I want to look again at the seeming craziness of markets right now, especially investors’ aversion to risk and the price people are willing to pay to acquire seemingly “riskless” assets.  US Treasuries, for example, are now yielding a piddling 2.5%!  Who would have thought!

Would you be willing to put away money in government paper, given the likelihood of future inflation, and get only 2.5% per year?

I wouldn’t. 

And maybe I’m wrong.  But I wouldn’t do it.  The world currently is on a “deflation is coming” kick. 

Maybe it’s right, too.  But given the amount of money that has been thrown at our economic problems the last couple of years, I think future inflation is a much bigger risk and possibility. So I “ain’t” going for no US Treasuries at 2.5% per year just to be safe.

Meanwhile, equities just keep getting cheaper and more beaten up.

Take a look at the Chartof the day below.

With 95% of S&P 500 companies having now reported their earnings for the second quarter of 2010, the chart above provides some long-term perspective to support my contion that stocks now offer value over bonds.

Lookee here.  Stocks’ earnings declined over 92% from the third quarter of 2007 to the first quarter of 2009, a development that brought stocks’ inflation-adjusted earnings to near Great Depression lows. However, since that 2009 low, S&P 500 earnings have surged (up over 800%, in fact) and currently come in at a level that occurred last at the peak of the dot-com bubble. So earnings are way, way up.  But stock prices are way down.  Earnings now are where they were in 2000, yes, but back then, those were phantom earnings, with prices greatly exaggerating their intrinsic value.

It is interesting, at least to me, that the original run-up in real earnings from Great Depression lows to dot-com highs took over 67 years.

But it took only 13 months to have them recover from the bursting of the crdit bubble.

My take?  In 2000, investors could not get enough risk.  Stock prices kep rising and rising, leaving earnings way behind.  Investors bought up stocks and stocked up on risk - and got beaten up badly.  In 2010, investors are doing the mirror opposite.  They are terrified of risk and are severely overpaying for “riskless” assets.  And they will be hurt badly.

In 2000, the place to be was, not stocks, but bonds.  In 2010, it’s just the opposite.

Or, so I believe and am acting accordingly.

The point of this blog is largely to help investors make better choices over long periods of time when investing for their retirement.  So, fees matter.  Matter a lot. Especially the longer you invest.

My investment book hammers away at this theme.  Morningstar, the guide star of the mutual fund business, urges us all to pay attention to the fees associated with our investments, and this morning’s New York Times, interestingly enough, has an editorial on “low fees.” 

I’m appending some of the Times’ editorial below:

“Investing is scary these days. Is it safe to go back in the stock market? Is the bond market the place to be? With so much uncertainty, how can investors know where to put their money? Morningstar, the mutual fund research service, is on to an answer, but it might not make you feel better about your financial advisers.

“In a study released last week, Morningstar found that low fees are the most dependable indicator of a mutual fund’s future performance. Morningstar looked at fees and performance during various time periods from 2005 through March 2010. Over every period and in every asset class — domestic equity, international equity, balanced, taxable bond and municipal bond — the cheapest funds, as a group, produced higher total returns than the most expensive group.

“We’re not talking loose change. Domestic equity funds in the cheapest group in 2005 returned an annualized 3.35 percent over the next five years, versus 2.02 percent for the most expensive group. The gap was similar in other asset categories.”

Pay attention, please!  Fees matter.

A very successful hedge fund manager now feels that the S&P 500 is going to 1500. If so, that would be an increase of over 40% from about where it is now.

I don’t know that he’s right, but I thought I’d share some perspectives that, I assure you, you will not read about or see elsewhere, because media unfairly favors negativity. You know, in winter, there may be a storm coming, but more people will tune in if the approaching storm can be cast as impending tragedy.

Back to investing, though, are there any good reasons why stocks should rise?

You betcha! First, stocks are cheap, if the financial world is not actually going bust. James Altucher, the hedge fund guy, notes that stocks are trading at 11 times forward earnings (that means, in general, next year’s [that is, “forward”] stock prices are estimated to be 11 times greater than stocks’ earnings).  About 15 times is about average.  Low interest rates also suggest that a higher multiple might be appropriate.  Forward earnings have a long history of being very good predictors of stock prices.

Altucher also notes the extreme pessimism of investors today.  Investor sentiment is back at the levels of July, 2009, when the market was just beginning to recover from its worse setback since the Great Depression. A lot of investors who focus on those low earnings multiples feel they are justified because of a likely upcoming economic downturn or perhaps even an economic collapse in Europe or the USA.  In past years, these sorts of assertions would have been met with more skepticism. In the current market environment, there is surprising acceptance of extreme negativity.

Altucher actually sees several positives. (I kid you not!)  Let me cite a few examples of large, bearish predictions that, so far, at least, have not developed as the doomsayers believed.

Automobiles

It was believed that auto sales would collapse after the Cash for Clunkers program, whatever you or I think of the value of the program.  Many believed that sales would be pulled forward from future sale periods with no lasting impact on the overall trend.

What happened? Well, sales have fallen from the highs of the Cash for Clunkers program, but they are, today, up more than 20% from levels before the program came to be.  Could the same thing happen after the expiration of government programs for home sales?

Consumer Spending

For many bearish pundits, consumers are “spent up, not pent up.”  They have argued that personal consumption expenditures would fall with home prices.  They have (inaccurately) argued that consumers are “70% of the economy” and projected a collapse of our national economy because of anticipated, much weaker consumer spending.

But data tell us, today, that consumer spending has exceeded its old highs, even at current unemployment levels.  The spending dip was never as great as predicted by the bears and was very temporary.

Europe and the Euro

Beginning in early May of this year, stock markets around the world collapsed under the weight of non-stop coverage of the sovereign debt crisis in Greece and elsewhere in Europe.  Very gloomy predictions said that many countries would soon default in Europe and elsewhere.  Many of the loudest (but not most accurate) voices predicted that countries would drop out of the European Union, and that the Euro would go to parity with the dollar.  People quickly associated the Euro as very risky, and included with it almost anything except bonds.

Today, just two months later, while the European story is certainly not over, the gloom and doom predictions have not come to pass and are not supported by the current data.  The Euro has certainly moved lower since May, but it seems to have found a bottom and has rebounded significantly.  At one point there were extreme predictions that a small change in the Euro could imply the loss of thousands of points in the Dow. Didn’t happen.

Taxes

Those with a political agenda have emphasized the impending expiration of the Bush tax cuts.  The change might actually stimulate a bipartisan approach to our huge deficit problem. But right now, it’s very difficult for any of us to predict policy outcomes when the specific plan is unknown.  Treasury Secretary Timothy Geithner, just within the few days, showed flexibility might still come from the Obama Administration on capital gains and dividend taxation.  His statements evince more market-friendliness from the Obama folks than I might have expected. If the administration is willing to moderate the upcoming severe changes in the treatment of dividends and capital gains, investors might actually become a bit less pessimistic about its handle on financial matters and its posture towards the very people who have the capital to stimulate employment. Stop demonizing them.

Mortgage Rates

Remember how so many, not so long ago, predicted that mortgage rates would spike when the Fed ended its mortgage purchase program?  Instead, rates have dropped, reaching record lows. I understand that many excuses can be offered for this failed prediction, but it was a very inaccurate call.  The Fed exited gracefully from this market.  Once again, it is something to bear in mind as the Fed reduces its involvement in the economy on other fronts over time. The end of the world may not be coming just yet.

There are and will remain many very large and real economic problems.  But extreme pessimism, such as we have been hearing of late, is not helpful to investors nor to America.  I may be more optimistic than I should be. I can’t predict the future. But I don’t want to part of the problem, either.

+++++++++++++++++++++++++++

To those of you who know me and my family’s story (see www.LettersforLizzie.com), I ask for your prayers for my wife Lizzie. The possibility of renewed, major health problems has arisen. We will be visiting a fleet of specialists this week looking for answers to what ails my dear Lizzie. If you think of us, please pray for us. We hope things come out well. If they do, I’ll be back to this page soon. If they do not, then it will likely take me longer to return. In the meantime, thank you for reading my blog.

I have just viewed my most recent post of June 7th.  Yikes!  Before you can read what I wrote, you poor folks have to wade through a swamp of techno-nonsense which I’m sure is important but I have no idea what it means nor how it got there.  I’m very sorry.

Ouch! Again, I see how limited is my handle on technology.

Well, I have gone back over that post and, I think, cleaned it up, so for those who are reading this new post, you might (or might not) want to look at the last post and read why stocks are cheap.  (Or, maybe not so cheap. )

And while not a lot has changed in the last two days — the world still seems so fragile, Europe and its euro are bed-fast with the flu, and debt appears to be eating up the entire western world - I thought, on a cheerier note, I’d give you some reasons why I think America, of all western nations, may arguably be doing better than much of the rest of the developed world.

I will be brief, too.  But I hope these thoughts - really more responses to myths about the US recovery from the Great Recession - give you hope and some reason to be encouraged.

First, it has been argued that the USA’s economic rebound has been, and is being, fueled almost entirely by massive Federal spending.

Not so! The American private sector, in spite of upcoming higher taxes, more regulation, mandatory health care and a higher minimum wage, has bounced back and has contributed 90% of the economy’s growth since last summer. Really!

Another myth is that the recent recession was so severe that it will take years - maybe decades - before our GDP – that is, the total of all the goods and services produced in the country - returns to its previous peak, just before the Great Recession began in the fall of 2007.

Well, surprise! Today, it looks like we’re just a quarter or two away from making up all the lost ground in U.S. production.

A third myth is that the financial crisis in Europe will further damage U.S. banks and trip up our own economic recovery.

Unlikely! The top 10 U.S. banks have only $60 billion in loans to Europe’s five most troubled sovereign debtors (Greece, Portugal, Spain, Ireland, and Italy). True, this is a boat load of money to you and me, but it amounts to less than 10% of the primary capital of our 10 biggest banks, so there’s ample cushion to absorb such losses, should our banks have to take write-downs on those foreign loans.

Fourth, there’s also talk – more like warnings - that China will suffer an American-style, sub-prime real estate crash that will send reverberating shock waves around the world.

Maybe! More likely though, again, very doubtful. Chinese homebuyers must put up a down payment of 20% to 50%, unlike in the U.S., where trouble arose because homes could be had with nothing down.

Lastly, unlike in America, there is no go-go, elaborate derivatives market tied to real estate in China – which, in America, spelled disaster for us a couple of years ago.

Admittedly, lots of bad stuff can still happen, in spite of what I’ve written.  Also, maybe I’m just too darn optimistic. But the five myths I’ve tried to rebut above form major elements of arguments that haunt knowledgeable investors and cause some to lose sleep at night or forego investing in stocks altogether.

They may well be overdone.

As the new year starts there had been great hope for improving employment in America.  The release yesterday of December’s unemployment numbers seemed to dash those hopes.  The U.S. Labor Department reported that nonfarm jobs actually fell 85,000 in December; a small increase had been forecast by some.  BUT!  not insignificantly, November employment was revised upward to show a net gain of 4,000 jobs – the first month in which there were job gains in two years.

For a bigger, longer perspective, chartoftheday.com shows the percentage increase in the number of jobs for every decade back to the 1940s (actually to 1939). What the chart illustrates is that, usually, the number of jobs at the end of a decade has been anywhere from 20% to 38% greater than 10 years prior. At least that has been the case until the decade just passed, during which the number of jobs basically ended where it began. This dismal job growth is particularly significant due to the fact that the US population has grown by 10%. And 10% growth is necessary over a decade just to keep up with demographic changes and population growth.  These realities have powerful negative investment implications, if they are not corrected. 

It’s worrisome that, in spite of a worldwide growth in wealth over the past 10 years, the US job picture seems so sickly.  However, it’s important to bear in mind that the very start of the decade was a time of usual euphoria, and the end a time of considerable gloom.  The decade started with a 4% unemployment rate and the hope that within a couple of decades we’d eliminate the national debt. It ended with a 10% unemployment rate and mountains of national debt as far as the mind can imagine.  In between there were two crushing national/international recessions that saw investment markets wilt. 

The lack of job growth for an entire decade may just be capturing two moments in a snapshot - the good and the bad - that might look much better a few years from now.