"Outrageous Ads Sign of Speculative Market"

[On the Road]

By Mark Hulbert

ANNANDALE, Va. (CBS.MW) - One of my informal indicators of an overvalued market is flashing warning signs. My indicator is based on how many liberties newsletter advertisers are taking with the truth. It varies widely over a market cycle.

For example, when the market's pendulum is at the fear end of the fear-to-greed spectrum, very few advertisers make outrageous performance claims. That's because investors are more preoccupied with preserving their capital than with taking risks.

At such times, greed doesn't sell very well. Ironically, this often signals that a market bottom is not that far off.

In contrast, my informal indicator shows that lots of liberties with the truth get taken when the pendulum swings to the opposite extreme. At such times, advertisers cater to investors' greed, promising outsized returns for those willing to subscribe to their clients' newsletters.

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http://biz.yahoo.com/cbsm/040415/6e58fd21b9b0455695c21559ee11c815_1.html

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Interesting anaylsis. I like these informal indicators. I am still short.

[swag]

1. My two bits

I think the S&P 500 should be somewhere between 1050 and 1100. So it's at 1128. Not awfully overvalued, but the Nasdaq at 2000+ certainly is, and the high tech-stock prices are certainly flushing the chumps. That folks are buying techs like madpeople when techs are 2x overall market in terms of valuation is indicative of a poorly educated class of investors. People are still buying the "growth" story. Bad move.

Here is my current asset allocation vs. my target allocation

..............current...target
US Stocks.......52.40...43%
reits...........10.22%..10%
int'l...........13.93%..20%
private stock....5.34%...5%
Bonds...........17.87%..20%
cash.............0.25%...2%

Notes: the Bond allocation is mostly in I-bonds and TIPS (www.treasury.gov), but I'll shift some back into conventional bonds when the 10-year Treasury note hits something between 4.75% and 5%.

Mark Hulbert should put on the wanky-panties because so much of his advice is for short-termers, but his readers should be long-termers. More of the media fucking over the little fish.

[On the Road]

2. You Can Argue that the S&P 500 is 100% Overvalued, Too

based on various valuation models: Price-Earnings, Price-Sales, PEG, Tobin's Q Ratio (based on replacement costs), etc. On a long-term historical basis you could argue that the S&P should be in the 600s. Have things permanently changed? I'm not betting my retirement savings on it. November may be a good time to get back in, but I'm not holding stocks in the down months (May-Oct).

[swag]

3. sure you could

Price-to-trailing-earnings certainly indicates an overvaluation. Tobin's Q more doubtful, though, despite what the authors of "Valuing Wall Street" have to say. Ed Yardeni, a former student of James Tobin, though he discounts the Q ratio as a good overall market valuation tool shows the market as fairly valued according to Q.

On the P/E front, Jeremy Siegel, Yardeni, et al. argue pretty persuasively (to my feeble mind, anyway) that econo-circumstances justify the currently higher-than-mean P/E.

But aside from all that, I maintain that a good asset allocation strategy acts as its own "valuation model" and as its own good stealth-contrarian strategy.

I think the market is about 5% overvalued right now. But what do I know? I'm posting about stocks on DU for Pete's sake.

[On the Road]

4. I'm More of a Bear

but then I've been off in my timing and predictions pretty consistently.

It partly depends on how much you see the 90's as a bubble. I tend to favor Carl Swedlin's periodically updated "Pictures of a Stock Market Mania."

http://www.cross-currents.net/charts.htm

However, even Swdelin the bear recently seemed to shrug, give up, and accept permanently higher valuations. According to contrarian theory, that's probably the last gasp of the bull market.

[swag]

5. well, you'll probably come out ahead of me in the end

What are you in now? Cash? Bonds? Real Estate? Small Business?

[On the Road]

6. My Money is Half Cash and Half Short Funds

I got in too early on the shorts and am down. I missed the bounce last year because I didn't think it would be as big or as long as it is. I seem to do the right things at the wrong time.

I spent some serious time about five years ago on fundamental analysis with small and microcaps (Motley Fool stuff) and had indifferent results -- big wins offset by big losses. Then I became impressed with the ability of technical analysis to see trends before the information becomes public. I have found that my estimate of the market tends to blind me to market signals -- you really need a zen-like state and a blank mind to listen properly to market signals, and that's seems to be difficult for me.

I also used a paid service (formerly bloodinthestreets.com, now getfolio.com), which has a philosophy of buying established companies when their price is depressed. Good strategy, and the guy seems to have a good model, but I subscribed at a time when three of the stalwarts he was investing in went bankrupt: MCI, ATHM, and one other. So I didn't make money there, even though it had outstanding gains in good market years.

I am now being conservative, if you can call it that, with the stock market. I've often thought about a market timing service. If there was one I could trust, I would easily spend the $1,000 per year, which seems to be the going rate.

My current focus is real estate. Like the stock market, I am very nervous about overvaluation in the DC area. However, following my girlfriend's lead, I bought three small houses in a blue-collar section of Baltimore in which prices are still depressed. All three were small townhouses that needed renovation, but they only cost $21,000, $28,000, and $29,000.

I am getting the last one finished and have started looking for a fourth. The cash flow can be pretty good if you can get reliable renters. I had definite problems at first being cheated by local handymen and with renters not paying. Hopefully those are in the past now. It's one of those things where perseverance pays off.