Thursday, April 20, 2017

Observations and Sample of Recent Trades: 4/20/17 (GAL, LXP, SPGYF, RDHL)/Trump the Autocrat Want-To-Be

Trump the Autocrat Want-To-Be:

Donald congratulated Turkey's Erdogan for winning a much disputed referendum that expands his powers and erodes Turkey's Democratic institutions: Trump Congratulates Erdogan on Turkey Vote Cementing His Rule - The New York Times The winner of the 2019 election, which will be Erdogan, can dispense with Turkey's Parliament. Both Trump and Erdogan are hostile to any checks on their power including the checks provided by a free press and the courts.

Trump Congratulates Erdogan on Gaining Vast New PowersTrump to Erdogan: Congrats On Your Dictatorship! | The NationDonald Trump criticised for congratulating Recep Tayyip Erdogan on winning Turkish referendum | The Independent

In a November 2015 conversation on Steve Bannon's radio show, Trump admitted that he had a conflict of interest with respect to Turkey:

"I have a little conflict of interest 'cause I have a major, major building in Istanbul. It's a tremendously successful job. It's called Trump Towers—two towers, instead of one, not the usual one, it's two." 

Erdogan presided over the opening ceremonies. How Donald Trump's Business Ties Are Already Jeopardizing U.S. Interests-Newsweek

Trump has the strongest authoritarian tendencies of any President.

Stocks, Bonds & Politics: GOP's Mass Deportation Plan & Economic Disruption/GOP's Problems With the First Amendment

Stocks, Bonds & Politics: Trump The Classless/Trump as the Victim of a Fake News Conspiracy

Stocks, Bonds & Politics: The GOP and First Amendment Conservative Values

Trump is reportedly considering abolishing the White House "We the People" petition website in order to save money. White House Considers Dumping Petition Site

Over 1M people, a new record, signed a petition calling for Donald to release his tax returns.  Petition the White House on the Issues that Matter to You | We the People: Your Voice in Our Government

Is America Still Safe for Democracy? | Foreign Affairs



A  number of analysts believe that the recent rally in bonds is based on a growing belief that the GOP's tax plan will not pass, which is a plausible theory. The market is beginning to price in the death of Trump’s tax reform - MarketWatch If a plan does pass, it may not mean much to the economy.  

Saudi Arabia, Kuwait signal likely extension of oil supply cuts | Reuters

Number of people collecting unemployment checks hits 17-year low, jobless claims show - MarketWatch

Philadelphia Fed factory gauge slides again from 33-year high, but remains elevated - MarketWatch

The FED's Beige Book report was positive: The Fed - April 19, 2017

Reuters ran this story last Wednesday. Exclusive: Putin-linked think tank drew up plan to sway 2016 U.S. election - documents | Reuters This story is yet another confirmation of Russia's presidential election meddling. Since Russia thought that Clinton would win, notwithstanding Russia interference on behalf of Trump, the second prong of Russia's attack was to intensify "its messaging about voter fraud to undermine the U.S. electoral system’s legitimacy and damage Clinton’s reputation in an effort to undermine her presidency, the seven officials said." Trump was working along the same lines, claiming repeatedly that a Clinton victory would be due to massive voter fraud. Putin and Trump were in sync on that effort. Stocks, Bonds & Politics: Trump and Massive Voter Fraud Allegations-Cover For Voter Suppression

Possible conflict of interest involves Ivanka Trump-CBS News ("China gave her business potentially lucrative trademark approvals on the day that she and President Trump were having dinner with the Chinese president at the Trump estate in South Florida.")

Trump’s claim that ‘no administration has accomplished more in the first 90 days’ - The Washington Post

White House misspells UK prime minister's name in official memo

Trump claims immunity as President in lawsuit-CNN (the one where he is charged with inciting an assault and battery of a protester)

I certainly believed, based on statements made by Trump and his Defense Secretary, that a fleet had been dispatched to North Korea's shores in the event Kim Jong Un detonated a nuclear bomb in celebration of his grandfather's birthday last Sunday. The fleet was actually sailing south to rendezvous with the Australian navy for exercises. I wonder if any North Koreans have commented on the Dear Leader's funky hairdo saying something like, "you need to quit using a blind barber".

Despite talk of a military strike, Trump’s ‘armada’ actually sailed away from Korea - The Washington Post (contrary to statements made by Defense Secretary and Trump)

Nothing to see here: US carrier still thousands of miles from KoreaAircraft Carrier Wasn’t Sailing to Deter North Korea, as U.S. Suggested - The New York Times

Trump-O-Meter: Sue his accusers of sexual misconduct | PolitiFact


1. Intermediate Term Bond/CD Ladder Basket Strategy 

A. Bought 1 Dow Chemical 3.5% Senior Unsecured Bond Maturing on 8/15/24

FINRA Page:  Bond Detail
DOW Dow Chemical Page at Morningstar/ E.I. du Pont de Nemours Page at Morningstar
Credit Ratings:
Moody's at Baa2
S & P at BBB

This bond can now be called at par value plus accrued and unpaid interest without penalty:

Dow Chemical and Dupont are in later stages of securing approval for their combination. Asset sales plan secures EU backing for $130B  Dow, DuPont merger-ReutersDuPont expects Dow merger to close later than expected-ReutersDuPont - DuPont and Dow to Combine in Merger of Equals

In 18-24 months after the merger is consummated, the combined entity currently plans to split into three companies: Agriculture, Specialty Materials, and Specialty Products. I do not know how the debt will be divided among those three companies.  

Dupont's bonds have a higher credit rating. Moody's affirms DuPont's A3 ratings; changes outlook to negative 

YTM at Total Cost (99.35) = 3.601%

B. Bought 2 Essex Property LP 3.25% Senior Unsecured Bonds Maturing on 5/1/23

Issuer: Essex Property LP-Operating Entity for and guaranteed by Essex Property Trust Inc. (ESS)

ESS Essex Property Trust  Page at Morningstar
Finra Page: Bond Detail (prospectus linked)
Credit Ratings:
Moody's at Baa1
Moody's upgrades Essex Property's senior debt to Baa1; outlook stable
S & P at BBB

YTM at Total Cost (99.628) = 3.318%

ESS Analyst Estimates 
Essex Apartment Homes | Apartment Home Communities

Essex recently sold $350M of 3.65% senior notes maturing in 2027. 

C. Added 1 JNJ 2.45% Senior Unsecured Bonds Maturing on 3/1/26

Issuer:  Johnson & Johnson (JNJ)

FINRA Page: Bond Detail (prospectus not linked)
JNJ Johnson & Johnson Page at Morningstar
Credit Ratings:
Moody's at Aaa
Moody's rated J&J's notes Aaa; stable outlook
S & P at AAA

YTM at Total Cost (96.09) = 2.952%

JNJ Analyst Estimates
JNJ 2017 1st Quarter Report (response on 4/18/17: JNJ $121.82 -$3.90 -3.10%)
Johnson & Johnson Maintains Top Moody’s, S&P Credit Ratings - Bloomberg
JNJ SEC Filings
JNJ 2016 Annual Report

Last March, JNJ sold the following senior unsecured bonds:


D. Added 1 American Water Works Capital 3% Senior Unsecured Bond Maturing on 12/1/26:

Issuer: American Water Capital, guaranteed by American Water Works Co. (AWK)
AWK American Water Works Co Inc  Page at Morningstar
Finra Page: Bond Detail (prospectus linked)
Credit Ratings:
Moody's at A3
Moody's Upgrades American Water to A3

YTM at Total Cost (98.036) = 3.238%

AWK 2016 Annual Report
AWK Analyst Estimates

E. Bought 2 Precision Castparts 2.5% Senior Unsecured Bond Maturing on 1/15/23:

FINRA Page: Bond Detail (prospectus linked)
Credit Ratings:
Moody's at A2
Moody's affirms Precision Castparts' A2 senior unsecured ratings (December 2016)
S & P at AA-

YTM at Total Cost (99.058) = 2.676%

Precision Castparts was acquired by Berkshire Hathaway. Berkshire does not guarantee this debt.

2.  Equity REIT Common and Preferred Stock Basket Strategy:

A. Added 100 LXP at $10.05- IB Trading Account:

LXP Stock Quote 

I bought the day before the ex dividend date, hoping to capture one or two quarterly dividends and to sell the shares for a 5+% profit. This is small ball. The stock has been trending down since late February when it was trading at over $11.25. LXP Stock Chart (shows possible double bottom with support near $9.75).

Buying the stock just prior to an ex dividend can make some sense depending on the circumstances when there was a decline materially greater than the dividend amount shortly before that date which did happen with LXP.

I recently discussed LXP when I bought its 2024 senior unsecured bond. Item # 1.D.: Stocks, Bonds & Politics: Observations and Sample of Recent Trades: 3/25/17 (SGZA, FFBC)/Trumpcare Kaput

I am generally not willing to press my luck with this stock and will certainly consider selling when the price goes over $11.

I also own 175+ Shares in two Roth IRA Accounts (snapshots intra-day 4/20/17): 

The open market lot purchase referenced in the first snapshot was discussed in this posts: 

Item # 2. ADDED 50 LXP AT $7.73 ROTH IRA and 100 in IB account at $7.8: Update For Equity REIT Basket Strategy As Of 1/11/16 - South Gent | Seeking Alpha

3. Continued to Pare Non-REIT Stock Allocation:

A. Eliminated GAL: Sold 60+ at $34.63+:

Profit Snapshot: +$46.93  

Quote: SPDR SSgA Global Allocation ETF

I am dumping a variety of small ETF positions that have not performed that well.

GAL  Page at Morningstar (currently rated 4 stars)

Sponsor's Webpage: GAL: SPDR SSGA Global Allocation ETF, Active ETFs (expense ratio=.35%)

GAL Holdings

4. Small Cap Biotech Lottery Ticket Basket Strategy:

A. Bough 30 RDHL at $9.56:

Thirty shares was the maximum amount of enthusiasm that I could muster.

Quote: RedHill Biopharma Ltd. ADR (RDHL)

Subsequent to my purchase, RDHL issued this press release: RedHill Biopharma Receives FDA Orphan Drug Designation for YELIVA® for the Treatment of Cholangiocarcinoma


Company Website: Home | RedHill

In November 2015, RIZAPORT® was approved for marking in Germany. So far, the FDA has not approved the drug for the U.S. Another NDA is expected to be submitted in the 2007 first half. The FDA gave a Complete Response Letter in February 2014. "The FDA letter raised no questions or deficiencies relating to RIZAPORT®’s safety and bio-equivalence data, and did not require additional clinical trials. The questions raised by the FDA primarily relate to third party CMC and to the packaging and labeling of the product."

I am buying these small cap lottery tickets for entertainment purposes. The bond buying spree is not providing much in the way of excitement and that is an extreme overstatement. 

5. Small Cap Canadian E & P Lottery Ticket Basket Strategy:

A. Added 50 Whitecap Resources at USD $ 7.80 (Grey Market Listing):

US Grey Market Quote Priced in USDs: Whitecap Resources Inc.  (SPGYF:OTC)
Toronto Quote Priced in CADs: Whitecap Resources Inc.  (WCP:TOR)
Home - Whitecap Resources 
Whitecap Resources confirms monthly dividend for march of $0.0233 per share
Whitecap Resource announces continued reserves per share growth and record low reserve addition costs across all categories (2/27/17 Press Release)

I have nothing to add to my prior discussion found in Item # 3A.

Disclaimer: I am not a financial advisor but simply an individual investor who has been managing my own money since I was a teenager. In this post, I am acting solely as a financial journalist focusing on my own investments. The information contained in this post is not intended to be a complete description or summary of all available data relevant to making an investment decision. Instead, I am merely expressing some of the reasons underlying the purchase or sell of securities. Nothing in this post is intended to constitute investment or legal advice or a recommendation to buy or to sell. All investors need to perform their own due diligence before making any financial decision which requires at a minimum reading original source material available at the SEC and elsewhere. A failure to perform due diligence only increases what I call "error creep". Stocks, Bonds & Politics: ERROR CREEP and the INVESTING PROCESS Each investor needs to assess a potential investment taking into account their personal risk tolerances, goals and situational risks. I can only make that kind of assessment for myself and family members.


  1. Comments from the Treasury Secretary is giving the market a lift today.

    “Whether health care gets done or health care doesn’t get done, we’re going to get tax reform done.” The tax bill will be done "very soon".

    That contradicts Donald's recent statement that Trumpcare needed to pass before turning to taxes.

  2. South Gent,

    I took some ALDX shares two days ago. Barring insider trading (which does not seem likely) the price movement of ALDX today exemplifies the impact of institutional investors' decisions on the illiquid micro cap biotech stocks. I think the floor of ALDX is at $4.50, its secondary public offering price, until their clinical trial results come out.

    1. Y: I do not recall seeing before today a biotech stock going down after announcing a FDA orphan drug designation.

      "Aldeyra Therapeutics, Inc. Receives Orphan Drug Designation from the U.S. Food and Drug Administration for ADX-102 in Sjögren-Larsson Syndrome"

      ALDX closed down 16.35% based on what appeared to be a positive news event.

      $4.35-0.85 (-16.35%)
      At close: 4:00PM EDT

      Volume was extremely heavy:
      Volume 1,827,007
      Avg. Volume 45,229

      The market cap is now at $65.8M.

      There was at least one large institutional seller into the early morning strength. That selling apparently lasted throughout the day and probably brought out a lot of short sellers front running the action.

      On a fundamental basis, I would just highlight what I said in my last post. Institutions do not believe that this company will succeed. That opinion is expressed in the price, even before today's pullback, and the lack of any partners for the compounds.

      Taking on a Phase III trial would likely require a capital raise. I would not say whether a bottom which was at $4.2 is in place until I see how much stock the company has to sell to fund ongoing trials. Possibly some investors were surprised that ALDX would continue with a trial for the indication mentioned in today's press release. It is hard to understand how that could happen since the company has been stating its intention to do so for some time now:


      A major catalyst that could change the share price dynamic would be for a large drug company agreeing to a partnership deal that both takes the share dilution issue off the table and validates the science with a second opinion.

      I am working my way up to 100 shares in my Schwab account, using commission free trades to buy. I had a fill for 20 shares at $4.7 and later entered another order for 20 shares at $4.2. Although the shares did touch that limit intra-day, I did not get a fill.

      I believe this is the press release announcing the Phase 2 results which only had 12 patients:

      "NS2 consistently produced clinically meaningful effects in reducing the severity of ichthyosis. As assessed by central review, five of six subjects (83%) treated with NS2 achieved a rating of "almost clear" or "mild" on global assessment. Six of six (100%) subjects treated with NS2 improved over the course of therapy as assessed by central review, and the improvement was greater than that observed with vehicle-treated patients (p < 0.05). For NS2-treated subjects, mean reductions in ichthyosis severity were greater after 8 weeks of therapy than after 4 weeks of therapy....Cholesterol, which is significantly elevated in the skin of SLS patients, was reduced in NS2-treated patients more than in vehicle-treated patients (p < 0.001). NS2 was observed to be generally well tolerated and there were no significant adverse events, serious adverse events or discontinuations in the trial."

    2. South Gent,

      Micro cap stock like ALDX is difficult to short because you need to find some brokers with enough shares to loan the shares to you before you can sell short.

      Perceptive Advisor seems to be the only institution (hedge fund) that made a major commitment at ALDX's secondary public offering. I would hope they know what they are doing.

      The one possibility is that some institutions that had allotment at the secondary offering price of $4.50 wanted to sell to lock in the profit.

      Time will tell.

  3. Trump is saying now that a new healthcare bill will be passed soon.

    “We have a good chance of getting it soon. I’d like to say next week, but I believe we’ll get it. Whether it’s next week or shortly thereafter.”

    However, given Donald's propensity to spew a constant stream of B.S. and Bombast out his wazoo, I would note that "a senior House Republican aide said the bill isn’t ready and there’s no plan for a vote next week or at any time in the future."

    Link to Bloomberg article on the purported progress of Trump's tax plan:


    "The Real World of Oil Has a Warning for Financial Markets"

  4. "Trump has the strongest authoritarian tendencies of any President. "

    I'd like to reframe that (i'm feeling punchy). He has authoritarian tendencies that contradict our democracy's very thesis.

    We have never had a president with that predilection before. Even ones who used a lot of executive orders, were at least patriotic to the basic concepts of the U.S.A..

    I didn't realize the climb today was from the Treasury Secretary's claiming tax reform is coming like a speeding bullet. I get the impression this market will rally if anything looks moderately okay with the admin. It no longer cares if the expected reforms actually take place. It's just happy to have an "agent for change" at the helm and any change reinforces that.

    I've been at a friend's house this week who's dealing with family loss, and much to my surprise, and she doesn't have wifi. Other than a handful of mins watching news, I have no idea what's going on in the world. What I've seen so far - not reassuring.

    The VIX model would still say to keep steady course? Yet in the past, you've used sense, as well as the model to make decisions.

    1. LMH: The Vix Model remains in a Stable Vix Pattern, viewed by the Model as an ongoing cyclical bull market.

      The VIX Model is not a timing model for long term bear and bull markets.

      Investors are accepting without reservation the promises being made by Trump and others in his administration.

      The GOP will be arguing that their corporate tax cuts will pay for themselves by generating greater growth. Corporations will invest the tax savings to create more jobs and growth rather than to buy back stock, to increase the dividend, and to sweeten management compensation packages.

      60 votes are needed in the Senate when the tax cuts increase the deficit beyond the 10 year budget window. So if the deficit is projected to increase, the tax cuts would expire after 10 years and would have to be passed into law again which might not be possible.

      The GOP will try to rely on their trickle down economic theory again, implemented through a dynamic scoring process that will show by Trump fiat that cutting taxes creates more tax revenue and lower deficits, and that will allow the tax cuts to be made permanent.

      The result will be even bigger deficits and a moving forward of the inevitable day of reckoning.

    2. "The VIX Model is not a timing model for long term bear and bull markets.

      Investors are accepting without reservation the promises being made by Trump and others in his administration.

      I'm not sure what you mean by this. I'm thinking, that the VIX model is useful for what to do as crash conditions appear and how to time their up and down movements once they start showing up.... but isn't useful for identifying a long term bull or bear cycle, nor useful for timing a coming bear before the VIX pattern starts asserting itself.

      Therefore, the high flying expections, are to be judged for whether they indicate a problem with the market, since the VIX model doesn't incorporate "pending worries" and only comes into play after the worries are more than pending.

      I understood that correctly?

      What motivates a company to spend on the future instead of buybacks and bonuses? What's made companies more inclined to spend on buybacks since the 2008 events?

      The tax cuts going away in 10 years has no direct relevance to investing right now. It's a problem, but not part of current stock market movement.

      I read that corporate tax rates when special deals are included, are really not that much lower than other countries, so cutting them isn't going to make the degree of meaningful impact that is talked about...

  5. Once again, I'm less than coherent. I meant that I've been staying at someone's house to help them, and there's no wifi there, so I have not been keeping up and aware of the world.

    Nice to have found out what the rally was about :).

  6. SVNLY: I received the annual dividend today in both my Fidelity and IB accounts.

    Svenska Handelsbanken AB ADR (SVNLY) is based in Sweden.

    Under Sweden's tax treaty with the U.S. I am entitled to a 15% withholding tax, but the broker has to assert my U.S. citizenship to secure that rate. Otherwise, Sweden will collect 30%, the same rate applicable to citizens of countries that have no tax treaty. Another issue is whether SVNLY pays the dividend through a channel that permits the broker to secure easily the proper tax rate.

    For the dividend paid into my IB account, 30% was withheld.

    For the dividend paid into my Fidelity account, I was charged 15% but a fee was deducted from the dividend that in effect brought the withholding up to 29%. I would have been better off with a 30% withholding tax which I could at least recover through a foreign tax credit.

    For whatever reason, dividends paid by SVNLY have what I would just call an unsolvable problem.

    For Nordea Bank, which is also a Swedish company, I received a 15% tax rate for the dividend paid earlier this month, and had to pay the ADR custodian $2.5 which is a standard annual fee. With the ADR fee, the total amount withheld was at 18.55% of the total.

    I had also bought 30 shares of Novartis (NVS) in my IB account to see how that firm handle the Swiss tax. The correct 15% rate was withheld.

    I recover foreign taxes through credits to my U.S. federal tax obligation and was able to take a credit for the entire amount of foreign dividend taxes collected in 2016.

  7. South Gent,

    Here is a very generic question: From your experiences in a correction what type of instruments loses its value faster? BDC, REIT, mREIT, MLP, HY, Biotech, Financials, Small Cap, PMs, Materials, or ...? Do you have a structure in mind when you pare your holdings?

  8. Y: I am just about done in my stock allocation reduction. I generally have reasons for selecting stocks and stock funds to sell.

    For example, I have knocked known my regional bank stock allocation due to (1) the robust rally since the election and (2) the consensus forecast that net interest margins would expand has proven to be wrong so far but that currently erroneous future forecast is not expressed in the prices. NIM is actually contracting rather than expanding.

    I expressed a reason for paring GE recently which was specific to that company.

    Smaller stock fund positions that have been mediocre performers are always sources of cash for me. I mentioned the ETF GAL in this post.

    Selling higher cost lots and keeping lower cost ones is a standard technique as well. This trading strategy basically involves selling the rips and buying the dips in a disciplined manner. And, this strategy forces a measure of discipline on my buying. Generally, I will buy back lots previously sold only when I can reduce my average cost per share. A variation permits me to buy as a short term trade which was the case with the LXP purchase discussed in this post.

    The most important asset allocation change over the past five months has been the movement from cash to individual bonds/CDs.

    As to which asset classes will go down the most in a bear market, it depends on the then existing circumstances. What is causing the bear market?

    If the 20+% decline is due to a valuation reset, rather than a fundamental change in the economy, high beta and richly valued names will generally go down more. A 50 multiple to 12 month TTM GAAP earnings might become a 20 or 25 multiple.

    The Russell 2000 will generally go down more than the S & P 500 and will become more volatile as well. That is why I used TWM more than SDS as a hedge in 2008.

    RVX is the volatility symbol for the Russell 2000.

    18.18+0.16 (+0.89%)^RVX

    14.63+0.48 (+3.39%)
    At close: April 21 4:14PM EDT^VIX

    The Russell 2000 and RVX started to flash warning signals before SPX and and the VIX prior to the Near Depression period.

    The iShares Russell 2000 ETF (IWM) topped out in June 2007 whereas the S & P hit its top in October 2007. The RVX started to flash warnings before the VIX.

    Regional bank stocks generally topped out in 2006 and had started to decline long before the S & P 500 topped out and turned south, which was another warning. The ETF KRE was launched in 2006, hit $50+ in December 2006, and was already in a waterfall type decline by October 2007:

    I noted at the time that many regional bank stocks started to roll over in 2005. Why were they declining in value throughout 2007? It was not NIM or current earnings.

    Junk bonds and BDCs will go down more than higher quality bonds when the stock decline is due to a recession or worst.

    During a mild bear stock market, I would anticipate that 80+% of the common stocks will decline in value. At a 30% decline for SPX, 50+% declines in individual common stocks will become far more common.

    The variables and combinations are too numerous too mention. History needs to be a guide, and I discuss stock market history all of the time.

    1. SG - so another predecessor to real declines coming, is some areas seeing it beforehand in a waterfall way (not a regular looking pullback).

      We haven't had any of those recently have we?

    2. LMH: Not to my knowledge, but you would not have known trouble was coming looking at a S & P 500 chart in March 2000 or October 2007 either. The VIX was flashing trouble ahead.

  9. South Gent,

    Thank you for the detailed response. Several big shots are sounding the alarm about the market lately. "If and when" the general public start taking a precautionary stand (even without any sign of serious problems)the picture will get ugly very quickly. Does it look like big gurus (e.g., PTJ and Klarman) vs. the Fed (Yellen)? Can they fight the Fed (that might have QE4 in the pocket)?

    Re. RVX just by glancing its 10 year chart the RVX spikes in 2010 and 2011 did not leave any lasting damage. Maybe QE2 (2011) and QE3 (2012-2013) saved the market?

    1. Y: There was a spike in the VIX as well in 2011 and the SPX declined that summer by almost 20%. However, using the VIX Model, the market was still in an Unstable VIX Pattern in 2011 that started in August 2007 with a Trigger Event. In that pattern, volatility spikes and significant market declines were still being forecasted by that Model. The Stable Vix Pattern did not start until September 2012 which coincided with QE3.

      My note about the formation of the SVP:

      The spikes in RVX were more pronounced than the VIX in 2010 and 2011 which highlights that turmoil causes the Russell 2000 to become more volatile than the S & P 500. The DJIA is the least volatile major index.

      Notwithstanding any survey data to the contrary, investors are extremely bullish about stocks and their future returns. That bullishness is reflected in what they are doing which is always more important than what a few of them say in response to a survey.

      This kind of bullishness is to be expected when there is a powerful bull move that lasts for close to a decade. A host of seemingly rational reasons are used to justify historically abnormal multiples. Future earnings forecasts stay rosy even after being proven to be grossly inaccurate for several years. Recessions and other bad events, including 50% declines, become a distant memory. Stocks are then viewed as risk free. Stay the course becomes the mantra. I think that we are there now. There simply needs to be one or more catalysts that cause the herd to reverse direction.

      In case I am wrong and the market continues to move skyward, I will maintain a stock allocation which may be higher than most financial planners would recommend for me.

      I have turned off reinvestment of dividends for most stocks and funds.

      Part of the allocation will be in T.Rowe Price mutual funds where I have allowed myself one choice after I buy shares. I can reinvest the dividend or take the dividend in cash. I can not sell shares once they are bought. I have turned off dividend reinvestment in those funds.

      I have pared some Vanguard funds but will not pare further unless certain account values numbers are hit that will allow for a $1K pare. My Vanguard Equity Income Admiral class shares, for example, will have to hit a $51+K value, without dividends being reinvested, to permit a $1K pare. The current value is $49,500+. Dividend reinvestment has been turned off for the Vanguard funds as well.

      I am more likely to maintain a significant allocation in equity REITs than other sectors due to their income generation, though I am actively trading them.

      The modern average forward non-GAAP P/E ratio for the S & P 500 is 13.8. The number is that high due to clearly excessive valuations in the late 1990s:

      The current forward non-GAAP P/E is 18.24 as of 4/21/17 and that is 8 years into an economic recovery without a recession intervening:

      The TTM GAAP P/E is 24.39.

    2. Y2000 - Klarman tends to be bearish a lot in his announcements. Also, doesn't he have investments or a fund? Often those with such motivation, tend to say what they need to see happen at a given time.

      SG - I thought the long term average GAAP PE is 15 using Shiller CAPE, so 13.8 is lower than that?

      I've never noticed before, we've been above 15 on the CAPE since 1990's. Truly makes it useless as a predictor. But as a statement of averages, what am I missing on the non-GAAP 13.8 average vs. Shiller's?

    3. LMH: The GAAP P/E, Non-GAAP P/E and the Shiller P/E are valuation ratios calculated using different methodologies and data.

      The long term SPX GAAP median P/E ratio is 14.65 going back to the 1880s.

      That link says the chart is based on trailing twelve month “as reported” earnings. "As reported" means GAAP earnings and the time period covered is TTM (trailing twelve months)

      That is also a future 12 month forward estimated earnings based on "operating earnings" which excludes a number of items that are included in generally accepted accounting principles:

      I would not pay any attention to a median derived from earnings information that starts in the 1880s. The 13.8 number is derived from non-GAAP forward estimates starting in the late 1970s which is what I characterized as a more modern data series.

      Figure 1:

      The Shiller P/E is based on the average GAAP earnings over the past ten years adjusted for inflation. The median is calculated based on data going back to the 1880s. That number is currently about 16.12:

      There is a study that the Shiller P/E works better as a forecasting model when national income and product account data, which has defined profits in a consistent manner, is substituted for GAAP earnings whose calculations have been changed over time by the accountants:

      Jeremy Siegel Article:

      Yes, the S & P 500 has been above 20 since the mid-1990s except for the Near Depression period and its aftermath. And during the 1995 to present period, there have been two catastrophic bear markets where the SPX declined 56.8% and 49.1%.

      Personally, I find little comfort for future returns looking at a SPX or DJIA long term chart.

      JPM's quarterly market update has a SPX chart at page 4 that starts in 1997:

      If that link does not work, the quarterly reports can be downloaded here:

      The charts and tables contained in that report need to be reviewed on a quarterly basis.

    4. I realized I never did thank you for all the great info in here (nor got a chance to really assess it enough).

      I'm not sure why you say "Personally, I find little comfort for future returns looking at a SPX or DJIA long term chart. "

      Though I did better than SPX's lack of 10 year rise, because I had 40% in mid-small caps.

      But looking at page 4, I'm getting an idea. The longer charts never bothered me as much (meaning from 1920's to now). What's bothering in the page 4 chart isn't the breakout from 2007 though that's very high, but the straight up since election, doesn't fit the pattern and looks like it needs to drop down, to normalize. Is that what you were spotting?

      Also, page 7 with earnings, it'd be helpful to see that chart with deltas instead to see whether it verifies what it looks like visually, which is that future earnings shoot up. They are in line with past earnings increases if drawing a line through the tops, but visually they look like over enthusiasm.

    5. LMH: Looking at the S & P 500 earnings chart at page 7, I see negligible earnings growth starting in the 2006 third quarter through the 2016 4th quarter. Earnings took a significant dip starting in the 2014 third quarter and were below that level in 2016 4th quarter. The S & P 500 closed at 1972.29 on 9/30/14 and at 2,238.83 on 12/31/16. Yesterday, the S & P 500 closed at 2,387.45.

      2014 Third Quarter S & P 500 Actual Earnings
      GAAP: 29.6
      Non-GAAP: 27.47

      Estimated 2017 First Quarter as of 4/20/17 (22.5% reporting)
      GAAP: 26.41
      NON-GAAP: 29.11

      So, the S & P 500 is up 21.05% through yesterday since 9/30/14 as earnings have declined. That entire move is pure multiple expansion.

      The S & P 500 closed at 1440.67 on 9/28/12 and is up 65.72% since that time.

      2012 Third Quarter Actual Earnings:
      GAAP: 24
      Non-GAAP: 21.21

      GAAP earnings have increased 10% between the actual 2012 third quarter number to the estimated 2017 first quarter number.

      Most of the gain since 9/28/2012 is due to multiple expansion. The expansion is ongoing.

      Parabolic moves based primarily on multiple expansions tend to collapse upon themselves. At some point, the earnings will have to accelerate rapidly or there will be a mean reversion to more reasonable norms based on history. The mean reversion that occurred in 2000-2002 resulted in a 50% decline and left the S & P 500 selling at the high end of its historical average range.

      My long history as an investor involves in part a dynamic asset allocation process. Part of that process involves selling into parabolic stock market spikes.

      See my 12/11/2008 Post:

      I did a major shift out of stocks in 2007 and a major shift back into stocks starting in late February 2009. I eliminated my stock positions in the two year period leading up to 2000-2002.

  10. I have published a new post: