Friday, May 15, 2009

Dow At 1000?

Should You Bother With Government Bonds?

by Jeremy Siegel, Ph.D.
Posted on Tuesday, May 12, 2009, 12:00AM

A few weeks ago Robert Arnott, chairman of Research Affiliates, caused quite a stir by publishing a paper in the May/June edition of the 'Journal of Indexes' entitled "Bonds: Why Bother". In the paper Arnott concludes:

"For the long-term investor, stocks are supposed to add 5 percent per year over bonds. They don't. Indeed, for 10 years, 20 years, even 40 years, ordinary long-term Treasury bonds have outpaced the broad stock market."

Arnott maintains that the long-term excess return of stocks over government bonds is only 2.5 percent, not 5 percent. Although Arnott doesn't identify the source of the 5 percent premium, he claims that it is widely used by pension plans and other investment advisers.

His conclusions are clearly designed to challenge the thesis of my book, "Stocks for the Long Run", which strongly advocates a diversified portfolio of global stocks as the overwhelming choice for long-term investors. (more)

Stocks still face deflationary collapse: Prechter

Thu May 14, 2009 6:50pm BST

NEW YORK (Reuters) - Longtime technical analyst Robert Prechter, who forecast the 1987 stock market crash, predicted this week that U.S. equities may plunge to half their lows hit in March as a deflationary depression bites.

Oil and U.S. Treasury bonds are also locked in long term bear markets, while corporate bond prices will plunge precipitously by next year as broad economy, banking system and company earnings sustain more damage from a financial crisis that's akin to the Great Depression, he said.

The U.S. S&P 500 stock index's .SPX rebound by nearly 40 percent since it sagged to a 12-year closing low of 676 points on March 9 is not sustainable, Prechter said in an interview with Reuters.

"It's not the start of a new bull market," said Prechter, chief executive at research company Elliott Wave International in Gainesville, Georgia. "Our models are (showing) right now that it is a much bigger bear market than most people realize, something along the lines of 1929-1932," he told Reuters in a wide ranging interview. "It's a very rare event," he added. (more)

Krugman Warns That the Run-up in Stocks Can’t Be Justified By the Fundamentals

By Bill Bonner • May 15th, 2009 •

"The market seems to be looking as if this is going to be an average recession, but it's not," said Paul Krugman, Princeton University's Nobel Prize-winning economist.

Nouriel Roubini also thinks the forecasts of a recovery are "too optimistic."

They're almost certainly right.

Krugman goes on to warn that the run-up in stocks can't be justified by the fundamentals: "It looks to me now as if the markets are now pricing in a rapid recovery, that they're pricing in a V-shaped recession, which I consider extremely unlikely."

Let's review: stocks get expensive...then they become cheap. That's just the way it works. Prices go up and down in long cycles. At the top of the cycle, they're very expensive - over 20 times earnings. At the bottom, they're very cheap, under 5 times earnings. At the top of the cycle you might need as many as 43 ounces of gold to buy the Dow stocks. At the bottom, one or two ounces will do the job. (more)

Big-picture Case for Energy Stocks is Pretty Bullish

By Dan Denning • May 15th, 2009

Maj chongqu' tI nguv bey'vetlh!

That's Klingon for, "Ooooh, that flower arrangement is soooo fabulous."

Actually, we don't really know if that's an accurate translation (not speaking Klingon ourselves). But it's been such a week of passion and debate here at the Old Hat Factory that we felt compelled to bring some levity back to the discussion.

There's certain world-weariness to the tone of the letters we've been getting this week. So in an effort to reinvigorate your animal spirits, we turned to our friends the Klingons, who came to our mind after watching the new Star Trek movie last night. More on the human imperative to act in a moment.

How about a little market analysis for a change? After touching $60 earlier in the week, crude oil closed just above $57 in New York trading. The International Energy Agency said that global oil demand would decline in 2009 by 2.56 million barrels per day. It would be the largest annual decline in world oil demand since 1981 (just before the stock market's 18-year run to glory).

Oil has risen despite OPEC production cuts, despite large inventories, and despite downward adjustments by the IEA to demand. Why would that be? Well maybe oil traders know that the supply side of the picture is the more important story. Demand is going to recover eventually. But the capital spending collapse in the oil industry beginning in 2008 has massively affected the industry's ability to supply future demand. (more)

Progressive Taxation Was Never About Fairness

By Dan Denning • May 13th, 2009 •

This is how we felt after reading over the details for last night's Federal budget.

In today's Daily Reckoning we take a merciless meat axe to the idea that progressive taxation has anything to do with fairness. Quite the contrary. There could be nothing more unfair than stealing from one man and giving to another based on his "ability to pay." But first, what's this about a budget deficit?

The fact that the budget is front page news (with extra sections of the newspapers) is a testament to how brainwashed and addicted to government the modern world is. Apparently we're all wards of the State now.

Should we really take these clowns this seriously? Sadly, we must, because they are not only spending their way into perpetual deficits, they are borrowing (stealing) from the future to do so. Aside from being ham-fisted economic ineptitude, it is also cowardly, immoral, and intellectually offensive. It also affects markets and your investments. More on that in a moment. (more)