12 SEP 2010, Sunday (Odds and Ends)

• Just a post to put some info up that I'll be able to search and find in the future.
• Probably put another post up later on the market...was pretty much a nothing week.

• US Treasury Yields historical perspective...interest rates.
• Goldman marks top in Municipal Bond market???

• Historical PE Ratio of SP500.  PE Ratio is price / earnings...how many $ are investors willing to pay per $ of earnings.  Sound investment is when rational investors pay as few $ for stock as possible for higher earnings potential.
• This is a fundamental measure of the stock market (economy) which rises and falls, cyclically.  It's not a timing tool.  More of an environmental indicator much like a thermometer.  
• Just as temperature changes for many different reasons, the PE Ratio does, too.  PE Ratio rising...stock prices are advancing faster than earnings OR earnings are falling faster than stock prices.  PE falling...stock prices are declining faster than earnings OR earnings are rising faster than stock prices.
• Using history as a guide, you can see what the norm was since 1900.
• Let's say that the red line boundary is a "Stocks are hot!" area...people are willing to pay up for stocks regardless of earnings (Love 'em!!!).  And, the green line boundary is a "Stocks are cold!" area...people are unwilling to pay up for stocks regardless of earnings potential (Hate 'em!!!).  It can stay hot or cold for long stretches, as you can see.  That's OK!  You're still going out...you just dress appropriately...so to speak.
• Now, to the macro thinking....but first some background...
• In 1975, IRA's were authorized (and further expanded in 1982) just as the Baby Boomers were hitting their 'high productivity years' (ie, max work and spending for family, housing, cars, kids college, etc).  Even though they were spending big, they were saving big, too!  It was this stable, large and growing, pool of funds that became the investment capital necessary to fund the research and development which brought previously unimagined products to the marketplace (ie, computers, Internet, cell phones, etc, ring a bell for anyone?).  Private investment capital (ie, savings) and private spending by hundreds of millions of free individuals...THAT is what powered the innovative economy we enjoyed in the 1980-90's.  It was one very long positive feedback loop...a virtuous cycle. 
• NOTE:  Government spending, government direction of particular industries (ie banks, autos, housing, healthcare, energy production, etc...cough, cough) nor government bailouts of failed financial giants (without prosecution of fraud when present) played no part in that discussion.  The only government involvement (and it was probably 100% unwittingly initiated) contained in the discussion was to encourage savings by individuals...our capitalist system did the rest.  It's not magic nor is it rocket science.  It's capitalism!
• Pssst!  Can someone please explain that to the fella at the top of this post...I would really appreciate it!
• OK, back to the PE discussion after that groundwork was laid...
• One big question is why did it get hotter than ever before in the mid 1990's and stay that way for so long?  One possible answer is the "locked up" savings (ie, IRA's) coupled with a booming economy due to new technologies.  With regards to stocks...it was a definite "Love 'em" phase.
• Next question...where to next?  Is it possible that as the Boomers are now drawing their IRA savings down, the stock market will lose some of it's underpinnings for several years?  Has that been, in part, what is occurring now?  Was the subprime mess just the catalyst?  Are we moving toward the "Hate 'em" phase for stocks?  I'll guess we'll know in a decade or so.  Which brings me to the old familiar Secular Bear Market reminder below...   

• Sooo, what is to be garnered from this PE Ratio information for the typical "buy and hold" investor...back to the PE Ratio chart...
• Buy and hold opportunities come along infrequently.  However, they do tend to come after the economy has been down on the mat for a long time, private debt burdens are reduced and savings begin to rebuild the required fuel for the capital investment cycle again...it'll happen...it just takes time.  
• Buy and hold environment?  You can see them in the chart...the closer you get to the green line (or below it).  Buy and hold fares better in the "Stocks are cold...Hate 'em" environment of single digit PE Ratios AND investors are shunning / swearing off stocks "for good".  It doesn't seem to me that we're there...people aren't afraid of stocks as too risky.  But, the Buy and Hold time is coming...tell your kids!
• America is not done!  We've been here before and we'll get through it this time too .  The machinery of capitalism is just "down for a maintenance period" now.  The machine is still working...just at a low output during the maintenance phase.  Government can help by stepping aside and let the technicians (Adam Smith's "invisible hand"?) do the work unimpeded..."Hey kid!  Quit throwing wrenches in there and just go get me a Coke while I finish my work here".  She'll be back up and running in awhile.  
• Patience, care for one another and good decisions along the way are all that is necessary!