Weekly Poll: SPY Is Stuck at 110

[tradingjournals]

Quote from shortie:

are you suggesting that my ~30 weekly polls are meaningless?
none got 100 votes so far, ~25 is typical

It depends on how you look at the Poll. Suppose you want to assess ET's opinion (which is larger in size than the readers of this thread). Then what determines the margin of error of your poll is the ratio of responds to the total population on ET, in addition to the size of respondents . So the first thing to do is to assess who the population is and its size, and work backwards. If r is the percentage of responds to size of population, and n is the number of respondents, the formula I would use is something like: ((r*(1-r))/n)^0.5, times 1.96 (for 95 percent margin). So you get a conclusion like Poll margin of error is 10% with a probability of 95%.

Notice that the poll test does not say anything about what is needed to draw individual conclusions. You still need a size like what you stated above to draw individual conclusions.

The interesting other part of your polls is that you can observe the arrival of responses, while typical polls are looked at at the end of polls. I think you understand this part because I read something from you that proves that you do.

The readers now have the proof why they should vote.

NOTE: I renew my call to readers of Shortie's threads to vote immediately. Help our friend shortie so he can help us. Please vote now. Do not delay it. a minimum of 100 voters are needed for this to be meaningful. [/B][/QUOTE]

 

[piezoe]

Quote from tradingjournals:

I think it is a good observation. I was in fact looking for a chart that depicts the yields of stocks and bonds over time. Does anyone have a URL/pic/chart?

The difference can also be due to perception that the earnings have been on cost cutting and numbers work while the 10-year is real. In addition bonds could sell off, and the difference in yield shrinks.

NOTE: I renew my call to readers of Shortie's threads to vote immediately. Help our friend shortie so he can help us. Please vote now. Do not delay it. a minimum of 100 voters are needed for this to be meaningful.

For peace of mind, may I suggest that you never look at a chart of the S&P for the last thirty years in constant dollars with dividends removed . Very depressing.

 

[trefoil]

Bullish. Can't come up with a reason to be bearish, unless of course the market's spooked by Friday's employment report...

 

[tradingjournals]

Quote from piezoe:

For peace of mind, may I suggest that you never look at a chart of the S&P for the last thirty years in constant dollars with dividends removed . Very depressing.

Great observation, and is in line with my personal intuition. Thanks for letting us know. You have been very generous. What if we use your observation to make some money? If you have the chart please post it so that we can see if we can build a strategy to milk it. Do we not only need something that is reliable to stand on to make money? At least that has been my understanding unless I am

 

[tradingjournals]

Quote from shortie:

At the end of trading Friday, the earnings yield on the Standard & Poor's 500 index was 6.6%, based on the past four quarters' operating earnings, the highest since 1995.

The gap between that yield and the 10-year Treasury yield—a measure of the cheapness of stocks relative to Treasury bonds—is the widest about 30 years, according to Jason DeSena Trennert, chief investment strategist at Strategas Research Partners.

I thought about this a bit more. Imagine every one in the economy that should borrow is not borrowing even at zero interest rate, because their current balance cheat is such that their liabilities are higher than their assets, and their current task is to produce cash flow to pay down debt, and reduce the gap between liability and assets. Therefore they would not borrow, not because of cost of money, but because they are paying down the debt that they acquired in the past (due to negative gap between liability and assets).

In such a situation if someone saves a portion of their income and send it to the financial system, and no one is borrowing it, then the equities would not rise because consumers income would be declining, and the government would become the borrower of last resort and/or the money would go to bonds.

In such a situation, the gap between equities and bonds would rise even further, not because of risk appetite in stocks, but because the balance cheats are upside down, and the difference between yield on stocks and yield on bonds become less relevant.

Could someone think about this, and critique it?

 

[shortie]

Quote from piezoe:

For peace of mind, may I suggest that you never look at a chart of the S&P for the last thirty years in constant dollars with dividends removed . Very depressing.

the rationale for the use of constant dollars i understand, but why remove the dividends?

 

[tradingjournals]

Quote from shortie:

the rationale for the use of constant dollars i understand, but why remove the dividends?

Because one can then realize that an inflation protected bond beats the stock market if dividend is lower than the bond yield????


Does anyone have that chart please?

 

[piezoe]

It has been posted on ET, but not by me. I don't know which thread, and it was a good while ago. I think I made a copy and may still have it. I'll look. In the meantime a google search may turn it up. What it shows is that after Bretton Woods was discarded the average return of the equities market in constant dollars with dividends removed has been approximately the return of government bonds. This tells us several important but little publicized -by the securities industry - facts about the equities markets since the 1970's.

1. The growth of equities due to real earnings growth is on average smaller than one might suppose. Much of a Company's reported earnings change may be due to inflation, and of course exchange rates too in the case of international companies, rather than real growth..

2. That without dividends, equities obviously provide, over time, a rather unsatisfactory risk to reward ratio. (And even with dividends, you don't see those mutual fund charts showing growth of $10,000 over time converted to constant dollars very often!)

3. Since the end of Bretton Woods, inflation along with dividends has become, in the long run, the most important driver of the U.S. equities market.

What I personally concluded was that in retirement investment accounts that are not going to be actively traded, one should do essentially what Bogle suggested, but instead of trying to copy the return of the S&P one should use a global index of only sound, dividend-paying stocks, as the benchmark to be copied. And then, of course, reinvest all dividends.

These considerations are obviously less important to profitable traders than they are to buy and hold investors.

The other thing to keep in mind is that the error bands in plots that have been converted to constant dollars might be quite significant. And I don't recall there being any discussion of possible errors in the data.

 

[tradingjournals]

Thanks for your detailed response Piezoe. Do you follow Ioo? (The 100 worldwide top companies EFT). I was actually thinking about the inflation and equities for long term, and was pondering what one might have achieved by selling option premium (puts) on an inflation vehicle (gold?), and going long a dividend index EFT.

I think that I might have read a couple years ago a little book (by Bogle?) where the point is to do rebalancing, and use EFTs.

 

[Runningbear]

Quote from tradingjournals:

I thought about this a bit more. Imagine every one in the economy that should borrow is not borrowing even at zero interest rate, because their current balance cheat is such that their liabilities are higher than their assets, and their current task is to produce cash flow to pay down debt, and reduce the gap between liability and assets. Therefore they would not borrow, not because of cost of money, but because they are paying down the debt that they acquired in the past (due to negative gap between liability and assets).

In such a situation if someone saves a portion of their income and send it to the financial system, and no one is borrowing it, then the equities would not rise because consumers income would be declining, and the government would become the borrower of last resort and/or the money would go to bonds.

In such a situation, the gap between equities and bonds would rise even further, not because of risk appetite in stocks, but because the balance cheats are upside down, and the difference between yield on stocks and yield on bonds become less relevant.

Could someone think about this, and critique it?

Trading Journals, what you are suggesting is exactly what happens in a deflationary spiral. Because people have negative views about the long term economy and asset prices, they stop spending and they become more frugal. They refuse to buy assets with borrowings because they know that what they owe in the future will exceed what they borrow. So less money is borrowed. The cycle feeds off itself. And even when interest rates each zero, asset prices are falling at -2% and -3%, so fed policy cannot stimulate the economy.

This is exactly what happen to japan and is now happening in the US.