Five Thought-Provoking Articles
Wednesday, November 6, 2013

    The five articles consist of an article by Brett Arends, You really can time the stock market, an article by Rex Nutting, I was right: Under Obama, spending has been flat, an article by Mark Hulbert, This seasonal pattern has turned bearish, an article by Paul Farrell, Shillerís hot P/Es powering a ĎRoaring Bullí till 2017, and an article by San Francisco Fed President John Williams, Stocks not obviously overvalued: Fedís Williams.
    Brett Arends' article argues that you can time the stock market by using the Shiller P/E ratio to determine whether the stock market is overvalued or undervalued. If you buy when the Shiller P/E ratio is low and the stock market is undervalued, and hold it until the Shiller P/E ratio says that the stock market is overvalued, then you can avoid secular bear markets and catch only secular bull markets. The problem I have with this strategy is that since the Shiller P/E ratio is the 10-year trailing average P/E ratio, you'll miss secular bull markets like the 8-year-long 1921-1929 bull market, and super-bear markets like the 3-year super-bear market from 1929 to 1932. You would have missed the entire bull market from March, 2009, when the S&P 500 bottomed at 667 to its present value of 1,770. You'd have been out of the markets from at least 2000 to 2013. From a truly lo-o-ong perspective played out over centuries, this might be perfectly suitable, but over the three or four decades or so of most people's working lifetimes, P/E ratios don't work out so well. In 1996, when the instantaneous P/E ratio on the S&P 500 exceeded 21-to-1, I was at sixes and eights, knowing that the equity markets were getting too pricey, but questioning whether I should go with the flow or buck the flow. In the end, I went with the flow, and it continued for another four years. At the stock market bottom in 2009, the "instantaneous" P/E ratio on the P/E ratio went "to infinity and beyond", not because stocks were impossibly expensive but because, for one quarter, earnings went negative.
    Rex Nutting's article reports that Last week, the Treasury Department announced that federal spending fell 2.3% this year, and that "It was the largest annual decline in federal spending since 1955, and the first time spending had fallen two years in a row since 1954-55, at the end of the Korean War.... Itís the first decline in federal spending over a four-year presidential term since Harry Truman sat in the Oval Office just after World War II." Wow! The first Truman Administration would have seen the drawdown in federal spending from WW II. Rex Nutting adds that "Awful fiscal policy has wasted millions of lives." and "The results are in, and they show that I was right, and that the Washington Post , Ann Coulter and Rush Limbaugh were wrong: On Barack Obamaís watch, federal spending hasnít grown at all." It sounds as though we've paid dearly for President Obama's futile first-term efforts to reach out to the Republicans. Interesting.
    Mark Hulbert's article argues that as we enter the second year of a presidential administration, stock market returns are generally quite poor. The only question I would raise about this is that of how much window-dressing the Obama Administration did leading up to last year's presidential election  President Obama has imposed austerity measures with falling federal expenditures in an effort to bring the budget deficit under control. The usual Fed-manipulated interest rate cycle hasn't been possible since 2008.
    Paul Farrell looks at all the predictions of market collapse and draws the contrarian conclusion. One reason he might be right is that the recovery from the Great Recession has been stretched out.
    John Williams' article concludes that, Robert Shiller to the contrary, stocks aren't currently overvalued.