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
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
Stocks post their worst day of 2012 - Los Angeles Times
Investors headed for the exits this week amid fears about Europe's continuing debt woes and concerns about China's economy weakening. But a dismal U.S. jobs report released Friday seemed to push investors to a breaking point.
Major U.S. indexes all posted sharp declines of more than 2% in what was the worst day for stocks this year.
The Dow Jones industrial average lost 274.88 points, or 2.2%, closing at 12,118.57. The broader Standard & Poor's 500 index lost 32.29 points, or 2.5%, to 1,278.04. The Nasdaq composite dropped 79.86 points, or 2.8%, to 2,747.48.
Some $525 billion poured out of U.S. stocks during the last week, when the blue-chip Dow erased its gains for the entire year. The S&P was still up 1.6% for all of 2012. Both indexes were on the verge of an official correction — a decline of 10% from their recent highs — while the Nasdaq ended the day down 12% from its March 26 high of 3,123 points.
"We are correcting, without a doubt," said Robert Verderese, a managing director at Knight Capital Group. "It's really just chaos on a global scale right now, and today's economic data out of the U.S. just really put the nail in the coffin."
The Labor Department reported that employers added only 69,000 jobs in May, far fewer than the 150,000 jobs economists had predicted. U.S. manufacturing also came in under expectations.
The nose dive for U.S. markets followed a rough day in European equities markets. Of major European markets, German's DAX fared the worst, ending the day down 3.4%.
As investors sold off stocks, they plowed their cash into safe investments, pushing down Treasury yields to records lows. The benchmark 10-year Treasury note's yield fell below 1.5% for the first time ever. Bond yields move inversely to prices.
"There's maximum fear," said Douglas Cote, chief market strategist at ING Investment Management in New York. "People are just running for safe, liquid assets."
What was especially disheartening to investors was that things had been looking up for the U.S. economy.
Consumer spending, a crucial economic driver, rose in April, as did construction spending.
The troubled housing sector had shown signs it was regaining its footing. Home sales are rising along with housing starts, permits and builder confidence. Mortgage rates are at record lows and vacancy and foreclosure rates have been moderating.
And U.S. corporate profits also have beaten expectations, Cote said.
"The market doesn't seem to be recognizing that," he said.
Wall Street got its first bad economic snapshot Thursday when the federal government reported the economy grew less in the first quarter than previously estimated.
Gross domestic product grew at a 1.9% annual rate in the first three months of the year, slower than 2.2% as previously measured, the U.S. Bureau of Economic Analysis said.
"It's really jobs and housing — those are the keys to our economy," Verderese said. "Until those things are turned around, we're going to be in trouble for a while."
As investors fear a U.S. economic slowdown, Wall Street will still focus heavily on Europe in coming weeks.
The European Central Bank will meet Wednesday, and Greece will hold elections June 17 that will determine whether the country follows through with austerity measures required as part of a bailout.
Meanwhile, the continent's leaders have yet to solve the Eurozone's intractable debt crisis. Spain's banking system is in turmoil. The future of the euro common currency remains in doubt.
Investors are hoping for coordinated monetary and fiscal efforts by global leaders to boost confidence, Verderese said.
In the U.S., congressional gridlock ahead of November's presidential election could prevent any coordinated fiscal strategy to boost the economy, he said.
"We're still in wait mode," Verderese said. "There's really no reason — other than that they're down — to buy stocks."
US STOCKS-Stocks erase most of 2012 gains after jobs report - Sify
"The 10-year yield and VIX are suggesting the vast majority of investors are choosing to panic," said Brian Jacobsen, chief portfolio strategist at Wells Fargo Funds Management in Menomonee Falls, Wisconsin.
"It's been pretty clear for the last year that Europe was going to be a drag for the global economy."
Jacobsen views the steep pullback as a buying opportunity and said he would not revisit that view unless the S&P 500 falls below 1,250.
The Dow Jones industrial average lost 241.92 points, or 1.95 percent, to 12,151.53. The S&P 500 Index dropped 28.63 points, or 2.18 percent, to 1,281.70. The Nasdaq Composite fell 70.26 points, or 2.49 percent, to 2,757.08.
Financial sector stocks were among the worst hit, with the KBW bank index down 4.4 percent, its largest daily drop since early November.
"Most investors don't think the problem in Europe is going to infect the U.S. economy as much as it would the U.S. financial system," said Wells Fargo's Jacobsen.
JPMorgan Chase & Co fell 3 percent to $32.17 and Bank of America Corp was down 4.2 percent to $7.04.
Data released later in the session was less bleak. U.S. construction spending rose 0.3 percent in April and the Institute for Supply Management said its index of national factory activity slipped to 53.5 from 54.8 in April, just missing expectations..
More than five issues fell for every one that rose on both the New York Stock Exchange and the Nasdaq.
In one of the few positive moves of the day, Newmont Mining surged 7.1 percent to $50.52 and Barrick Gold added almost more than 7 percent to $41.82 as gold posted its biggest one-day rise in more than two years.
Homebuilders were among the weakest stocks. Pulte Group plunged 10.8 percent to $8.35 while D.R. Horton lost 8.3 percent to $15.22. The PHLX housing sector index fell 6 percent, but it was still up nearly 14 percent for the year.
Romney reveals he's worth $250M in new financial report - Daily Herald
WASHINGTON — A new financial report from GOP presidential candidate Mitt Romney shows that his personal fortune remains near $250 million, about the same as last year even after a mass sell-off of stocks from his vast investment portfolio.
Romney’s campaign said Friday that his assets ranged between $190 million and $250 million, and a tally by The Associated Press put the figure at the high end of that range.
The new financial report from Romney describes sales over the past year of a large amount of stocks that had been managed through his blind trust. The stocks sold included such familiar corporate entities as Boeing, Volkswagen and Pepsico.
The stock sales also included several notable firms whose interests had conflicted with Romney’s stances — among them China-based businesses Hang Lung and Komatsu. Romney has advocated toughened dealings with China’s government over its expanding economic interests.
Romney campaign spokeswoman Andrea Saul stressed Friday that the investment decisions for Romney and his wife, Ann, were made under a blind trust administered by a Boston-based lawyer who has long worked with Romney. “Governor and Mrs. Romney’s assets are managed on a blind basis,” Saul said. “They do not control the investment of these assets, which are under the control and overall management of a trustee.”
In 2007 during his first presidential run, Romney had assured critics that the trustee, R. Bradford Malt, would see that his investments would not clash with his positions or Republican party stances. But the new 2012 disclosure — along with other Romney financial documents released earlier this year — showed that the Romneys held onto some of those investments well past 2007.
The annual financial disclosure report that Romney turned over Friday to the Federal Election Commission showed a slightly wider range — between $83 million and $255 million — than the narrower asset range released by the Romney campaign. A Romney campaign official who spoke on condition of anonymity to discuss the candidate’s finances said that the campaign’s figures were slightly more accurate because of differences in valuation.
The new financial disclosure shows that even after his stock sales, Romney still made millions of dollars over the past year in lucrative bank notes and investment funds, including nearly 40 different funds associated with his former company, Bain Capital.
Those assets include at least two investments that had not been previously disclosed in Romney’s 2010 financial report. Both were described as “Bain Capital Inc.” funds. One was valued at nearly $2 million; the other slightly more than $3,500.
In notes provided Friday with the disclosure, Romney’s trustee explained that the income from those investments and others cited in the disclosure were part of Romney’s retirement agreement with Bain Capital. Romney’s 2010 financial disclosure did not provide any details about his retirement agreement. The specifics of that agreement — which provided Romney with steady income in the 13 years since he left Bain Capital in 1999 — have never been made public.
The notes explain that the two “Bain Capital Inc.” funds are from expired entities that “formerly operated investment advisory businesses.” The notes say that the income was provided to Romney under “true-up payments” — in essence, catch-up payments — to make up for payments not made before the entities ceased operation. Romney campaign officials were not immediately available to further explain those payments.
Romney also reported owning as much as $500,000 in gold — a holding similar to what he owned last year. He also reported $260,000 in stock retainer distributions from the Marriott Corporation, where he served on the board of directors until early 2011. Romney’s father, George Romney, was close to the Marriott family, and the firm’s current chairman, J.W. “Bill” Marriott is a prominent fund-raiser and has donated $500,000 to a pro-Romney political committee.
Romney made $190,000 in speaker’s fees for speeches at Emory University, Barclay’s Bank, the International Franchise Assn. and the Intercontinental Real Estate Fund. He also received as much as $100,000 from proceeds from his campaign-themed book, “No Apology.”
Romney’s stock sales unloaded dozens of investments that had been managed under his blind trust by several investment management companies. The campaign did not explain the rationale behind the stock sales, but tax forms released by the Romney campaign earlier this year showed that both the blind trust overseeing his and his wife’s investments began shedding many stocks in 2010, just before he geared up his presidential campaign.
Among the stocks that Romney sold, according to Friday’s disclosure, included Wal-Mart’s Mexican operation, which has been roiled by payoff allegations, and British Sky Broadcasting, the television operation sought by media magnate Rupert Murdoch.
Other sold stocks included Komatsu and Schlumberger, firms that have been targeted in the past for doing business in Iran. The blind trust also shed an investment in Fresenius Medical Care, a German company that has done work in stem cell research, which Romney has said he opposes.
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