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Generous Mr. Market?
Old 12-27-2004, 05:08 PM   #1
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Generous Mr. Market?

Mr. Market has been acting rather generous of late. He seems to be offering fair prices for many different stocks right now.

One wonders about the reason behind this personality change...will he move on to giddy, or regress back to humbug and put things on sale again?


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Re: Generous Mr. Market?
Old 12-27-2004, 10:29 PM   #2
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Re: Generous Mr. Market?

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...will he move on to giddy...
My guess would be yes. The government plans to borrow $2 trillion for private accounts, and about half of this money will find its way into equities. In addition, boomers are still storing up equities for their retirement in their 401k plans. They don't seem to particularly care how low the dividend yield on the S&P drops.
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Re: Generous Mr. Market?
Old 12-27-2004, 10:54 PM   #3
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Re: Generous Mr. Market?

Isn't the market P/E something like 22 right now? Where are these bargains you're talking about?
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Re: Generous Mr. Market?
Old 12-28-2004, 05:37 AM   #4
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Re: Generous Mr. Market?

Pontification and bs wise - I vote for a gut grinding 10-15 yr sideways movement punctuated by a few 30% dips and rally's until P/E and other valuations fall to the low side of the historical channel. Nothing changed much since Ben Graham - except world markets may join interest rates and real estate as alternate/competing sources of investment.

I have no take on how the 'newer' commodities investment vehicles ala PCRIX may alter the landscape.
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Re: Generous Mr. Market?
Old 12-28-2004, 08:31 AM   #5
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Re: Generous Mr. Market?

At the current 22 P/E of the "market" the earnings
yield is about 4.5%. Tack on 3% for inflation and
we can expect an average annual return of about
7.5% going forward over the very long term. Who
knows what it will do next year, but with the recovery
getting long in the tooth we might see a little RTM
sooner rather than later. In any case, stick with
your planned asset allocation and rebalance as
needed.

My 60/40 "coffeehouse" with a double weight to International (about 28% of stock) has served me
well the past year and I will ride that horse again.
I hope fate does not put a burr under my saddle.

With the yield curve threatening to invert, you might consider reducing the duration of your bond allocation. Personally, I plan to use the "bar bell" approach and split my allocation between Vanguard's TIPS fund and Short Term Investment Grade.

Best wishes to all of us for a prosperous new year!

Cheers,

Charlie
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Re: Generous Mr. Market?
Old 12-28-2004, 08:52 AM   #6
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Re: Generous Mr. Market?

Quote:
I didn't realize the wording was so confusing *
No, it was clear to me. * You said the market was being generous. * That means the market is giving something to me, right? * And not only that, it is giving it to me at "fair prices." * How could I possibily interpret that to mean overvalued?

Not being snarky, just a sanity check. * As soon as I start having difficulty parsing simple sentences, I need to check myself into the nearest ER home.
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Re: Generous Mr. Market?
Old 12-28-2004, 09:15 AM   #7
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Re: Generous Mr. Market?

Quote:
With the yield curve threatening to invert, you might consider reducing the duration of your bond allocation.
Inverted curves scare me as they usually signal bad times ahead =(

Looking at the curve though, it looks ok for now:

http://www.bloomberg.com/markets/rates/

And a cool Java curve:

http://www.stockcharts.com/charts/YieldCurve.html

What do you look for that signals an impending inversion?
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Re: Generous Mr. Market?
Old 12-28-2004, 11:16 AM   #8
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Re: Generous Mr. Market?

It seems to me that the yield curve is getting less
steep every time Greenspan & Co. meet. Long
yields are not going up much yet but the short
end is moving up at 0.25% per clip. It won't take
long at this rate. But I am no expert .... just an
interested observer.

Cheers,

Charlie

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Re: Generous Mr. Market?
Old 12-28-2004, 05:23 PM   #9
 
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Re: Generous Mr. Market?

Quote:
It seems to me that the yield curve is getting less
steep every time Greenspan & Co. *meet. *Long
yields are not going up much yet but the short
end is moving up at 0.25% per clip. *It won't take
long at this rate. *But I am no expert .... just an
interested observer.

Cheers,

Charlie
I think it is a matter of time before long rates start to spike. I think the bond market is basically waiting for the slightest indication that the Fed is no longer on top of officially reported inflation, and then we will see a pretty quick march to roughly 5% on the 10 year. Alternatively, if big corporate borrowers start getting back into the market to raise capital for substantial expansion, you will see both rates and credit spreads widen. When will the latter happen? Watch capacity utilization rates. If we get to and stay above 80%, watch for rates and spreads to start going up.

As for Mr. Market, who the heck knows. The indexes appear to be no bargain, but I wouldn't call it bubble territory. However, I would say that the market has priced in pretty healthy profit growth for next year. If it doesn't materialize, watch out below.
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