Why over-valuations matter

With all the complacent talk and soothing reassurance from the “always-long stocks” sales force, one would think that “volatility” is but a benign nuisance that causes the odd hiccup but no lasting pain. Grin and bear; stiff upper lip; all in a normal day’s investing. Sure.

Except when valuations have become stretched to egregious levels like today. In those instances, volatility typically strikes to evaporate chunks of invested principle along with years of apparent growth and income all in a matter of hours, days, weeks or months. This chart of the Canadian Financial Sector since this secular began in 2000, demonstrates the point.

XFN Jan 27 2014

Beginning in the fall of 2012 when misplaced faith in the Fed’s Q’eternity plan went epidemic, the Canadian financial ETF (XFN)rocketed up 62% (along with the S&P and some other dividend paying sectors). Because of this huge price spike, the dividend yield dropped to 3% (from what had been above 7% if one had bought after share prices had plunged 50% in 2001-2003 and 2008-2009).

A 3% dividend may have looked like a good deal to the naive while prices were rising or staying flat, but once prices begin to give back, the irrational exuberance of the prior rally serves to devour buy and holders (most of them thinking they are in “conservative, dividend-paying, blue-chip” blah, blah, broker bologna).

So far this year, the sector is off about 4.4% since the December high. So in a couple of short weeks, holders have lost more than a year of the dividend income they were banking on and 1% of their principle. And that is nothing. To correct for all the QE nonsense since 2012, the financial sector would have to fall a further 35% from here. To retest the support it found in the last 2 bear markets, it stands to lose more than 60% from present levels. Don’t worry be happy?

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The Dow’s 5-year rhyme

I have to say, given the exhausted consumer and weak global demand, I was skeptical that the traders and churners could keep a sick dog hunting for 5 full years this cycle…but congrats to them are in order I guess. On the other hand, it just means world markets are back teetering in a hellish state of over-valuation for the third time in the past 15 years. The more they over-lever, the more painful the payback every time. Of course, the long-always insist the down cycles are completely random and unforeseeable, so they will never admit the symmetry in human behavior driving these cycles…

Dow's 5 year rhyme

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Robert Kessler: in defense of bonds and cash

Warning, the truth and common sense in this discussion may well boggle the minds of those brainwashed with conventional wisdom today. Try to hear it anyway…the truth will empower and set us free.

It is now accepted wisdom on Wall Street that the great bond rally of the past 30 years is over and that we have entered a new era of higher interest rates. Not so fast says this week’s Great Investor guest, Robert Kessler. He points out we have had many false alarms about economic growth and central bank tightening over the last 6 years only to see interest rates retreat again. Kessler has correctly defended the value of U.S. Treasuries in particular against Wall Street naysayers for more than a decade. So before you follow the stampede out of bonds you might want to listen to his defense of bonds. Here is a direct video link.

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