerman has to report to jail in the next two days.
A judge has given Zimmerman 48 hours to surrender. The judge also revoked Zimmerman's $150,000 bond.
Zimmerman failed to report $200,000 raised and stored inside his PayPal account. He and his wife discussed the evasion during jail phone calls. The two used a special code to deceive listeners and discuss the funds.
A Florida judge ruled that Zimmerman’s deceit merits revocation of his bond. Furthermore, Zimmerman’s second passport was discovered.
Some argue that his $200,000 should not be included as personal finances because that money goes to his attorneys. Others say that Zimmerman’s lie, or attempted cover-up, really harms Zimmerman’s chances at trial. They asked how can a jury believe a man who hasn’t been honest with the courts?
Others have defended Zimmerman’s two passports, explaining that he likely lost the first and ordered a second. Still, wisdom, based in logic and the law not race, dictates that if Zimmerman’s second passport was needed because he lost the first, then an honest man would have reported recovering the first lost passport.
Zimmerman’s last name, particularly European, and Trayvon’s first name, particularly African American, have set off a string of events that have pit race and parties against each other.
Many older members of the African American community believe George Zimmerman wasn’t charged with murder immediately because his victim was black. A number of African Americans and lawyers for Trayvon Martin have stated over and over that had Martin been the shooter, Martin would be in jail.
Those on the opposite end of the race spectrum, those who believe Zimmerman is a white victim, are also prominent debaters in the Trayvon Martin shooting. Many argue that Zimmerman’s hope rests with Republicans and gun lobbyists who believe in Stand Your Ground and the right to bear arms in this country as long as the owner has a legal right (permit) to carry the weapon.
Others point to an African American President who has made only one comment on the Trayvon Martin shooting. Weeks after the murder and about a week after Trayvon Martin’s death saturated cable news, President Obama told the world that if he had a son, his son would look like Trayvon. These “others’ argue that Zimmerman’s become part of a federal “witch hunt”--a sly reference to Department of Justice Deputy Eric Holder, also African American.
Communities, black, white and other, have all cried “Justice for Trayvon” thus shunning any and all notions that they’ve gathered in Trayvon’s Martin name to race bait. For many, Zimmerman’s trial is about justice, not race.
Zimmerman shot an unarmed African American 17-year-old. His lawyers will argue self-defense. The 17-year-old had THC in his system. Zimmerman had been on a prescription drug that warns of upset to the psyche, particularly with moods that cater anxiety and aggression.
What his trial and the what the law mean to George Zimmerman isn’t clear. Past behaviors, inc luding a scuffle with police that merited a mug shot and criminal record suggest that Zimmerman has had problems with authority in his past. Lying about his finances has cast an old light on Zimmerman. A light that suggests Zimmerman owns a certain disrespect and casual disregard for the American Justice System
passport cover photo credit: Wikipedia
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Money test ahead for teens - AZCentral.com
Roughly 3 million students are graduating from high school this year. Do they know enough to manage their money effectively?
Some signs suggest that teens and young adults, like Americans generally, still have a lot to learn. High-school students who this year took a government-sponsored test of money issues, known as the National Financial Capability Challenge, got only 69 percent of the questions correct on average. Arizona students did worse, notching an average score of 67 percent.
Most schools don't routinely offer practical training in financial management, even though most Americans will deal with banks or credit unions, investments, credit cards, taxes, insurance and the like.
The lack of money education is nothing new, but today's crop of teens and young adults faces particularly tough challenges. These include an unusually sluggish job market, a more complex financial landscape, an uncertain future for Social Security and heightened white-collar-theft risks.
Given the obstacles, many experts suggest young adults should do what they can now to get educated, even if it means doing it on their own.
"The mistakes they make can have costly and long-lasting consequences," said Bill Hardekopf, chief executive officer at LowCards.com, in urging today's graduates to start building sound money habits.
Alyssa Coughenour, who graduated from Pinnacle High School in May, might be more prepared than many of her peers. She has been using a debit card and checking account for two years, recently got a credit card and saves money regularly from her summer job.
She also took a course on financial basics through the Boys & Girls Clubs of Greater Scottsdale. The course touches on budgeting, saving and more.
Coughenour, who is 18 and will be heading to Duke University, also credits her parents with serving as helpful role models. "They pounded into my head that you don't want to get too deeply into debt," she said.
Coughenour said she regularly pays off her credit-card balance in full and aims to maintain a balance of at least $500 in her checking account.
John Arnold, a certified financial planner with AXA Advisors in Scottsdale, suggests that young adults build credit, but only if they can do so without maxing out on their available balance, straining to make payments or, worse, defaulting.
A lot of Americans can use a lesson in living on less than they earn.
Step one is drawing up a budget, to see where your money goes. You likely will need to track spending for at least a couple of months to get an accurate picture and to see how certain expenses vary over time. From the budget, you may be able to identify a cash surplus that can be put into savings.
Studies have shown that many Americans are woefully short of savings they can draw on in a pinch -- for that unexpected auto repair or other big expense. "Get in the habit of saving on a regular basis, even if it's only $25 to $50 a month," Arnold advises. "Building good financial habits at a young age is the important thing."
After the emergency fund, try to save for the long haul. The main advantage young adults have is time -- you can grow investments substantially with many years to work with. If feasible and if you have work-related income, set aside money in a Roth IRA, on which you can make tax-free withdrawals decades down the road.
Also, get familiar with credit. Potential lenders already might be monitoring how well you handle financial responsibilities. Your track record with debt shows up in your credit reports, and the information on file in these reports goes into calculating your credit scores.
With good scores, you generally will be able to borrow at low interest rates, while bad scores will hurt. Credit scores are checked when you apply for all types of loans, including credit cards, Hardekopf said. They also could factor in when you apply for insurance, seek to rent an apartment or even apply for a job.
Over your lifetime, you will deal with various types of financial institutions. A good first step is to learn about banks and credit unions. Make sure you can recognize the many types of fees that could apply, from ATM surcharges to overdraft and account-maintenance costs. But also recognize that you might be able to obtain checking accounts and even use credit cards for little or no cost.
Of special note, in this digital age, teens and young adults should heighten their awareness about identity theft. The Internet and social media are great for researching and sharing information, but they also offer more avenues for crooks to get at your money. Don't carelessly reveal personal identifiers such as your birth date, mother's maiden name or Security Security number.
Thieves have been known to raid bank accounts, claim someone else's income-tax return and take out loans while posing as another person. You might be able to mend the financial damage -- many credit-card companies will absorb all fraud losses, for example. But it could take weeks or months, possibly years, to clear your name.
Your financial future also will be easier if you learn basic concepts now. These include the relationship between bond prices and interest rates, income-tax rules, key types of insurance coverages and how compound interest can work -- for or against you. Also, recognize that there's a general link between risk and return -- safe instruments like bank accounts generally deliver the lowest returns while riskier assets such as stocks stand a good chance of generating higher profits if you can accept uncertainty.
The vast majority of today's graduates haven't received many classroom lessons, but the tests will come, sooner or later.
Reach the reporter at russ.wiles@arizonarepublic.com or 602-444-8616.
Money Watch: Investing tips to help put kids through college - USA Today
Q: I am a single parent. I will soon be debt-free and then I can set aside a little money for my daughter's college. Should I put it in a savings account or are there better options? I will only have four years to save.
A: Four years is not a long time horizon; however, you still need to be willing to take on some investment risk in order to grow your money.
A savings account will earn very little income at these low interest rates and you will owe tax on that interest income. But a well-diversified portfolio in a 529 plan offers better upside potential. And your earnings would grow tax free, and withdrawals would be tax free when used for college expenses.
In addition to federal tax benefits, many states offer tax deductions for 529 plan contributions. But some of the states are considering reducing or eliminating the tax deduction as they grapple with mounting budget deficits. Investors need to be very careful in choosing their own state's 529 plan solely on the basis of a state tax deduction that may or may not be there in the future.
It's wise to shop around before you choose a 529 plan. One of the best sites to compare and contrast plans is http://www.savingforcollege.com/. It provides a 5-Cap rating for each state's 529 plans, based on such things as performance and risk. A 1-Cap rating is the worst and 5-Cap is the best.
That four-year time horizon makes your asset allocation challenging. It requires you to look more at the investment markets and be willing to make investment choices that might go against popular logic.
For example, you would naturally consider an age-based portfolio option or bonds and cash as your most conservative options. However, with interest rates at record lows and the possibility that they will rise over the next four years, you would be investing in bonds at exactly the wrong time, because bond prices fall when interest rates go up.
And an age-based portfolio for an 18-year-old would be weighted heavily in bonds and cash. Given the real possibility that interest rates will rise, you might need to put more of your 529 plan into stocks to avoid the interest-rate risk in bonds.
You could place it in stable value funds, but your returns would be meager over that time horizon. Stocks, given all the volatility, have produced the best long-term total returns, but it requires taking a bit of risk.
If your daughter goes to a four-year college, you could continue to invest inside the 529 plan while she attends college, so presumably your time horizon is longer than just the four years she has until she begins college. In addition, many kids take a gap year after high school to travel and save money for college, which may give you an additional year to grow your investments.
John Gugle, NAPFA -registered financial adviser
Alpha Financial Advisors, Charlotte
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