Anyone taking money off the table?

[pb4uski]

...With FAS 142, intangibles are no longer amortized annually but are instead subject to periodic writedown for impairment.....

True for goodwill and some intangibles (aka indefinite-lived intangibles)... but other intangibles were still amortized in relation to their estimated economic benefit but also subject to impairment.

 

[Lsbcal]

True for goodwill and some intangibles (aka indefinite-lived intangibles)... but other intangibles were still amortized in relation to their estimated economic benefit but also subject to impairment.

An interesting article on PE10 was written by Swedroe and mentioned at Bogleheads. Here is the Swedroe article link:
Swedroe: CAPE 10 Ratio In Need Of Context | ETF.com

If we make an adjustment from a CAPE 10 to a CAPE 6 or CAPE 5, and we use a still very long period of 56 years and operating earnings, we find the current valuation of the market is less than 20% above its mean. That’s a dramatically lower figure than the 57% difference between the current CAPE 10 and its long-term average.

...
The bottom line is that once those adjustments are considered, there’s a case to be made that the market no longer looks overvalued. However, that doesn’t mean expected returns aren’t lower than the historical average.

 

[eta2020]

The market and the economy have minds of their own, which makes timing too challenging for me, but I agree, if you've won the game, stop playing.

Just as you can not predict equities you also can not predict next 3 decades of inflation.

Hence CDs also do not provide any safety over a long period of time .

If you FIRE at 50 there is no free ride to "won the game".

 

[NW-Bound]

A young ER can always redefine the game, so he still comes out winning if something unexpected happens. See Web photo for an idea.

I am older, have fewer years left, and am close to SS and Medicare also. I don't know if I have won the game or not, but I am still playing (carefully though). It's fun.

 

[Gone4Good]

An interesting article on PE10 was written by Swedroe and mentioned at Bogleheads. Here is the Swedroe article link:
Swedroe: CAPE 10 Ratio In Need Of Context | ETF.com

Swedroe makes several adjustments to the standard CAPE calculation. Every single adjustment serves to either reduce the current calculation or raise the median benchmark to make current levels seem more reasonable.

Seriously? Every. Single. One?

That doesn't sound like someone making objective adjustments to improve a calculation. That sounds like someone making adjustments to achieve a desired outcome.

So what does he propose?

Use a 60 year average to calculate the median CAPE
On his list of adjustments I think this one makes the most sense. There are lots of good reasons to think that the equity risk premium is lower today than it was in 1950 (meaning higher stock valuations). And even at the depths of the 2009 market crash CAPE only briefly breached 12x before immediately bouncing bank into the low and mid teens. I doubt 16x is the right level for "fairly valued" stocks in the 21st century.

The CAPE 60 year median value is a shade under 20x. That sounds fair to me.

Use a 6 year earnings average instead of a 10 year average
Swedroe doesn't say why he chose to use a 6 year earnings average. He doesn't argue that it's a better measure. He simply says there's nothing special about a 10 year average and goes ahead with this adjustment. If there's not anything special about either 6 or 10, why bother making a change at all? (pst, because it lowers the CAPE value, maybe?)

But there is something special about the 10 year average. It's longer than our typical business cycle so it more likely includes both peak and trough earnings. Six years is too short as evidenced by the fact that today's six year average completely misses the earnings crash of 2008 and 2009.

Using the 6 year average results in a current CAPE of 22.5x and a 60 year median of 18.5x (based on GAAP earnings)

Use Operating Earnings instead of GAAP Earnings
This is a ridiculous adjustment. "Operating earnings" are basically earnings minus all of the bad stuff(i.e. investment writedowns, litigation expense, plant closing expenses, reorganization expense, foreign currency losses, and yes, goodwill impairments, among many, many other things.) Swedroe explains this is a necessary adjustment because of FAS 142 accounting changes to goodwill (critiqued here).

He repeats again that the change in goodwill accounting results in a 4 point overstatement in CAPE versus periods prior to 2001. But again fails to link to any source for this claim.

After all of this he concludes valuations are about 18% above their mean.

Using only the adjustments that seem reasonable gets you about ~35% overvalued.

Either way. Not cheap.

 

[Gone4Good]

Just as you can not predict equities you also can not predict next 3 decades of inflation.

Hence CDs also do not provide any safety over a long period of time .

Not over a lifetime or even 3 decades, for sure.

But right now 5 year CDs yield 2% and trailing inflation is 1.5%. That's not great, but it is a positive return.

If inflation rises and interest rates rise, I can opt out of CDs at minimal cost and move into something better.

If I own stocks at high multiples and inflation and interest rates rise do those multiples hold? Probably not.

If I own 5 year or longer bonds and inflation rises can I get out at par? Absolutely not.

So yes inflation is a concern. So too is owning long-duration assets at very high valuations.

Meanwhile the cheap put option embedded in CDs is hugely valuable in times of uncertainty.

 

[daylatedollarshort]

Some posters here have pensions, rental income, SS, other kinds of retirement income or some combination of income streams to cover living expenses completely or with minimal SWRs. Even a real return of zero would provide for a 2.5% SWR over 40 years, and most TIPS maturities have higher yields than a zero real return these days. Twenty year TIPS are currently at a .52% real yield and the thirty years at .90%.

We use liability matching for our retirement strategy and don't have a lot in stocks. I don't like losing money, especially at our ages. I'm okay with not getting big returns in retirement.

 

[eroscott]

We've started two 72t/SEPPs and the money always comes from the bond mutual fund (bucket). I have refilled the buckets recently from some equity run ups for a couple year withdrawals. Market can do what it wants for a couple years!

 

[Totoro]

The problem with writing puts on the S&P at 20% below the current price (a relatively safe bet) is that it gives you only a return of around 2% annualized, and that is with expiration 9 months out or longer. You could just buy CDs, then break them to buy stocks if and when a crash occurs.

5 years CDs for me yield 1.5% currently (I'm in the eurozone). I just checked the options on SPY-20%, annualized about 3% (expiration in december). It was 3.5% a week or so ago.

Not a huge increase, granted. Still a nice bump.

 

[Fermion]

If you wrote puts on the S&P that were 20% below the current price, couldn't you also do something with at least part of the cash covering those puts?

Maybe a very short term broker CD that you could break if the market dropped more than 20% and you were forced to buy the stock at the low strike.

Might be able to get another 0.25% or something?

edit: Wait, CapitalOne360 pays 0.75% for their online saving account FDIC insured. You could park the money securing the puts you sold there and thus add 0.75% to whatever you get for selling the far out of the money SPY puts.

 

[Totoro]

You are right.

In my case a high yielding savings account is 0.8% right now. So put (dunno, half of it?) there, not sure what the allowed margin is at my broker.

Do know that I have 5 days to cover if forced to buy.

 

[NW-Bound]

I have been doing option writing in a tax-deferred account to avoid tax complications. So, I did not think of the case for taxable accounts where you can squeeze a bit more out of that cash using CD. In my tax-deferred account, I cannot use that cash securing the puts for anything else.

I do have more after-tax cash, but it is sitting in I-bonds. Been thinking to cash it out to get better yield with option writing, but I guess I can use that cash for two purposes. The problem with redeeming these long-held I-bonds is that I would lose the deals I have had on them. But for a 15% discount on the S&P, perhaps being assigned if the market drops that bad would do me a lot of good in the long term.

Risk, reward, risk, reward... Real investing is a lot more fun and intellectually challenging than going to Las Vegas, because you get to define the game and have to determine the odds.

 

[gcgang]

Market Rally Begs the Question: Time to Take Profits? - Barron's

This weeks Barron's points out the rally has been strongest in those asset classes that have been most depressed, commodity and EM primarily, and that recently many so called safe dividend payers have taken big hits (KO, MSFT). Seems to advise taking some $ off the table now is prudent.

 

[gumshoe]

I'm a simpleton. Don't know anything about puts, calls, options, technical anaysis. Don't believe in market timing. Hate trading in and out of stocks for short term gains. All this is too complicated and too much work, mentally and emotionally.

For the last 25-30 years, have usually maintained between 85 - 95% equities, with the rest in cash. Except for a couple years in the beginning, never held any bonds. Very seldom sell, unless I lose faith in a particular stock/mutual fund/ETF. For the most part, I am a "buy and holder". Am well diversified across different industries in domestic, international, and emerging markets. No penny stocks for me. I feel safer with the big boys & established leaders for the individual stocks, although I do hold some small-cap mutual funds & ETF's.

Dividends keep rolling in from the blue chips like BA, PEP, JNJ, MRK, MO, HD, VZ, JPM, etc. There's also capital appreciation on growth stocks such as FB, AMZN, BIDU, etc.. Hold long enough, and the growth stocks may eventually become those stodgy big-cap stocks that start paying dividends, e.g. MSFT, INTC, CSCO, etc. In the meantime, I keep reinvesting dividends & capital gains from the Mutual Funds and ETF's, if they have any. Dividends from the individual stocks are used to build up cash reserves for opportunities to buy stock on sale during a downturn.

The years 2000 and 2008 were brutal, but I kept holding on to my positions and added more equities along the way. Have done pretty well with this method. I realize this is not typical, especially for someone 62 who retired at 50. But, as poster "daylatedollar short" alluded to, my risk tolerance is supported by a small pension, a little rental income from a couple of SFH's, social security (not claimed yet), and dividend income. Altogether, these sources of income more than cover my living & recreational expenses, so I don't worry too much.

Don't know if the next 15 to 20 years will serve me as well as the last. If not, I am confident I can still live off what I have til I die. If so (and if I don't have extraordinary end-of-life medical care expenses), my nephew and niece will get a nice surprise when I'm gone - and at a stepped-up cost basis. Never thought I would pass the threshold for federal estate taxes, but it can creep up on you when you are not paying attention.