This week’s Outside the Box is with an old friend to long-time readers, Ed Easterling of Crestmont Research. Ed is usually on the bullish side, but his research of late points to a few warning signs that say some cycle convergences may be pointing to problems. And that coincides with my macro concerns. As usual, lots of charts and data, but easy to read and understand. And, for those with stock market investments, very thought-provoking and timely.
I write this at 34,000 feet on the way back to Dallas. I met with a few Congressmen this morning and then ten Senators (!) this afternoon. It seems that some of them had read Endgame and rounded up a rather impressive group to come hear me speak for about 90 minutes. No Powerpoint, just off the cuff, with lots of very pointed questions, and they were taking notes (mostly). Some have been my long-time readers (go figure). It was bipartisan. Actually tripartisan, as independent Joe Lieberman was there, and asked some very hard questions. They cut me no slack and I gave no quarter. It was a very frank discussion. This is a group that is quite worried (I should say seriously worried) about our future, and they let me know there were more like them. On both sides of the aisle. It was actually somewhat encouraging, except that they are not optimistic. There was a sense of palpable concern that nothing might be done until we have a crisis, and so they realize the need to act. They are working to get their fellow Senators on board. Maybe there is hope. Without naming names, I was particularly impressed with the questions from a “Tea Party” Senator when I talked about the “glide-path option” and what going too fast would mean – as in a depression. I think he got it. We’ll see. He took the most notes, although Portman (who ran OMB so has a serious resumé and credibility on budgets) was going through paper rather fast as well.
They grilled me on the debt ceiling, and I gave it my best; but I think the debt ceiling is a temporary sideshow to the whole deficit issue. They truly were getting the “hitting the wall” if we don’t get the deficit under control. I left a lot of books and was surprised that more than a few came with their own copies to have me sign. Senator Dan Coats set up the meeting, and Rob Portman helped round up the group. Getting that many Senators in a room is not easy. And a few of my heroes were in the room, too. It was a very humbling experience for your already humble analyst.
As an aside, neither the Congressmen (some of whom are in the GOP leadership) nor any of the Senators have a clue as to how the debt-ceiling issue will work out. There were lots of guesses and speculation. One of the “Gang of Six” was there, and he had no idea what would happen.
Small self-promotion: you should get Endgame and read it. If Senators are reading it and marking it up, maybe you should take a look. http://www.amazon.com/Endgame.
Ok, we are landing, so it’s time to hit the send button. More later.
Your can’t believe this life analyst,
This week we look at another except from Ed Easterling’s gonzo book on stock market return projections, called Probable Outcomes. This section is entitled “Game Changer,” and it is that and more. (Again, thanks to Ed for letting us read his work!)
“Game Changer” is a thought-provoking, somewhat detailed analysis, with two major surprises. The first is that GDP growth was well below average last decade (a trend that could continue this decade); and second, slowing growth has a substantial negative effect on valuations (P/E ratios). This ties well into my own Endgame and suggests implications about slower growth, etc. (similar to what I project from work of my own). Slower growth drives P/Es lower (even without higher inflation, or deflation) and could drop the market by a third or so relative to “normal” cycles.
Ed and I talk about this a lot, and agree that readers must understand Endgame to appreciate how significant “Game Changer” can be. Probable Outcomes complements Endgame with specific implications for investors and policy makers who look to the stock market for returns over this decade.
Just another quick plug for Endgame from a review on Amazon:
“Endgame: ‘The final stages of an extended process...’ The aptly chosen title for Mauldin's new book reflects the vision that he started sharing over a decade ago when he foresaw the Muddle Through Economy (he repeatedly warned about Muddle Through in his free weekly newsletter at Thoughts from the Frontline and in his best-selling books).
“In Endgame, Mauldin and Tepper detail the history of events that layered increasing debts on an underperforming economy. Their analysis is not limited to the U.S., but rather walks around the world highlighting a global issue. Mauldin again demonstrates his laudable ability to synthesize vast amounts of information into relevant nuggets. The first half of Endgame lays the foundation brick-by-brick, including a look at the basics of economics and recent research to understand the situation. The second half of the book proceeds country by country laying out the common and unique problems that they confront. It exposes a world of vulnerability, but not one that is hopelessly destined. Mauldin and Tepper are optimists, and present a call to action that can result in a successful endgame.
“Once again, as another decade starts, Mauldin assembles a plethora of data and charts to deliver information that investors, policy makers, and involved citizens need to better understand and act upon. From the classic principles of Minsky to the modern groundbreaking research of Reinhart and Rogoff, Mauldin explains clearly the credible scenario that the burdens from mountains of debt create another decade or longer of Muddle Through as a process rather than an event. Passage through the vestibule of the endgame requires restitution in the forms of deflation, inflation, volatility, and slow economic growth. Despite the headwinds, endgame need not be game-over – which appears to be Mauldin's personal game plan for his new book. He includes writings to his children that their future can be much brighter than the current period that we confront. Knowledge is power and you'll find both in Endgame.”
Your writing away analyst,
One of my favorite analysts is Ed Easterling of Crestmont Research. We used to get together a whole lot more when he lived in Dallas, but he has since moved to the wilds of Oregon. Ed’s first book, Unexpected Returns, is a classic work that I think is a must-read for all stock market investors.
And now he favors us with yet another book, called Probable Outcomes: Secular Stock Market Insights, in which he takes on the mostly silly research, done by so many analysts, that purports to show what an investor can expect to make from his retirement portfolio over time. I can’t tell you how disastrous this simplistic analysis can be for retirees.
This week’s Outside the Box is an excerpt from this latest book.
“Probable Outcomes continues the Crestmont Research tradition of full-color charts and graphs that enable investors and advisors to differentiate between irrational hope and a rational view of the stock market. The unique combination of investment science and investment art explores the market from several perspectives, and addresses the implications for a broad range of investors. Ed Easterling delivers an insightful analysis of the likely course for the stock market over the 2010 decade. Investors and advisors will benefit from this timely outlook and its message of reasonable expectations and value-added investing. This essential resource provides a comprehensive understanding of the fundamental principles that drive the stock market. Based on years of research, Probable Outcomes offers sensible conclusions that will empower you to take action, guide your investment choices during the current period of below-average returns, and allow you to invest with confidence, whatever your financial strategy.”
I can’t recommend this book strongly enough. If you
are retiring or thinking about doing so and think you can safely take 5% a
year, please, please read this book. You can get it out www.Amazom.com/probable (http://www.amazon.com/
And now let’s turn to Ed’s insights.
Your starting to feel human again analyst,
Does the concept of retirement sound scary? If it does don't feel that you're alone. A lot of issues and concerns come along with the subject, the most familiar of which is financial freedom. Even after you have saved a substantial nest egg, it can be difficult to plan out your withdrawal strategy when presented with several unknown variables such as life expectancy and rate of return.
Today's Outside the Box is by my good friend and the always fascinating analyst, Ed Easterling. Ed has written a very well researched article on how to structure a portfolio and plan for retirement. How much of your retirement portfolio can you withdraw each year? It may not be as much as you think if you want to be sure that your money outlives you. Ed covers some of the inherent risks and describes several scenarios that people face. For those of you unfamiliar with Ed, he is the author of Unexpected Returns: Understanding Secular Stock Market Cycles, President of an investment management and research firm, and a member of the adjunct faculty at SMU's Cox School of Business. You can read more about him and his research at www.crestmontresearch.com.
Whether young or old, retirement is a point in life that we all must face. I believe that you will find Ed's article to be an engaging view on how to properly prepare for and plan out your retirement.
I am excited to present to you today a very interesting piece by my good friend and local Dallas resident, Ed Easterling. Ed has performed an in-depth study on how several key fundamentals have performed over time and how they are likely to perform over the next several years. His analysis shows how EPS and corporate profit margins have correlated to the business cycle dating all the way back to 1950. I find his study to be very insightful and dead on in the midst of the current market climate.
For those of you unfamiliar with Ed and his work, he is the author of Unexpected Returns: Understanding Secular Stock market Cycles and President of an investment management firm. In addition, Ed is a member of the adjunct faculty at SMU's Cox School of Business where he teaches a course on alternative investments and hedge funds for MBA students. Mr. Easterling is most known for publishing provocative research on the financial markets which can be viewed at www.CrestmontResearch.com.
I trust that you will find his "Beyond the Horizon" to be very compelling research and an "outside the box" point of view. May you enjoy!
"The current state of volatility is an indicator of a potentially sharp stock market decline based upon (i) the currently low level of volatility, (ii) the tendency for upward spikes to follow extreme low volatility, (iii) the relationship of market direction to volatility trends, and (iv) the propensity for downside volatility during secular bear markets. Volatility could decline further and could remain low for some time longer; however, based upon history, it has not stayed low without subsequently spiking and, as it goes lower, the likelihood of a spike increases significantly.
When volatility does start to rise and the stock market likely declines, the bulls will call it a "pullback" or a "correction" in advance of the next major upward move in the market. Because we are currently in a secular bear market (at the least, a bear-in-hibernation), the market can be expected to act as it has during the past secular bear markets. Keep in mind: over the course of secular cycles, the market is driven by recognized principles of economics and finance. The current market conditions are not positioned to provide another secular bull market at this time--it is not a sleeping bull. The current conditions reflect a secular bear or a bear-in-hibernation because the price/earnings ratio ("P/E") is above its historical average. Without a rising P/E, future returns will be below average and investors are likely to experience an extended, choppy, and often volatile period.
There are strategies to employ to capitalize on volatility and to protect downside risk. Recognition is empowering. It is incumbent upon investors to understand the environment and to seek profit-oriented investments rather than hope that the market will again provide the passive rewards that occurred during the secular bull market of the 1980s and 1990s."
This week we will turn our attention to a topic of intrigue, volatility, one of which I think is becoming increasingly important. Ed Easterling, a good friend and fellow hedge fund colleague of mine, has performed an in-depth study on volatility trends and their effects on the capital markets. I have been harping on a similar theme in my e-letter, Thoughts from the Frontline, which I recommend you read in conjunction with this if you have not already.
Ed Easterling is the author of Unexpected Returns: Understanding Secular Stock Market Cycles, President of an investment management and research firm, and a member of the adjunct faculty at SMU's Cox School of Business where he teaches the course on alternative investments and hedge funds for MBA students. Mr. Easterling publishes provocative research on the financial markets at www.CrestmontResearch.com.
"The Calm Before the Storm" uncovers the current and historical levels of volatility in the marketplace and explores their impact on both secular bull and bear market cycles. Moreover, Ed goes on to discuss what those trends mean for investors' expectations and returns in the not too distant future. I trust that you will indeed benefit from Mr. Easterling's fundamental research and his "outside of the box" insights.
This week's letter is from my good friend Ed Easterling of Crestmont Research in Dallas. Ed helped co-author a couple of Chapters in my book "Bull's Eye Investing" and that inspired him to write his own book. Ed's must read book, in my opinion, is called "Unexpected Returns: Understanding Secular Stock Market Cycles."
In this article Ed lays out why boomers will not see the average market returns of the past in their future. The "Buy and Hold" crowd will point to Ibbotson studies on long term returns and Markowitz's Modern Portfolio Theory as reasons to invest, but Ed explains how these two things can be used to mislead investors and that is why it is this week's Outside the Box.
This week's letter is from my good friend Ed Easterling of Crestmont Research in Dallas. Ed helped co-author a couple of Chapters in my book "Bull's Eye Investing" and that inspired him to write his own book. Ed's recently published, a must read book in my opinion, is called "Unexpected Returns: Understanding Secular Stock Market Cycles."
This article uses some of the insightful research in the book to examine current market conditions and why Ed thinks the "Four Categories" are pointing to a bear market decline in the near future.
Successful investing is all about recognizing and managing risk and not looking for the next home run. It is a lesson we all need to understand. I hope you enjoy this week's edition of Outside the Box.